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EX-31.2 - EXHIBIT 31.2 - GBS Enterprises Incv329019_ex31-2.htm
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EX-32.2 - EXHIBIT 32.2 - GBS Enterprises Incv329019_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - GBS Enterprises Incv329019_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended: September 30, 2012

 

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

 

Commission file number: 000-53223

 

GBS ENTERPRISES INCORPORATED

(Exact name of registrant as specified in its charter)

 

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

 

585 Molly Lane

Woodstock, GA 30189

(Address of principal executive offices)

 

(404) 891-1711

Issuer’s telephone number

 

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

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

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

 

Common Stock, $0.001 par value

(Title of class)

 

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

 

Yes ¨ Nox

 

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

 

Yes ¨ No x

 

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

 

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

 

Yes x No ¨

 

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

 

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange ct. (Check one):

 

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

 

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

 

Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE REGISTRANTS

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of September 30, 2012, there were 29,431,664 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 3
Item 1. Consolidated Financial Statements 3
  Balance Sheet 3
  Statement of Operations 4
  Statement of Cash Flows 5
  Notes to the Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 44
Item 3. Quantitative and Qualitative Disclosures About Market Risk 58
Item 4. Controls and Procedures 58
     
  PART II - OTHER INFORMATION 59
Item 1. Legal Proceedings 59
Item 1A. Risk Factors 59
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
Item 3. Defaults Upon Senior Securities 59
Item 4. [Removed and Reserved by the Securities and Exchange Commission] 59
Item 5. Other Information 59
Item 6. Exhibits 59
Signatures   60

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1.          Financial Statements 

 

GBS Enterprises Incorporated

 

Interim Consolidated Financial Statements

 

September 30, 2012

 

(Unaudited)

  

GBS Enterprises Incorporated

Interim Consolidated Balance Sheets

September 30, 2012 and December 31, 2011

(Unaudited)

 

   September 30, 2012   December 31, 2011 
   $   $ 
Assets          
Current Assets          
Cash and cash equivalents - Note 7   742,954    3,250,821 
Accounts receivable - Note 8   3,530,475    4,886,788 
Inventories - Note 3   117,466    236,712 
Prepaid expenses - Note 9   193,468    444,147 
Other receivables - Note 10   1,179,620    1,020,010 
Assets held for Sale   -    24,107 
Total current assets   5,763,983    9,862,585 
           
Property, plant and equipment - Note 11   1,785,357    1,604,994 
Non-Operating Receivables - Note 12   5,014    548,909 
Investment in related company, at equity - Note 6   270,970    244,219 
Deferred tax assets   5,220,470    3,945,272 
Goodwill - Note 13   36,206,460    39,221,603 
Software - Note 14   13,753,545    14,258,610 
Other assets - Note 15   36,435    - 
Total non-current assets   57,278,251    59,823,607 
           
Total assets   63,042,234    69,686,192 
           
Liabilities and stockholders' equity          
Current liabilities          
Notes payable   -    1,381,821 
Liabilities to banks - Note 16   20,945    19,595 
Accounts payables and accrued liabilities - Note 17   5,212,619    6,872,665 
Deferred income - Note 19   6,912,538    6,476,582 
Other liabilities - Note 18   3,952,643    4,256,410 
Due to related parties   489,827    51,321 
Total current liabilities   16,588,572    19,058,394 
           
Liabilities to banks - Note 20   3,742,578    3,463,483 
Deferred tax liabilities   1,049,950    1,196,472 
Retirement benefit obligation - Note 22   59,719    57,364 
Other liabilities - Note 21   987,995    2,273,737 
Total non-current liabilities   5,840,242    6,991,056 
           
Total liabilities   22,428,814    26,049,450 
           
Stockholders' equity          
Capital stock - Note 23          
Authorized:          
75,000,000 common shares of $.001 par value each 25,000,000 preferred shares of $.001 par value each Issued and outstanding 29,431,664 common shares (December 31, 2011: 27,247,958 )   29,432    27,248 
Additional paid in capital   49,346,693    47,325,971 
Accumulated deficit   (15,488,493)   (12,147,666)
Other comprehensive income   410,713    494,206 
Subscriptions received   45,000    - 
    34,343,345    35,699,759 
Noncontrolling interest in subsidiaries   6,270,075    7,936,983 
           
Total stockholders' equity   40,613,420    43,636,742 
           
Total stockholders' equity and liabilities   63,042,234    69,686,192 
           
Supplemental Cash Flow Disclosures - Note 26          
Subsequent events - Note 27          

 

3
 

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Operations

For the three and nine month periods ended September 30, 2012 and 2011

(Unaudited)

 

   For the three months   For the nine months 
   Ended September 30   Ended September 30 
   2012   2011   2012   2011 
   $   $   $   $ 
                 
Revenues - Note 24                
Products   5,129,213    6,779,677    15,657,650    15,496,714 
Services   2,320,972    1,449,641    7,496,360    5,823,637 
    7,450,184    8,229,318    23,154,010    21,320,351 
Cost of goods sold                    
Products   1,570,195    1,876,286    5,759,646    3,976,750 
Services   2,756,207    3,000,140    7,673,063    7,049,630 
    4,326,402    4,876,426    13,432,709    11,026,380 
Gross profit   3,123,782    3,352,892    9,721,301    10,293,971 
                     
Operating expenses                    
Selling expenses   3,137,347    4,308,647    11,056,192    12,277,502 
Administrative expenses   1,394,743    1,322,386    4,215,399    4,839,237 
General expenses   397,507    142,062    754,170    842,917 
    4,929,597    5,773,095    16,025,761    17,959,656 
                     
Operating income   (1,805,815)   (2,420,203)   (6,304,460)   (7,665,685)
                     
Other Income (expense) - Note 25                    
Other Income (expense)   937,667    (245,631)   92,863    64,916 
Interest income   209    2,367    2,866    19,254 
Interest expense   (133,741)   (53,269)   (241,405)   (261,753)
    804,134    (118,950)   (145,676)   (177,583)
                     
Income (loss) before income taxes   (1,001,681)   (2,539,153)   (6,450,136)   (7,843,268)
                     
Income tax (income) expense   (287,718)   (522,667)   (1,409,759)   (2,105,739)
                     
Net income (loss)   (713,963)   (2,016,486)   (5,040,377)   (5,737,529)
Net income (loss) attributable to non controlling interest   (271,574)   (868,768)   (1,699,550)   (2,492,331)
                     
Net income (loss) attributable to stockholders   (442,389)   (1,147,718)   (3,340,827)   (3,245,198)
                     
Other comprehensive income (loss)   214,494    (30,387)   (116,135)   (421,469)
Other comprehensive income  (loss) attributable to non noncontrolling interest   107,033    (15,163)   (32,642)   (210,313)
Other comprehensive income (loss) attributable to stockholders   107,462    (15,224)   (83,493)   (211,156)
Net income (loss) and comprehensive income (loss) attributed to stockholders   (334,927)   (1,162,941)   (3,424,320)   (3,456,354)
                     
                     
Net earnings (loss) per share, basic and diluted  $(0.024)  $(0.084)  $(0.176)  $(0.265)
                     
Weighted average number of common stock outstanding, basic and diluted   29,431,664    24,002,476    28,598,033    21,621,201 

 

4
 

 

GBS Enterprises Incorporated

Interim Consolidated Statements of Cash Flows

For the nine months ended September 30, 2012 and September 30, 2011

(Unaudited)

 

   September 30, 2012   September 30, 2011 
   $   $ 
         
Cash flow from operating activities          
Net loss / net income   (5,040,377)   (5,737,529)
Adjustments          
Deferred income taxes   (1,421,720)   (2,067,420)
Depreciation and amortization   3,289,383    3,433,734 
Write-down of Goodwill and Intangibles   3,079,168    - 
Gains from equity investment   (26,751)   5,065 
Loss (Gain) on Sale of Assets   (1,566,119)   (2,415,601)
Changes in operating assets and liabilities:          
Accounts receivable and other current assets   1,471,490    2,178,160 
Other non current assets   (37,398)   (95,509)
Inventories   119,245    (264,611)
Accounts payable and other liabilities   (2,438,073)   2,602,260 
           
Net cash provided (used) by operating activities   (2,571,151)   (2,361,451)
           
Cash flow from investing activities          
(Purchase) Sale of intangible assets   (2,527,077)   (3,035,533)
(Purchase) Sale of property, plant and equipment   (579,206)   (2,186,029)
(Purchase) Sale of Subsidiaries   -    - 
(Increase) Decrease in Financial assets   614,480    (1,980,066)
           
Net cash provided (used) in investing activities   (2,491,803)   (7,201,628)
           
Cash flow from financing activities          
Net borrowings - banks   1,067,397    2,826,184 
Other borrowings   (2,074,044)   (3,340,592)
Capital paid-in   3,583,176    6,678,950 
Loans from related party   (28,432)   (2,210,267)
           
Net cash provided (used) in financing activities   2,548,096    3,954,275 
           
Effect of exchange rate changes on cash   6,991    140,831 
           
Net increase (decrease) in cash   (2,507,867)   (5,467,973)
Cash and cash equivalents - Beginning of the year   3,250,821    8,530,864 
           
Cash and cash equivalents - End of year   742,954    3,062,891 

 

5
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 1INTERIM 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 accept as described in Note 4 with respect to reporting periods, follow the same accounting policies and methods of their application as the Company’s audited March 31, 2012 financial statements. All adjustments are of a normal recurring nature. It is suggested that these interim financial statements be read in conjunction with the Company’s March 31, 2012 financial statements.

 

Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that can be expected for the year ending December 31, 2012.

  

6
 

  

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 2COMPANY AND BACKROUND

 

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

 

£Information Technology (“IT”) systems analysis, planning and management;
£Automating business processes;
£Optimizing system and application performance;
£Ensuring the security and compliance of systems, applications and processes; and
£Migrating and integrating systems, applications and processes.

 

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

 

Our software and services are designed to mainly serve organizations that have investments in IBM’s Lotus® Notes and Domino platform. The IBM Lotus® Notes and Domino platform is both a system for enterprise email as well as an application platform, meaning that it can be used as both an email system and an environment in which business applications can be deployed and used. This platform was originally brought to market by Lotus Development Corp. in 1989, and was subsequently acquired by IBM in 1995. According to Radicati, 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 Radicati Group Inc., April 2011, “IBM Lotus Notes/Domino Market Analysis, 2011-2015“)

 

7
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

8
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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 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”).

 

9
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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

 

Transactions following the acquisition

 

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

 

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

 

10
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

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.

 

11
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

12
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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. IDC is 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.

 

13
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

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.

 

14
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

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.

 

15
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Comprehensive Income (Loss)

 

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

 

Net Income per Common Share

 

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

 

Financial Instruments

 

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

 

16
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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 Bulgarian Lev. Accordingly, some assets and liabilities are incurred in those currencies and we are subject to foreign currency risks.

 

Fair Value Measurements

 

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

 

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

 

Cash and cash equivalents

 

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

 

17
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Inventories

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

 

Goodwill and other Intangible Assets

 

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

 

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

 

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

 

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

 

Intangible assets obtained as part of an acquisition which do not meet the criteria for a separate entry are identified as goodwill. Goodwill is reviewed once a year during an impairment test, whereby the appraised fair value of the invested capital of the reporting unit, is compared with the carrying (book) value of its invested capital amount (including goodwill.) Use value is generally applied in order to determine the recoverability of goodwill and intangible assets with an indefinite useful life. The projected financial plan prepared by the management serves as the basis for this determination of use value and the planning assumptions are each adjusted for the current state of knowledge. Reasonable assumptions regarding macroeconomic trends and historical developments are taken into account in making these adjustments. Future estimated cash flows are determined based on the expected growth rates of the markets in question.

 

18
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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

 

Property, Plant and Equipment

 

Property, plant and equipment are valued at acquisition or manufacturing costs reduced by scheduled and, if necessary, unscheduled depreciation. Fixed assets are depreciated on a straight-line basis, prorated over their expected useful life. Scheduled depreciation for property, plant and equipment is based on useful lives of 3 to 10 years. Leasehold Improvements are depreciated up to 40 years.

 

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

 

Impairment or Disposal of Long-Lived Assets

 

The Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC topic, 360.10. This guidance requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds its’ expected cash flows or appraised value In this instance, the asset is considered to be impaired and is written down to fair value.

 

Revenue Recognition

 

Sources of Revenues:

 

License revenues

 

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

 

19
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

20
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

21
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Recent Accounting Pronouncements

 

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

 

Off - Balance Sheet Arrangements

 

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

 

Principles of Consolidation and Reverse Acquisition

 

As previously disclosed, the Company has exchanged a total of 5,405,411 shares of common stock in exchange for 50.1% of the outstanding common shares of GROUP. Although the Company was the legal acquirer, the transaction was accounted for as a recapitalization of GROUP in the form of a reverse merger, whereby GROUP becomes the accounting acquirer and is deemed to have retroactively adopted the capital structure of the Corporation. Accordingly, the accompanying consolidated financial statements reflect the historical consolidated financial statements of GROUP for periods presented prior to January 6, 2011. All costs associated with the reverse merger transaction were expensed as incurred. Those expenses totaled approximately $300,000 and were included in professional fees in administrative expenses.

 

22
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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

 

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

 

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

 

4.CHANGE IN ACCOUNTING POLICIES

 

Fiscal reporting

 

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

 

23
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 5SUBSIDIARY COMPANIES

 

(KUSD = 1,000’s of US Dollars)

 

The subsidiaries listed below were included in the basis of consolidation:

 

    Stockholders'
      Profit  
      Equity      of the   Date
      as of
09.30.12
   Percentage of
Subscribed Capital
   Consolidated
Year
   of the
First
   Headquarters  KUSD   KUSD   in %   KUSD   Consolidation
                       
ebVOKUS Software GmbH  Dresden   317.35    54    50.1%   -78   1/11/2005
GROUP Business Software Ltd.  Manchester   1,365.29    23    50.1%   -88   31/12/05
GROUP Business Software Corp.  Woodstock   -11,632.46    1    50.1%   -3,867   31/12/05
GROUP LIVE N.V.  Den Haag   -3,377.03    134    50.1%   -8   31/12/05
Permessa Corporation  Woodstock   -5.23    0    50.1%   667   9/22/2010
Relavis Corporation  Woodstock   -790.90    2    50.1%   18   1/8/2007
GROUP Business Software AG  Eisenach   25,481.40    29    reverse 50.1%   -1,276   6/1/2011
Pavone AG  Paderborn   -1,241.87    47    100.0%   -614   1/4/2011
Pavone Ltd.  North Yorkshire   -79.25    587    100.0%   -4   1/4/2011
Groupware Inc.  Woodstock   -481.66    1    100.0%   0   1/6/2011
IDC Global, Inc.  Chicago   2,451.09    0    100.0%   132   7/25/2011
SD Holdings, Inc.  Mauritius   -776.99    3,382    100.0%   89   9/27/2011
GBS India  Chennai   68.14    14    100.0%   44   7/1/2012

 

The above table reflects the individual companies. On a consolidated level, the following transactions have taken place as reported:

 

On April 1, 2012, the Company sold SD Holdings Ltd. (“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.

 

24
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

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.

 

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.

 

Note 6ASSOCIATED COMPANY

 

Due to the absence of domination/control, B.E.R.S. AD, Varna, Bulgaria was treated an associated company in the consolidated financial statements. GROUP Business Software AG's acquired B.E.R.S AD for 265 (KEUR). The investment, representing 50% of B.E.R.S. AD has been accounted for on the equity basis, with the Company’s proportionate share of income being recorded in the consolidated statement of operations with a corresponding adjustment to the asset carrying value. In the quarter ended September 30, 2012, the proportionate share of the income was 18.5 KUSD (December 31, 2011 year end: 35 KUSD.)

 

25
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

     Total
Value
          
       Assets             
       09.30.12   Debts   Sales Revenues   Annual Profit/Loss 
Associated Companies  Headquarters   KUSD   KUSD   KUSD   KUSD 
B.E.R.S. AD   Varna    271    103    382    37 

 

Note 7CASH AND CASH EQUIVALENTS

 

As of the financial statement date, the Company’s cash and cash equivalents totaled 743 KUSD (December 31, 2011 year end: 3,251 KUSD). Included in that amount are cash equivalents of 20 KUSD (December 31, 2011 year end: 12 KUSD).

 

Note 8ACCOUNTS RECEIVABLE

 

As of the financial statement date, Accounts Receivable was 3,530 KUSD (December 31, 2011 year end: 4,887 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 9PREPAID EXPENSES

 

Prepaid expenses in the amount of 193 KUSD were primarily recorded for prepaid rent and advance on technological collaboration events (December 31, 2011 year end: 444 KUSD).

 

Note 10OTHER RECEIVABLES - CURRENT

 

Other Receivables as of the financial statement date were 1,180 KUSD (December 31, 2011 year end: 1,020 KUSD). The largest individual item under other receivables represents tax assets (664 KUSD). Also included are deposits (335 KUSD) and other prepaid costs (181 KUSD).

 

26
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

Updated 12.31.2011  Cost
8,459.5
   Accumulated depreciation
6,854.5
   Net Book Value
1,605.0
 
Additions   579.2    399.4      
Disposals   -460.1    -440.4      
Currency differences   0.0    0.0      
Reclassifications   241.8    221.5      
Updated 09.30.2012   8,820.4    7,035.0    1,785.4 

 

Note 12 NON-OPERATING RECEIVABLES

 

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

 

   KUSD   KUSD 
   2012   2011 
Receivable from sale of GEDYS IntraWare GmbH          
Balance outstanding, payable in monthly installments of $ 20,006, bearing interest at prime plus .25%, no greater than 2% per annum   0    777 
Current portion, included in other current receivables   0    -233 
Net Amount included In Non-Operating Receivables   0    544 
Other long term receivables   5    5 
Balance, September 30 and December 31   5    549 

 

27
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 13GOODWILL

 

Goodwill arises from the following business acquisitions:

 

Affiliated Company  Date of the First
Consolidation
  Goodwill
Q3 in
kUSD
   Goodwill
YE 2011
in kUSD
 
GROUP Business Software AG  6/1/11   18,492.2    20,194.4 
GROUP Business Software Corp.  12/31/05   2,177.5    2,177.5 
GROUP LIVE N.V.  12/31/05   0.0    0.0 
GROUP Business Software Ltd  12/31/05   2,765.1    2,765.1 
ebVOKUS Software GmbH  1/10/05   443.6    443.6 
Relavis Corporation  1/8/07   0.0    0.0 
Permessa  9/22/10   2,387.4    2,387.4 
Pavone AG  1/4/11   5,892.5    4,956.4 
Groupware Inc.  1/6/11   0.0    994.1 
IDC  7/25/11   2,994.4    2,994.4 
SD Holding  9/27/11   0.0    2,308.7 
GBS India  7/1/12   1,053.7    0.0 
TOTAL      36,206.5    39,221.6 

 

During the period ended September 30, 2012, the Company sold SD Holdings, Ltd. and dissolved Pavone Ltd., the effect of which was to reduce the goodwill associated with these subsidiaries. The reduction in goodwill attributed to GROUP Business Software AG (“GROUP”) resulted when the Company purchased additional shares of GROUP as disclosed in Note 2

 

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.

 

28
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Capitalized development costs are generally amortized over a period of three years starting with the date of marketability of the new products or major releases.

 

Concessions, Industrial Property Rights, Licenses

 

The intangible financial assets carried in this item are licenses acquired in exchange for payment.

 

These financial assets are measured at acquisition cost less scheduled straight-line amortization. The assets added in the scope of the cost price allocation of the business divisions acquired this year.

 

The useful life spans were based uniformly throughout the Company according to those used by the parent company. Scheduled amortization is performed over a period from three to ten years.

 

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

 

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

 

Concessions and licenses
kUSD
  Development
of the cost
   Development
of
accumulated
depreciation
   Balance 
             
Updated December 31, 2011   33,093.8    18,835.2    14,258.6 
Additions   2,520.1    2,890.0      
Disposals   -140.0    -4.9      
Currency differences   93.0    0.0      
Reclassifications   0.0    0.0      
Updated September 30, 2012   35,473.9    21,720.3    13,753.6 

 

Note 15OTHER ASSETS

 

This includes of 36 KUSD from rent deposits (December 31, 2011 year end: Nil KUSD).

 

29
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 16LIABILITIES TO BANKS - CURRENT

 

Short term liabilities to banks of 21 KUSD (December 31, 2011 year end: 20 KUSD) represent an operating line of credit (6 KUSD), bearing interest at a 3.25% daily periodic rate with a credit limit of 100 KUSD and checks in transit (15 KUSD) at the financial statement date.

 

Note 17ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Trade payables

 

As of the financial statement date, trade accounts payable amounted to 2,365 KUSD (December 31, 2011 year end: 2,235 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.

 

  Status               Currency   Status 
KUSD  12.31.11   Utilization   Dissolution   Increase   Differences   09.30.12 
                         
Tax provision   32    32    0    0    0    0 
Salary   859    587    26    888    0    1,134 
Vacation   439    70    63    16    0    322 
Workers Compensation Insurance Association   27    25    0    15    0    18 
Compensation Levy for Non-Employment of Severely Handicapped Persons   17    18    0    15    0    14 
Outstanding Invoices   882    834    183    747    0    611 
Annual Financial Statement Costs   401    273    119    204    0    214 
Other Provisions   367    198    2    237    0    404 
Warranties   60    0    0    0    0    59 
Gesture of goodwill   160    0    160    0    0    0 
Provision for Legal Costs   71    0    1    0    0    71 
                               
Total   3,314    2,035    554    2,122    0    2,847 

 

30
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Provisions for salaries of 1,134 KUSD (December 31, 2011 year end: 859 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 322 KUSD (December 31, 2011 year end: 439 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 611 KUSD (December 31, 2011 year end: 882 KUSD) was created.

 

Other Provisions of 404 KUSD (December 31, 2011 year end: 367 KUSD) include accruals for Board of Director compensation (46 KUSD) and miscellaneous provisions.

 

Expenses for the audit of the Company and preparation of the annual consolidated financial statements were recognized at 214 KUSD (December 31, 2011 year end: 401 KUSD).

 

A provision for anticipated legal consulting of 71 KUSD was recorded (December 31, 2011 year end: 71 KUSD).

 

For warranty claims, a provision of 59 KUSD (December 31, 2011 year end: 60 KUSD) was created determined by service income.

 

Note 18OTHER SHORT TERM LIABILITIES

 

Other short-term liabilities of 3,953 KUSD (December 31, 2011 year end: 4,256 KUSD) includes the following obligations and payments currently due:

 

   9.30.12    12.31.11 
Other Short-Term Liabilities   KUSD    KUSD 
Purchase Assets L911   0    1,094 
Purchase Assets Permessa   750    1,900 
Tax Liabilities   944    724 
Purchase Archiving Software   321    324 
Purchase Payment EBVokus   257    0 
Short Term Borrowings   1,592    0 
Other Short Term Liabilities   88    215 
    3,953    4,256 

 

31
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 19DEFERRED 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 6,912 KUSD (December 31, 2011 year end: 6,477 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 20LIABILITIES TO BANKS – LONG TERM

 

Liabilities to banks as of the financial statement date was 3,743 KUSD (December 31, 2011 year end: 3,463 KUSD) represent bank obligations of GROUP AG with Baden-Württembergische Bank with a credit line totaling 4,000 KUSD (3,000 KEUR) and are collateralized by a silent blanket agreement for GROUP AG’s trade receivables. The term of the loan runs until June 30, 2014. The Company has curtailed the risk of changing interest rates existing with regard to liabilities to banks due to variable interest rate agreements by obtaining a fixed interest rate for half of its credit line. Accordingly, 2,000 KUSD (1,500 KEUR) is bearing interest at prime plus 1.5% and 2,000 KUSD (1,500 KEUR) is fixed at 3.5%.

 

Note 21OTHER LIABILITIES – LONG TERM

 

Other long-term liabilities as of the financial statement date of 988 KUSD (December 31, 2011 year end: 2,274 KUSD) includes long-term capital leases of 200 KUSD (December 31, 2011 year end: 8 KUSD) and an unrelated third party loan of 788 KUSD (December 31, 2011 year end: nil).

 

32
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 22RETIREMENT BENEFIT OBLIGATIONS

 

There has been no change in the retirement benefit obligations since last reported in the annual financial statements. Please refer to that statement for details.

 

Note 23COMMON STOCK

 

Common stock belongs to the legally purchasing company according to the principles of a Reverse Acquisition and therefore, the common stock is that of GBS Enterprises Incorporated. The Company has authorized capital of 75,000,000 common shares and 25,000,000 preferred shares each with a par value of $001. No preferred shares have been issued. As at September 30, 2012, there were 29,431,664 shares of common stock outstanding. At the time of the Reverse Acquisition, there were 16,500,000 shares of common stock outstanding and, as the Reverse Acquisition was accounted for as a recapitalization applied retroactively, this balance is recorded as the balance outstanding since inception.

 

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 net proceeds of this offering were $6,839,327.25.

 

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.

 

33
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

We will not receive any proceeds from the sale of shares of Common Stock by the Selling Stockholders. We 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, we 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.

 

The number of shares of Common Stock issuable upon the exercise of the Private Placement Warrants and 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 and Investor Warrants are only exercisable by the payment of cash. Pursuant to the terms of the Private Placement Warrants and Investor Warrants, the warrant holders are required to exercise their Warrants, in the event our Common Stock trades at an average of at least $3.00 per share for a period of not less than 20 consecutive trading days. Also, throughout the three year exercise period of the Private Placement Warrants and Investor Warrants, the Company has the right to redeem the Warrants for $0.05 per share.

 

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.

 

34
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

On April 28, 2012, $ 632,500 in notes payable to RealRisk Ventures, LLC (“RealRisk”) 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 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.

 

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(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(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. The transaction has been disclosed in the Balance Sheet as Subscriptions received.

 

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.

 

35
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

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

 

Warrants and Options

 

The Company has issued warrants to outside consultants in payments for services provided as detailed in the following schedule. The warrants are issued as “cashless” warrants and all have a three-year term with the exception of the Ventana Capital Partners’ warrant which has a 30 month term. Each warrant is exercisable into one share of common stock. The warrants have been valued using a Black-Scholes option pricing model with volatility, equity value and interest rate inputs noted below. The valuation of the warrants issued in the quarter ending September 30, 2012 is for disclosure purposes only as the charge is related to the cost of issuing the shares and there is no impact to the financial statements. The warrants issued on April 1, 2011, whose value was determined to be $34,000, was included as compensation expense and credited to additional paid in capital in fiscal 2012. There are no stock options issued by the Company to employees or other parties.

 

36
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Black Scholes assumptions for warrants issued were as follows:

 

For the period ending September 30, 2012 -

 

Volatility –   77.1%
      
Risk free interest rate -   1.19%
      
Expected life -   3 years 
      
Dividend rate -   Nil 

 

Summary of Warrants Issued:                    
Outside Consultants  Grant
Size
   Strike
Price
   Val. Date   Stock Value at
Val. Date
   Warrant Value at
Val. Date
 
Ventana Capital Partners   2,000,000   $4.00    10/1/2010   $0.03   $0.00 
Frank J. Pena   117,880   $1.50    3/14/2011   $0.91   $0.34 
Garwood Securities, LLC   117,880   $1.50    3/14/2011   $0.91   $0.34 
Jackson E. Spears   421,520   $1.50    3/14/2011   $0.91   $0.34 
William Gregozeski   50,000   $1.50    3/14/2011   $0.91   $0.34 
Frank J. Pena   3,000   $1.50    3/14/2011   $0.91   $0.34 
Garwood Securities, LLC   2,400   $1.50    3/14/2011   $0.91   $0.34 
Jackson E. Spears   9,600   $1.50    3/14/2011   $0.91   $0.34 
Ronald J. Everett   100,000   $1.50    4/1/2011   $0.91   $0.34 

 

Common Stock Warrants  Common   Valuation   Fair Value
Per
   Warrants 
Issued to Outside Consultants  Shares   Date   Warrant   Fair
Value
 
                 
Common Stock Warrants issued on October 1, 2010   2,000,000    10/1/2010   $0.00   $0 
                     
Common Stock Warrants issued on March 14, 2011   707,280    3/14/2011   $0.34   $240,475 
                     
Common Stock Warrants Granted on March 24, 2011   15,000    3/24/2011   $0.34   $5,100 
                     
Common Stock Warrants Granted on April 1, 2011   100,000    4/1/2011   $0.34   $34,000 
                     
    Total Warrants' Fair Value                 $279,575 

 

37
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

None of these warrants have been exercised.

 

As noted above, through a private placement, the Company issued 6,044,000 warrants which allowed the holder to purchase one share of common stock of the Company from the date of the grant until the third anniversary of the date of the grant for a purchase price of $1.50 per share.

 

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. 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.

 

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 financial statement date, 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, an aggregate of $6,588,500 in additional gross proceeds will be received. However, there can be no assurance that any additional warrants will be exercised.

 

A recap of the warrants outstanding as at September 30, 2012, which expire in March, 2014 is as follows:

 

Number of        
Warrants   Exercise price   Expiration date
         
 2,000,000   $4.00   6/1/2013
           
 707,280   $1.50   3/14/2014
           
 15,000   $1.50   3/24/2014
           
 3,199,000   $1.50   3/31/2014
           
 100,000   $1.50   4/1/2014

 

The weighted average exercise price at December 31, 2011 was $2.32

 

The weighted average exercise price at September 30, 2012 was $ 2.32

 

38
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Note 24REVENUE ALLOCATION

 

Gross revenue may be broken down by the following products for the nine months ended September 30, 2012, the nine months ended September 30, 2011 and the twelve months ended December 31, 2011 are as follows:

 

   9.30.12    9.30.11    12.31.11 
Sales Revenues   KUSD    KUSD    KUSD 
                
Licenses   3,230    3,170    5,174 
Maintenance   8,355    8,517    11,565 
Service   7,496    5,824    8,673 
Third-Party Products   1,754    1,264    2,302 
LND Third-Party Products   2,209    2,397    3,607 
Others   109    149    179 
                
    23,154    21,320    31,500 

 

Revenues by geographical area for the nine months ended September 30, 2012, the nine months ended September 30, 2011 and the twelve months ended December 31, 2011 are as follows:`

 

Sales Revenues   9.30.12    9.30.11    12.31.11 
by geographic area   KUSD    KUSD    KUSD 
                
US   9,256    6,442    9,359 
Germany   13,200    14,035    20,622 
United Kingdom   698    843    1,110 
Others   0    0    410 
                
    23,154    21,320    31,500 

 

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

 

39
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

Long-lived assets   9.30.12    12.31.11 
by geographic area   KUSD    KUSD 
           
US   1,509    1,287 
Germany   254    292 
United Kingdom   4    3 
Others   19    24 
           
    1,785    1,605 

 

Note 25OTHER INCOME/EXPENSE

 

At the financial statement date, Other income was 93 KUSD (September 30, 2011 quarter end: 65 KUSD).

 

Note 26SUPPLEMENTAL CASH FLOW DISCLOSURES

 

The significant non-cash transactions for the period ending September 30, 2012 and year ended December 31, 2011 were as follows:

 

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

 

40
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

e.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.
   
f.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.
   
g.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.

 

Note 27SUBSEQUENT EVENTS

 

On October 26, 2012, GBS Enterprises Incorporated (the “Company”) entered into a note purchase and security agreement (the “Loan Agreement”) with Stephen D. Baksa (the “Lender”), a member of the board of directors of the Company. Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated October 26, 2012 (the “Note”), to the Lender in the aggregate principal amount of $1,000,000, bearing an annual interest rate of 20% 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 Lender a first priority security interest in all of the Company’s right, title and interest in and to the shares of IDC Global, Inc. 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(2) thereof.

 

41
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

On October 29, 2012, the Company entered into a note purchase agreement (the “Intercompany Loan Agreement”) with Group Business Software AG, a German public company and the Company’s 50.1% owned subsidiary (“GROUP”). Pursuant to the Intercompany Loan Agreement, GROUP issued a promissory note, dated October 29, 2012 (the “GROUP Note”), to the Company in the aggregate principal amount of $145,000, bearing an annual interest rate of 20% and maturing on the first anniversary date of the date of issuance, without any penalty for prepayment. The Intercompany Loan Agreement contains restrictions that require GROUP to use the proceeds of the GROUP Note solely (i) to pay the payroll of GROUP Business Software Corp., due October 29, 2012, and (ii) for such other purposes as the parties to the Intercompany Loan Agreement may agree from time to time. The GROUP Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

Each of the directors of the Company, including all four disinterested directors with respect to the transactions, has approved each of the transaction agreements discussed above and the transactions contemplated thereby.

 

On November 14, 2012, GBS Enterprises Incorporated (the “Company”) entered into a note purchase agreement (the “Intercompany Loan Agreement”) with Group Business Software AG, a German public company and the Company’s 50.1% owned subsidiary (“GROUP”). Pursuant to the Intercompany Loan Agreement, GROUP issued a promissory note, dated November 14, 2012 (the “GROUP Note”), to the Company in the aggregate principal amount of $227,018.20, bearing an annual interest rate of 20% and maturing on without any penalty for prepayment. The Intercompany Loan Agreement contains restrictions that require GROUP to use the proceeds of the GROUP Note solely for the payment of certain trade payables of GROUP and certain of its subsidiaries. The GROUP Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

42
 

 

Notes to the Interim Financial Statements

September 30, 2012

GBS Enterprises Incorporated

 

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.

 

43
 

 

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 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.

 

nCash 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.

 

nAccounts 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. $1.0million; 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.

 

nInventories 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.  

 

nPrepaid Expenses decreased from $444,147 at December 31, 2011 to $ 193,468 at September 30, 2012 from the reclassification of prepaid into current expenses.

 

nOther 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.

 

nNet 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).

 

nNon-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).

 

nInvestments in Related Company increased from $ 244,219 at December 31, 2011 to $ 270,970 at September 30, 2012.

 

nDeferred 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.  

 

nGoodwill 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.

 

nSoftware 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.

 

nOther 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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nOther 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)

 

nAmounts 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.

 

nLiabilities 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.

 

nDeferred 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.  

 

nRetirement Benefit Obligation increased from $57,364 at December 31, 2011 to $ 59,719 at September 30, 2012.

 

nOther 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.

 

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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.  

 

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.

 

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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   2011 
Net 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 

  

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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.

 

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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.

 

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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.

 

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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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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

 

None

 

Item 4.  Controls and Procedures.

  

Under the supervision of and with the participation of our management, including our principal executive officer and the principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2012.

 

Prior to this filing our disclosure controls and procedures and, in annual reports, our internal controls over financial reporting were not fully effective due to limited knowledge of U.S. GAAP by our accounting and reporting departments at the time of the original filings. Effective with the filing of this FORM 10-Q we changed our Internal Controls over financial Reporting to be fully compliant with PCAOB and U.S. GAAP regulations.

 

On September 19, 2012, the Board of Directors of the Company changed the Company’s fiscal year end from March 31 to December 31, beginning December 31, 2012.

 

Based on this evaluation, our principal executive officer and principal financial officer concluded, as of September 30, 2012 that our disclosure controls and procedures were effective.

 

Subsequent Events

 

On October 26, 2012, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with Stephen D. Baksa (the “Lender”), a member of the board of directors of the Company. Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated October 26, 2012 (the “Note”), to the Lender in the aggregate principal amount of $1,000,000, bearing an annual interest rate of 20% 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 Lender a first priority security interest in all of the Company’s right, title and interest in and to the shares of IDC Global, Inc. 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(2) thereof.

 

On October 29, 2012, the Company entered into a note purchase agreement (the “Intercompany Loan Agreement”) with GROUP. Pursuant to the Intercompany Loan Agreement, GROUP issued a promissory note, dated October 29, 2012 (the “GROUP Note”), to the Company in the aggregate principal amount of $145,000, bearing an annual interest rate of 20% and maturing on the first anniversary date of the date of issuance, without any penalty for prepayment. The Intercompany Loan Agreement contains restrictions that require GROUP to use the proceeds of the GROUP Note solely (i) to pay the payroll of GROUP Business Software Corp., due October 29, 2012, and (ii) for such other purposes as the parties to the Intercompany Loan Agreement may agree from time to time. The GROUP Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

Each of the directors of the Company, including all four disinterested directors with respect to the transactions, has approved each of the transaction agreements discussed above and the transactions contemplated thereby.

 

On November 14, 2012, GBS Enterprises Incorporated (the “Company”) entered into a note purchase agreement (the “Intercompany Loan Agreement”) with Group Business Software AG, a German public company and the Company’s 50.1% owned subsidiary (“GROUP”). Pursuant to the Intercompany Loan Agreement, GROUP issued a promissory note, dated November 14, 2012 (the “GROUP Note”), to the Company in the aggregate principal amount of $227,018.20, bearing an annual interest of 20% and maturing on the first anniversary date of the date of issuance without any penalty for prepayment. The Intercompany Loan Agreement contains restrictions that require GROUP to use the proceeds of the GROUP Note solely for the payment of certain trade payables of GROUP and certain of its subsidiaries. The GROUP Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

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.

 

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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.

 

In connection with a note purchase and security agreement, the Company issued John A. Moore, a member of the Board of Directors of the Company and his wife a warrant to purchase 100,000 shares of common stock of the Company. The warrant and related transactions are described in the Company’s Form 8-K filed August 16, 2012.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.  

 

Not applicable

 

Item 5. Other Information.

 

 

Item 6. Exhibits.

 

No.   Description
10.1   Note Purchase and Security Agreement, dated August 13, 2012, by and between GBS Enterprises Incorporated and John A. Moore, Jr. and Annedenise M. Moore (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K File No. 000-53223) filed on August 16, 2012)
     
31.1(1)   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive Officer
     
31.2(1)   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial and Accounting Officer
     
32.1(1)   Section 1350 Certification of Principal Executive Officer
     
32.2(1)   Section 1350 Certification of Principal Financial and Accounting Officer
     
101.INS (2)   XBRL Instance Document
     
101.SCH (2)   XBRL Taxonomy Extension Schema Document
     
101.CAL (2)   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB (2)   XBRL Taxonomy Extension Labels Linkbase Document
     
101.DEF (2)   XBRL Taxonomy Extension Definition Linkbase Document
     
101.PRE (2)   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1) Filed herewith.
(2) To be filed by amendment.

 

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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: November 19, 2012 By: /s/ Gary D. MacDonald
  Gary D. MacDonald
  Interim Chief Executive Officer
  (Principal Executive Officer)
     
Date: November 19, 2012 By: /s/ Markus R. Ernst
  Markus R. Ernst
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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