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GBS ENTERPRISES INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) 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 10-K for the fiscal year ended March 31, 2012. 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, and related Cloud
Computing technology. Headquartered in Eisenach, Germany the Company 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.
The Company's Common Stock is quoted on the OTC Bulletin Board under the ticker
symbol, "GBSX."
Products and Services
GBS has grown by consolidating the fragmented Lotus Software market through the
acquisition of companies with complementary product, technology or services
offerings. GBS has continuously developed its software and service business to
service and support GBS's expanding Lotus customer base.
Historically, GROUP has achieved growth through acquisition by targeting
underperforming companies with complimentary operations and leveraging GROUP's
expertise to successfully turnaround and integrate these targets. Key success
factors for this strategy are: enhanced portfolio, positioning GROUP as the
'one-stop-shop' for Lotus applications and services, expanded customer support,
fast code migration, and cloud enablement/XPages conversion of acquired
applications. Going forward, the Company will focus on potential acquisition
targets in the following areas of software and services: Applications,
Professional Services, Hosting/Outsourcing Services, Administration and IT
services, and XPages expertise.
Messaging and Business Applications Software & Solutions
GBS Messaging and Business Application Software & Solutions product lines
include software and advisory services for email and Instant Messaging (IM)
Management, Security, Compliance, Archiving and Productivity, CRM Applications,
Governance, Risk & Compliance (GRC) Management software, Workflow and Business
Process Management software, ePDF Archiving & Document Management.
GBS develops, sells and installs well known business process and management
software suites based on Lotus Notes / Domino and IBM Portal technology, mainly
for major international companies and medium-sized customers.
Through GBS's comprehensive messaging software product lines and associated
services, Lotus Notes, Microsoft Exchange or SMTP-based-email customers, as well
as Lotus Sametime, customers are able to provide their users with secure,
efficient and centrally administered use of e-mail and IM while maintaining
control over their compliance with current legal requirements and corporate
guidelines.
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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 companies strategic and tactical advisory services for
evaluating, planning, staffing and execution of any customer project. GBS
Consulting Services' global teams of consultants use modern project management
techniques, proprietary methodologies and GBS accelerator technologies to
complete client projects on time and with reduced risk.
We believe that our focus on recruiting and retaining top Lotus expertise
positions our team to offer leading-edge Lotus Notes / Domino subject matter
knowledge to our customers. GBS consultants have an average of over 12 years'
experience each in Lotus Notes/Domino and its related products and are routinely
asked to present at IBM Lotus events including Lotusphere, an annual conference
hosted by IBM Lotus Software.
As a Premier IBM Business Partner, GBS is one of the few partners that can sell
and support licenses for all five IBM software brands: Lotus, WebSphere,
Rational, Tivoli, and DB2.
Cloud Computing
As IT departments face continuous budget reductions and constant pressure for
higher performance and efficiency, CIOs are focusing on modern technologies to
support their need for increased scalability, flexibility and lower costs. GBS
has identified this demand as a strategic growth opportunity for the company and
has placed a significant focus on expanding its Cloud Computing and
Modernizing/Migrating technology offerings. The strategic opportunities are
served by GBS with two distinct offerings:
1) GROUP Live - Cloud Automation Platform / Cloud Platform-as-a-Service (PaaS)
software and services. and
2) Modernizing/Migrating - Lotus Notes modernization/migration services and
technology accelerators
GBS Cloud Computing activities are focused on cloud automation solutions and
therefore the Company has made acquisitions and R&D investments to create an
award winning Cloud Platform-as-a-Service offering. Under the GROUP Live banner,
the GBS PaaS offering has been sold to a variety of enterprise customers, which
use the PaaS software to host internal corporate clouds (Private cloud) and
applications as-a-service to their various internal user groups. GROUP Live has
also been sold and implemented by a number of Independent Software Vendors
(ISVs), which are leveraging the platform to deliver their own
Software-as-a-Service (SaaS) applications to their respective customer bases.
Both of these customer groups enjoy the comprehensive nature of this platform
agnostic PaaS solution and its exceptional change management capabilities,
enabling resource flexibility, business agility, scalability and ease-of-use
beyond that which is generally available in the market today.
GBS Lotus Application Modernization and Migration
GBS Lotus Application Modernization and Migration activities are focused on the
IBM Lotus / Domino applications market and the offering spans from expert
services and accelerator technologies to modernized, web enabled and migrated
Lotus applications; and thus ultimately 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-pending software that underpins Modernizing/Migrating
was developed by GBS with assistance and guidance from IBM Corporation'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.
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Strategy and Focus Areas
We see a high potential to achieve growth by successfully integrating our
strategic portfolio with our core competences. 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 with our cloud automation platform 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. Additionally, we generate revenue from consulting
around utilizing our cloud platform services.
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
mobile applications through automated conversion processes. This portfolio
includes a set of powerful analysis tools known as Insights that identify all of
the Lotus Notes applications within an organization and provide metrics about
the uses and users of those applications. Because of the nature of Lotus Notes
and Domino, the applications within a customer environment tend to be highly
distributed and number in the thousands. For many organizations, this fact alone
makes it extremely difficult to plan for projects that involve modernizing these
applications for use in a browser and on mobile devices or migrating them to
another platform. Our technologies help them to dramatically reduce the cost,
risk, time and resources associated with these highly complex projects.
We generate revenue with our analysis tools by charging a fee for the use of our
technology and for the associated cost of the services to produce a report and
set of recommendations for the customer. Additional revenues come from
consulting services that result from helping our customers to 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 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
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") 2,265,240 shares of SWAV common stock. Also on April 26, 2010,
Lotus (on behalf of the SPPEF Members as discussed below) purchased an aggregate
of 11,984,770 of the outstanding shares of common stock from the selling
shareholders of SWAV for an aggregate of $370,000. As a result of the two sets
of transactions, Lotus owned an aggregate of 14,250,010 shares of common stock
of SWAV, representing approximately 95.0% of the 15,000,000 shares of SWAV
common stock outstanding on April 26, 2010.
On September 6, 2010, SWAV's name was changed to GBS Enterprises Incorporated.
On October 14, 2010, the Company's trading symbol on the OTC Bulletin Board was
changed from SWAV to GBSX.
About Lotus Holdings, Ltd.
Lotus is a holding company which was formed under the laws of Gibraltar for the
purpose of financing merger and acquisition projects, specifically in the niche
market of small or microcap companies listed on the Frankfurt Stock Exchange
with complex shareholder structures and whose stock is trading below one Euro
(€1.00) per share.
SPPEFs
Lotus typically finances its merger and acquisition projects through the use of
Special Purpose Private Equity Funds ("SPPEFs"). Typically, SPPEFs are funded by
a company's major shareholders (the "Major Shareholders") seeking to raise
capital for projects and who fund at least 50% of the SPPEF, with the remaining
portion being provided through the investment community and network of investors
in Lotus. Each SPPEF is co-managed by a representative of the company's Major
Shareholders (the "Representative Secretary") and an attorney appointed by Lotus
(the "Lotus Representative").
On February 25, 2010, a group of shareholders (the "GROUP Major Shareholders")
of GROUP 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").
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In early April 2010, the SPPEF Members decided to acquire SWAV. As disclosed
above, on April 26, 2010, Lotus, on behalf of the SPPEF Members, acquired an
aggregate of 11,984,770 shares of SWAV common stock from the selling
shareholders of SWAV for an aggregate purchase price of $370,000. The 11,984,770
shares of SWAV common stock represented approximately 79.9% of the 15,000,000
outstanding shares of SWAV common stock on April 26, 2010. Upon the consummation
of the acquisition, the then executive officers and directors of SWAV resigned
and Mr. Joerg Ott, the Chief Executive Officer of GROUP and a GROUP Major
Shareholder, was appointed the Chief Executive Officer of SWAV and sole member
of SWAV's Board of Directors.
Transactions following the April 26, 2010 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 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 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.
Additional Acquisitions
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.
Subsidiary Companies
Pavone AG
Effective April 1, 2011, the Company acquired 100% of the outstanding common
shares of Pavone AG, a German corporation ("Pavone") 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.
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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 (as discussed below), 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.
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. 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 Global 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.
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 to Lotus
Holding, Ltd. for a purchase price of $1,877,232 in an effort to restructure the
Company's multilevel subsidiary- structure derived from 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.
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.
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Overview of Cloud Computing Technology and Industry Trends
Cloud computing is a general term for anything that involves delivering hosted
services over the Internet. These services are broadly divided into three
categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and
Software-as-a-Service (SaaS).
IaaS providers have massive data centers that can handle the data run over the
cloud, the largest of which is Amazon.com. IBM also participates in this
business and hosts GROUP Live. PaaS providers offer the actual cloud platform
that runs on the IaaS data centers and can deploy the applications (SaaS
products). Some of the leading PaaS providers include Amazon Web Services,
Microsoft Azure Services Platform, Google App Engine, and Rackspace Cloud, along
with GBS's GROUP Live products. SaaS delivers applications on the cloud, which
simplify product licensing and maintenance. The SaaS market was first filled by
a number of CRM (Customer Relationship Management), ERP (Enterprise Risk
Management) and email applications but has spread into nearly all other types of
software. Leading providers in this space include Salesforce.com, Google and
Zoho as well as IBM's Lotus Live suite.
Over the past five years, there has been a migration from on-premise hardware
and software to cloud computing which allows companies to increase efficiency
and reduce cost by paying for software and hardware use on a subscription
basis. In this model, IT managers are able to rent server capacity on an
as-needed basis from a third party, instead of managing a data center
on-premise, and purchasing up-to-date licenses for software based on real-time,
instead of purchasing bundles of licenses or software and upgrading when updates
are released.
Competition
The competitive landscape in the enterprise data center market is intense and
changing, and we expect there will be a new class of very large, well-financed,
and aggressive competitors, each bringing its own new class of products to
address this new market. We also expect to see acquisitions, further industry
consolidation, and new alliances among companies as they seek to serve the
enterprise data center market.
The Company is focused on developing a portfolio of Cloud Computing software
technologies and Application Services to address the needs of Independent
Software Vendors (ISV), Data Center providers, as well as commercial and
government organizations.
Results of Operations
Assets:
Total Assets decreased from $ 69,686,192 at December 31, 2011 to $63,042,234 at
September 30, 2012. Total Assets consists of Total Current Assets and Total
Non-Current Assets.
At September 30, 2012, Total Current Assets were $ 5,763,983 as compared to $
9,862,585 at December 31, 2011. Total Current Assets consist of: Cash and Cash
Equivalents; Accounts Receivable; Inventories; Prepaid Expenses; and Other
Receivables.
n Cash and Cash Equivalents decreased from $ 3,520,821 at December 31, 2011 to $
742,954 at September 30, 2012 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 the resulting losses in operations.
n Accounts Receivable decreased from $ 4,886,788 at December 31, 2011 to $
3,530,475 at September 30, 2012 due to increased collections from personnel
added to focus efforts on improvement of cash flow. GROUP reduced its accounts
receivables by approx. $1.0 million; GBS Corp by approx. $600,000, Pavone
Groupware GmbH by approx. $400,000 whereas the accounts receivables of GBSX
increased by $1.0 million resulting from the sale of the Companies
participation in Synaptris Holding.
n Inventories decreased from $ 236,712 at December 31, 2011 to $ 117,466 at
September 30, 2012 from the sale of finished goods (pdf licenses) within Pavone
Groupware GmbH.
n Prepaid Expenses decreased from $444,147 at December 31, 2011 to $ 193,468 at
September 30, 2012 from the reclassification of prepaid into current expenses.
n Other Receivables increased from $ 1,020,010 at December 31, 2011 to $
1,179,620 at September 30, 2012 and includes other prepaid costs (approx. $
180,000), tax assets (approx. $ 664,000) and deposits (approx. $ 335,000).
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At September 30, 2012, Total Non-Current Assets were $57,278,251 as compared to
$59,823,607 at December 31, 2011. Total Non-Current Assets consist of: Property
(plant and equipment), Non-Operating Receivables, Investments in Related
Company, Deferred Tax Assets, Goodwill, Software and Other Assets.
n Net Property (plant and equipment) increased from $1,604,994 at December 31,
2011 to $ 1,785,357 at September 30, 2012 with additional net investments in
depreciable equipment in IDC Global (approx. $526,000) and Group AG (approx. $
34,000) with the remainder primarily to charges for depreciation (approx. $
399,000).
n Non-Operating Receivables decreased from $ 548,909 at December 31, 2011 to $
5,014 at September 30, 2012. Decreases were from GROUP (approx. $102,000) for
other loans and for a loan repayment from Gedy IntraWare GmbH (approx.
$441,000).
n Investments in Related Company increased from $ 244,219 at December 31, 2011 to
$ 270,970 at September 30, 2012.
n Deferred Tax Assets increased from $ 3,945,272 at December 31, 2011 to
$5,220,470 at September 30, 2012 and consisted of Deferred Tax Assets derived
from financial assets and losses carried forward.
n Goodwill decreased from $39,221,603 at December 31, 2011 to $36,206,460 at
September 30, 2012 and consisted of the goodwill associated with eight business
entities. Increases were attributed to the purchase of GBS India with goodwill
of $ 1,053,748. Decreases were from the deconsolidation of SD Holdings of $
2,308,700, deconsolidation of Pavone, Ltd of $58,000 and a reduction for
negative goodwill for $ 1,702,208 as described more fully in Note 12 of the
Financial Statements.
n Software decreased from $14,258,610 at December 31, 2011 to $ 13,753,545 at
September 30, 2012, as a result of the quarterly 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.
n Other Assets increased from $ nil at December 31, 2011 to $ 36,435 at September
30, 2012. This category includes rent deposits.
Liabilities:
Total Liabilities decreased from $ 26,049,450 at December 31, 2011 to $
22,428,814 at September 30, 2012. Total Liabilities consists of Total Current
Liabilities and Total Non-Current Liabilities.
At September 30, 2012, Total Current Liabilities were $ 16,588,572 compared to $
19,058,394 at December 31, 2011. Total Current Liabilities consist of
Liabilities to Banks, Accounts Payable and Accrued Liabilities, Deferred Income,
Other Liabilities and Amounts Due to Related Parties.
n Notes Payable decreased from $1,381,821 at December 31, 2011 to $ nil at
September 30, 2012. $1,286 was converted into shares of GROUP with the balance
being repaid in cash in January 2012.
n Liabilities to Banks increased from $19,595 at December 31, 2011 to $ 20,945 at
September 30, 2012 and included a line of credit, and cash in transit.
n Accounts Payable and Accrued Liabilities decreased from $6,872,665 at December
31, 2011 to $ 5,212,619 at September 30, 2012. This includes trades payables
(approx. $ 2,365,000), and other accruals (approx. $2,847,000).
n Deferred Income increased from $6,476,582 at December 31, 2011 to $ 6,912,538
at September 30, 2012 encompassing maintenance income collected in advance with
a minor decrease related to contracts for annual services which were billed to
customers in advance.
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n Other Liabilities of $4,256,410 at December 31, 2011 decreased to $ 3,952,643
at September 30, 2012 and includes amounts due for purchased software,
purchased companies (Permessa) and business technology (ebVokus), short term
loans, and tax liabilities. Decrease was primarily related to the payment made
to the shareholders of Permessa Corporation for the initial purchase of this
entity ($1,150,000), payments made on the purchase of Lotus 911 ($1,094,190),
payments made on prior purchases of software ($2350) and other liabilities
(approx. $127,000). Increases included payments currently due on ebVokus
business ($257,100), short term investor borrowings (approx. $1,594,000) and an
increase in tax liability (approx. $220,700)
n Amounts Due to Related Parties increased from $ 51,321 at December 31, 2011 to
$ 489,827 at September 30, 2012 and includes amounts due to associated
companies and a reclassification of related party loans (approx. $466,000).
At September 30, 2012, our Total Non-Current Liabilities were $5,840,242,
compared to $ 6,991,056 at December 31, 2011. Total Non-Current Liabilities
consist of Liabilities to Banks, Deferred Tax Liabilities, Retirement Benefit
Obligation, and Other Liabilities.
n Liabilities to Banks increased from $ 3,463,483 at December 31, 2011 to $
3,742,578, at September 30, 2012 and consisted of a long-term business line of
credit due to the Baden-Württembergische Bank. The increase is due to the
funding of expenditures consistent with the advancement of our technology, the
associated costs necessary to build and implement the go to market strategy and
the resulting losses in operations.
n Deferred Tax Liabilities decreased from $ 1,196,472 at December 31, 2011 to
$1,049,950 at September 30, 2012 resulting from the deferred taxes associated
with the capitalization of software expenses, the purchase price allocation of
acquired assets, and the temporary adjustment of depreciation.
n Retirement Benefit Obligation increased from $57,364 at December 31, 2011 to $
59,719 at September 30, 2012.
n Other Liabilities decreased from $ 2,273,737 at December 31, 2011 to $ 987,995
at September 30, 2012. The decrease resulted from a debt to equity conversion
in GROUP in the amount of $2,266,075. Increases in the capital leases of IDC
Global, Inc. (approx. $192,000) and an unrelated third party loan of GBS India
(approx. $788,000) were included.
Revenues
For the quarter ended September 30, 2012, our Net Sales increased to $
23,154,010 from $21,320,351 from the quarter ended September 30, 2011.
Product revenue increased from $15,496,714 to $15,657,650 in the three-months
ended September 30, 2012 as compared to the prior year period as a result of an
increase from Third Party Products with an increase in revenue licenses also
contributing.
Service revenue increased from $5,823,637 to $7,496,360 in the three-months
ended September 30, 2012 as compared to the prior year period generated
primarily from the service revenue associated with the recently acquired IDC
Global, Inc. and Pavone Groupware GmbH.
The total revenue from IDC's data center services increased by $3.1million, and
GROUP contributed with an increased revenue of approximately $400,000.The total
revenue in GBS Corp. decreased by $1.2 million and PavoneGroupware GmbH
decreased by approx. $500,000. These decreases occurred mainly in the areas of
Third Party Products and Services.
Cost of Goods Sold
For the quarter ended September 30, 2012, Cost of Goods Sold increased to
$13,432,709 from $11,026,380 during the quarter ended September 30, 2011. Cost
of Goods Sold consists of Cost for Services, Cost for Third-Party Products and
Cost for Software Licenses.
Within Cost of Goods Sold there was an increase of $1,782,896 in the
three-months ended September 30, 2012 as compared to the prior year period for
costs related to the products division of Revenue and an increase of $623,838 in
the three-months ended September 30, 2012 as compared to the prior year period
for the associated costs within the services division of Revenue. Of these,
increases were in the categories of materials ($1.8 million), operating costs
($400,000) and capitalized development costs ($500,000). These increases were
primarily associated with the acquisitions of PavoneGroupware GmbH and IDC
Global, Inc., and additional material costs incurred through GROUP AG. Personnel
costs decreased ($100,000) and amortization decreased ($200,000) in the
three-months ended September 30, 2012 as compared to the prior year period.
Operating Expenses
For the quarter ended September 30, 2012, Operating Expenses decreased to
$16,025,761 from $ 17,959,656 during the quarter ended September 30,
2011. Operating Expenses consist of Selling Expenses, Administrative Expenses
and General Expenses.
15
For the quarter ended September 30, 2012, Selling Expenses decreased to
$11,056,192 from $12,277,502 during the quarter ended September 30, 2011. This
decrease was primarily attributable to decreases in operating expenses including
$400,000 less in marketing expenses, $300,000 less in travel expenses, $100,000
less in external services and $100,000 less in office space categories.
For the quarter ended September 30, 2012, Administrative Expenses decreased to
$4,215,399 from $4,839,237 for the quarter ended September 30,
2011. Administrative Expenses consist of costs for the management and
administration units. Within this decrease $200,000 is related to personnel
costs and $400,000 is related to operating expenses. The operating expenses
decreased by $300,000 in auditing and consulting costs due to reduced M&A
activity, and travel expenses were decreased by $200,000. Other operating
expenses increased by $100,000.
For the quarter ended September 30, 2012, General Expenses decreased to $754,170
from $842,917 for the quarter ended September 30, 2011, in response to newly
administered budgeting procedures which lead to a reduction in operating
expenses of $200,000 and an increase in General personnel costs of $100,000.
Other Income (Expense)
For the quarter ended September 30, 2012, Other Income of $92,863 increased from
Other Income of $64,916 for the quarter ended September 30, 2011. This includes
income from investments of associated companies and other income.
Liquidity & Capital Resources
At September 30, 2012 the Company had $742,954 in cash and cash equivalents,
compared to $ 3,250,821 at December 31, 2011.
In March 2011, the Company consummated a private placement offering of an
aggregate of 6,044,000 Units at a purchase price of $1.25 per Unit, for gross
proceeds of $7,555,000. Each Unit was comprised of one share of Common Stock and
one three-year Warrant to purchase one share of Common Stock at an exercise
price of $1.50 per share ("Private Placement Warrant"). The number of shares of
Common Stock issuable upon the exercise of the Private Placement Investor
Warrants and corresponding exercise prices are subject to adjustment in the
event of a stock split, dividend, recapitalization, reclassification and
otherwise. The Private Placement Warrants are only exercisable by the payment of
cash. Pursuant to the terms of the Private Placement Warrants, the warrant
holders are required to exercise their Private Placement Warrants in the event
our Common Stock trades at an average of at least $3.00 per share for a period
of not less than 20 consecutive trading days. Also, throughout the three year
exercise period of the Private Placement Warrants, the Company has the right to
redeem the Warrants for $0.05 per share.
In March 2012, the Company issued an aggregate of 2,020,000 warrants to five
"accredited investors" pursuant to Section 4(2) of the Securities Act (the
"Investor Warrants"). 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.
On April 9, 2012, the Company filed a Registration Statement on Form S-1 (File
No: 333-180626) (the "Registration Statement") therein registering the 6,044,000
shares of Common Stock underlying the Private Placement Warrants and 2,020,000
underlying the Investor Warrants on behalf of the selling stockholders named in
the Registration Statement (the "Selling Stockholders"). As of the date of this
Form 10-Q, the Registration Statement has not been declared effective under the
Securities Act by the SEC. The Company is in the process of amending the
Registration Statement in response to the SEC's most recent comments regarding
the first amendment to the Registration Statement filed on July 19, 2012.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. It will, however, receive proceeds in the
event the Private Placement Warrants and Investor Warrants are exercised by the
Selling Stockholders. As of the date of this Form 10-Q, the Selling Stockholders
have exercised an aggregate of 2,025,000 Private Placement Warrants and 900,000
Investor Warrants, for gross proceeds of $3,487,500. If the outstanding
4,019,000 Private Placement Warrants and 1,120,000 Investor Warrants are
exercised, the Company will receive an aggregate of $6,588,500 in additional
gross proceeds. However, there can be no assurance that any additional warrants
will be exercised. To date, we have used the proceeds of the warrants already
exercised for general corporate working capital purposes. We intend to use the
proceeds from the exercise of any additional warrants for general corporate
working capital purposes.
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(2) of the Securities Act due to the fact that the issuance was
isolated and did not involve a public offering of securities.
16
On April 28, 2012, $632,500 in notes payable to RealRisk Ventures, LLC
("RealRisk") were converted into 550,000 shares of common stock and into a
warrant as described below. On February 22, 2012, the Company had issued a
Convertible Promissory Note (the "RealRisk Note") to RealRisk in the principal
amount of $632,500 bearing interest at the rate of 4.5% per year and maturing on
June 30, 2012. The Company issued the RealRisk Note pursuant to 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. The outstanding principal and
interest under the RealRisk Note was convertible by the holder thereof into
shares of the Company's Common Stock at a rate of $1.15 per share prior to May
15, 2012. Under the RealRisk Note, if the holder converted such note prior to
May 1, 2012, the Company would issue the holder a warrant to purchase 550,000
shares of the Company's Common Stock for a period commencing on the date of
issuance until the third anniversary date of the date of issuance for $1.75 per
share.
On April 30, 2012, $ 632,500 in notes payable to Lotus Holdings Ltd. ("Lotus
Holdings") were converted into 550,000 shares of common stock and into a warrant
as described below. On January 5, 2012, the Company had issued a Convertible
Promissory Note (the "Lotus Note") to Lotus Holdings for the principal amount of
$500,000 bearing interest at the rate of 4.5% per year and maturing on June 30,
2012. The Company issued the Lotus Note pursuant to 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. The outstanding principal and interest
under the Lotus Note was convertible by the holder thereof into shares of the
Company's Common Stock at a rate of $1.15 per share prior to May 15, 2012. Under
the Lotus Note, if the holder converted such note prior to May 1, 2012, the
Company would issue the holder a warrant to purchase 500,000 shares of the
Company's Common Stock for a period commencing on the date of issuance until the
third anniversary date of the date of issuance for $1.75 per share.
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 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(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 September 30, 2012, the Company has not issued these 30,000
shares of Common Stock underlying under the Units but such shares are deemed to
be beneficially owned by Mr. Ernst.
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(2) of the Securities Act due to the fact that the
issuance was isolated and did not involve a public offering of securities.
On August 13, 2012, the Company entered into a Note Purchase and Security
Agreement with John A. Moore, a member of the Board of Directors of the Company,
and his spouse (collectively, the "Lender") pursuant to which the Company sold a
secured promissory note (the "Note") to the Lender in the aggregate principal
amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on
the first anniversary date of the issuance with a 2% prepayment penalty. To
secure the obligations of the Company under the Note, the Company granted the
Lender a first priority security interest in the accounts receivable of the
Company and its subsidiaries located in the United States of America on a
one-for-one (1:1) basis.
In connection with the execution of the Loan Agreement, on August 13, 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(2) thereof.
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
Quarter Ended Quarter Ended
September 30, September 30,
2012 2011Net cash provided (used in) Operating Activities $ (2,571,151 ) $ (2,361,451 )
Net cash provided by (used in) Investing Activities $ (2,491,803 ) $ (7,201,628 )
Net cash provided (used in) by Financing Activities $ 2,548,096 $ 3,954,275
Effect of exchange rate changes on cash
$ 6,991 $ 140,831
Net increase (decrease) in cash and cash equivalents
during the period
$ (2,507,867 ) $ (5,467,973 )
Cash and cash equivalents, beginning of period $ 3,250,821 $ 8,530,864
Cash and cash equivalents, end of period $ 742,954 $ 3,062,891
17
Cash Flows
Net Cash used by operating activities for the nine month period ending September
30, 2012 was approximately $2.6 million compared to net cash used by operating
activities for the nine month period ending September 30, 2011 of approximately
$ 3.5 million. This change is primarily due to cost cuts and aggressive
collection management made by the Company. The cash used in investing activities
during the nine month period ending September 30, 2012 was approximately $2.5
million, compared to cash used in investing activities in the comparative period
ending September 30, 2011 of approximately $6.6 million. This decrease was
primarily from the sale of intangible assets of approximately $1.8 million and
that no new investments were made in new businesses during the nine month period
ending September 30, 2012. Net cash provided by financing activities decreased
from approximately $ 4.0 million for the nine month period ended September 30,
2011 to approximately $2.5 million for the nine month period ended September 30,
2012. The decrease was primarily due to increase in loan to banks of
approximately $1.0 million and a decrease from a debt to equity swap of $2.2
million in GROUP Business Software AG.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
areas where critical estimates were made that have significant importance to the
financial statements are as follows:
i. Allowance for doubtful accounts. The company provides for potential bad
debts on an account-by-account basis. Bad debts have not been significant and
our allowance has been accurate. Non-trade receivables are also scrutinized and
allowed for based on expected recovery.
ii. Allocation of the price paid when acquiring subsidiaries. When the Company
acquires subsidiary companies an allocation of the purchase is required. The
allocation is based on management's analysis of the value of the net assets, and
is based on estimated future cash flows that each component will produce. Such
components might include software, customer lists and other intangible assets
that are not readily determinable. The allocation has a significant impact on
the future earnings of the Company as certain assets, customer lists for
example, must be amortized and charged to operations over time, while other
assets, notably goodwill, does not.
iii. Impairment testing on intangibles and goodwill. As noted in more detail
below, these areas involve numerous estimates as to expected cash flows,
expected rates of return and other factors that are difficult to determine and
are often out of the Company's direct control.
iv. Valuation of deferred tax credits. The Company provides an allowance for
tax recoveries arising from the application of losses carried forward. An
allowance is provided where management has determined that it is less than
likely that the loss will be applied and income taxes recovered.
Comprehensive Income (Loss)
The Company adopted FASB Codification topic ("ASC") 220, Reporting Comprehensive
Income, which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income consists of net income and other gains and losses affecting
stockholder's equity that are excluded from net income, such as unrealized gains
and losses on investments available for sale, foreign currency translation gains
and losses and minimum pension liability. Since inception, the Company's other
comprehensive income represents foreign currency translation adjustments and
small net actuarial losses on pension plans.
Net Income per Common Share
FASB Codification topic ("ASC") 260, Earnings per share, requires dual
presentation of basic and diluted earnings per share (EPS) with a reconciliation
of the numerator and denominator of the EPS computations. Basic earnings per
share amounts are based on the weighted average shares of common stock
outstanding. If applicable, diluted earnings per share would assume the
conversion, exercise or issuance of all potential common stock instruments such
as options, warrants and convertible securities, unless the effect is to reduce
a loss or increase earnings per share. Diluted net income (loss) per share on
the potential exercise of the equity-based financial instruments is not
presented where anti-dilutive. Accordingly, although the diluted weighted
average number of common stock outstanding is disclosed on the statements of
operation, the calculated net loss per share is the same for bother basic and
diluted as both are based on the basic weighted average of common stock
outstanding. There were no adjustments required to net income for the period
presented in the computation of diluted earnings per share.
18
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, the Bulgarian lev and the Indian rupee. Accordingly,
some assets and liabilities are incurred in those currencies and we are subject
to foreign currency risks.
Fair Value Measurements
The Company follows FASB Codification topic (ASC") 820, Fair Value Measurements
and Disclosures, for all financial instruments and non-financial instruments
accounted for at fair value on a recurring basis. This new accounting standard
establishes a single definition of fair value and a framework for measuring fair
value, sets out a fair value hierarchy to be used to classify the source of
information used in fair value measurement and expands disclosures about fair
value measurements required under other accounting pronouncements. It does not
change existing guidance as to whether or not an instrument is carried at fair
value. The Company defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities, which are required to be recorded
at fair value, the Company considers the principal or most advantageous market
in which the Company would transact and the market-based risk measurements or
assumptions that market participants would use in pricing the asset or
liability, such as inherent risk, transfer restrictions and credit risk.
The Company has adopted (ASC") 825, Financial Instruments, which allows
companies to choose to measure eligible financial instruments and certain other
items at fair value that are not required to be measured at fair value. The
Company has not elected the fair value option for any eligible financial
instruments.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of issuance to be cash equivalents.
Inventories
Pursuant to ASC 330 (Inventories), inventories held for sale are recognized
under inventories. Inventories were measured at the lower of cost or market.
Cost is determined on a first-in-first out basis, without any overhead
component.
Goodwill and other Intangible Assets
Intangible assets predominately include goodwill, acquired software and
capitalized software development. Intangible assets acquired in exchange for
payment are reflected at acquisition costs. If the development costs can be
capitalized per ASC 985-20-25, these are reflected as ascribable personnel and
overhead costs.
Company created software can be intended for sale to third parties or used by
the Company itself. If the conditions for capitalization are not met, the
expenses are recorded with their effect on profit in the year in which they were
incurred.
The Company amortizes intangible assets with a limited useful life to the
estimated residual book value in accordance with ASC regulations. In addition,
in special circumstances according to ASC 350-30, a recoverability test is
performed and, if applicable, unscheduled amortization is considered.
The useful life of acquired software is between three and five years and three
years for Company-designed software.
Intangible assets obtained as part of an acquisition which do not meet the
criteria for a separate entry are identified as goodwill. Goodwill is reviewed
once a year during an impairment test, whereby the appraised fair value of the
invested capital of the reporting unit, is compared with the carrying (book)
value of its invested capital amount (including goodwill.) Use value is
generally applied in order to determine the recoverability of goodwill and
intangible assets with an indefinite useful life. The projected financial plan
prepared by the management serves as the basis for this determination of use
value and the planning assumptions are each adjusted for the current state of
knowledge. Reasonable assumptions regarding macroeconomic trends and historical
developments are taken into account in making these adjustments. Future
estimated cash flows are determined based on the expected growth rates of the
markets in question.
19
If the carrying amount of the reporting unit exceeds the appraised fair value,
the impairment based on use value measures the amount of loss, if any, and an
unscheduled amortization expense is recorded. If the appraised value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
not considered to be impaired.
Property, Plant and Equipment
Property, plant and equipment are valued at acquisition or manufacturing costs,
reduced by scheduled and, if necessary, unscheduled depreciation. Fixed assets
are depreciated on a straight-line basis, prorated over their expected useful
life. Scheduled depreciation is mainly based on useful lives of 3 to 10 years.
Leasehold improvements are depreciated up to 40 years.
If fixed assets are sold, retired or scrapped, the profit or loss arising from
the difference between the net sales proceeds and the residual book value are
included under other operating earnings and expenses.
Impairment or Disposal of Long-Lived Assets
The Company evaluates the recoverability of its fixed assets and other assets in
accordance with ASC topic, 360.10. This guidance requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds its' expected cash flows or appraised value In this instance, the asset
is considered to be impaired and is written down to fair value.
Revenue Recognition
License Revenues
Our license revenues consist of revenues earned from the licensing of our
software products. These products are generally licensed on a perpetual basis.
Pricing models have generally been based either upon the physical
infrastructure, such as the number of physical desktop computers or servers, on
which our software runs or on a per user basis. License revenues are recognized
when the elements of revenue recognition for the licensed software are complete,
generally upon electronic shipment of the software and the software key to
provide full access to all functionalities for our customers. In general our
invoices reflect license, service and maintenance components. In the case of
multi element contracts, the revenues allocated to the software license in most
cases represent the residual amount of the contract after the fair value of the
other elements has been determined. Certain products of our software offering
are licensed on a subscription basis.
Software Maintenance Revenues
Software maintenance revenues are recognized ratably on a pro-rata basis over
the range of the contract period. Our contract periods typically range from one
to five years. Vendor-specific objective evidence ("VSOE") of fair value for
software maintenance services is established by the rates charged in stand-alone
sales of software maintenance contracts or the stated renewal rate for software
maintenance. Customers who are party to software maintenance agreements with us
are entitled to receive support, product updates and upgrades on a
when-and-if-available basis.
Professional Services Revenues
Professional services include pre-project consulting, software design,
customization, project management, implementation and training. Professional
services are not considered essential to the functionality of our products, as
these services do not alter the product capabilities and may be performed by our
customers or by other vendors. Professional services engagements performed for a
fixed fee, for which we are able to make reasonably dependable estimates of
progress toward completion, are recognized on a proportional performance basis
based on hours incurred and estimated hours of completion. Professional services
engagements that are on a time and materials basis are recognized based on hours
incurred. Revenues on all other professional services engagements are recognized
upon completion. Our professional services may be sold with software products or
on a stand-alone basis. Vendor Specific Objective Evidence (VSOE) of fair value
for professional services is based upon the standard rates we charge for such
services when sold separately.
Foreign Currency Translation
The functional currency of the Company is US dollars. For financial reporting
purposes, the financial statements of GROUP were translated into US dollars.
Assets and liabilities were translated at the exchange rates at the balance
sheet dates and revenue and expenses were translated at the average exchange
rates and stockholders' equity was translated at historical exchange rates. Any
translation adjustments resulting are not included in determining net income but
are included in foreign exchange adjustment to other comprehensive income, a
component of stockholders' equity.
20
Other Provisions
According to FASB ASC 450 Contingencies, provisions are made whenever there is a
current obligation to third parties resulting from a past event which is likely
in the future to lead to an outflow of resources and of which the amount can be
reliably estimated. Provisions not already resulting in an outflow of resources
in the following year are recognized at their discounted settlement amount on
the financial statement date. The discount taken is based on market interest
rates. The settlement amount also includes the expected cost increases.
Provisions are not set off against contribution claims. If the amended estimate
leads to a reduction of the obligatory amount, the provision is proportionally
reversed and the earnings are recognized in other operating earnings.
Deferred Taxes
Income taxes are provided in accordance with FASB Codification topic 740,
Accounting for Income Taxes. A deferred tax asset or liability is recorded for
all temporary differences between financial and tax reporting and net operating
loss-carry forwards.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that, some portion or all of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted
for the effect of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other
(Topic 350): Testing Goodwill for Impairment. With the objective of reducing the
cost and complexity of performing an impairment test for indefinite-lived
intangible assets by simplifying how an entity tests those assets for impairment
and to improve consistency in impairment testing guidance among long-loved asset
categories. The amendments permit an entity first to assess qualitative factors
to determine whether it is more likely than not that an indefinite-lived
intangible asset is impaired as a basis for determining whether it is necessary
to perform the quantitative impairment test in accordance with Subtopic 350-30,
Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The
more-likely-than-not threshold is defined as having the likelihood of more than
50 percent. The amendments are effective for annual and interim impairment tests
performed beginning April 1, 2013. Adoption of this new standard is not expected
to have significant impact to the Company's financial statement.
Principles of Consolidation and Reverse Acquisition
As previously disclosed, the Company originally exchanged a total of 5,405,411
shares of common stock in exchange for 50.1% of the outstanding common shares of
GROUP (and retained its 50.1% shareholding by acquiring an additional 883,765
shares of GROUP on February 27, 2012). Although the Company was the legal
acquirer, the transaction was accounted for as a recapitalization of GROUP in
the form of a reverse merger, whereby GROUP became the accounting acquirer and
was deemed to have retroactively adopted the capital structure of the
Corporation. Accordingly, the accompanying consolidated financial statements
reflect the historical consolidated financial statements of GROUP for all
periods presented, and do not include the historical financial statements of the
Company. All costs associated with the reverse merger transaction were expensed
as incurred. Those expenses totaled approximately $300,000 and were included in
professional fees in administrative expenses.
The Company has based its financial reporting for the consolidation with GROUP
in accordance with FASB Accounting Standard Codification (ASC) 805-40 as it
relates to reverse acquisitions. Goodwill has been measured as the excess of the
fair value of the consideration effectively transferred by the Company, the
acquiree, for financial reporting purposes, over the net amount of the Company's
recognized identifiable assets and liabilities.
We have recorded the acquired assets and liabilities of GBSX on the acquisition
date of January 6, 2011, at their fair value and the operations of GBSX have
been included in the consolidated financial statements since the acquisition
date.
The assets and liabilities of GROUP, the acquirer for financial reporting
purposes, are measured and recognized in the consolidated financial statements
at their precombination carrying amounts in accordance with ASC 805-40-45-2(a).
Therefore, in a reverse acquisition, the non-controlling interest reflects the
non-controlling shareholders' proportionate interest in the pre-combination
carrying amounts of GROUP's net assets even though the non-controlling interests
in other acquisitions are measured at their fair values at the acquisition date.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholder's equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
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