GBS ENTERPRISES INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge) 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 where it has become IBM's largest
provider of business software and service solutions worldwide. GROUP caters
primarily to mid-market and enterprise-size organizations with over 3,500
customers in thirty-eight countries spanning four continents, representing more
than 5,000,000 active users of its products. GROUP's customers include Abbot,
Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota. GROUP provides IBM
Lotus Notes/Domino Application and Transformation technology, and related Cloud
Computing technology. Headquartered in Eisenach, Germany the Company has offices
throughout Europe and North America. The Company's maintains a website at
www.gbsx.us. GROUP maintains a website at www.gbs.com. The information contained
in the Company's and GROUP's websites is not incorporated by reference herein.
The Company's Common Stock is quoted on the OTC Bulletin Board under the ticker
Products and Services
GBS has achieved significant growth by consolidating the fragmented Lotus
Software market through the successful merger & acquisitions of companies with
complementary product, technology or services offerings. Based on its organic
growth and growth by acquisition GBS has continuously developed its software and
service business to service and support GBS's expanding Lotus customer base.
Historically, GROUP has achieved growth through acquisition by targeting
attractive, yet underperforming companies with complimentary operations and
leveraging GROUP's expertise to successfully turnaround and integrate these
Key success factors for this strategy are: enhanced portfolio, positioning GROUP
as the 'one-stop-shop' for Lotus applications and services, expand customer
support, fast code migration, and cloud enablement/XPages conversion of acquired
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
Messaging and Business Applications Software & Solutions
GBS Messaging and Business Application Software & Solutions product lines
include software and advisory services for email and Instant Messaging (IM)
Management, Security, Compliance, Archiving and Productivity, CRM Applications,
Governance, Risk & Compliance (GRC) Management software, Workflow and Business
Process Management software, ePDF Archiving & Document Management and e-Banking
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
As a leader in the IBM Lotus Notes Software and Services business GBS provides
high-end consulting services to its customers. GBS develops, sells and
orchestrates customer-specific Lotus Domino strategy and consulting services,
such as CIO and IT department leader Strategic Advisory Services, Managed
Services, Outsourcing, Administration, Assessments and Implementations,
Performance Improvements, Custom Application Development , Governance and
Security, Technical Support, and Training, as well as Email Migration Services.
The talented team at GBS Experts has outstanding skill sets in the areas of
system architecture and evaluation, application integration, e-mail and Instant
Messaging, administration, application development, application migration,
middleware deployments and licensing, outsourcing and hosting.
Based on GBS's unique concentration of industry talent and expertise, mainly in
the areas inside and around IBM Lotus Notes/Domino, inside and around corporate
messaging (IBM, Microsoft, SMTP) and inside and around IT environmental and
application assessment, analysis and reporting, commercial and governmental
customers, as well as SIs and channel partners are able to relay on the industry
leading strategic and tactical advisory services for evaluating, planning,
staffing and execution of any customer project. GBS Consulting Services' global
team of consultants use modern project management techniques, proprietary
methodologies and GBS accelerator technologies to complete client projectson
time and with reduced risk.
GBS's focus on recruiting and retaining top Lotus expertise, positions our team
to offer leading-edge Lotus Notes / Domino subject matter knowledge to our
customers. As a testament to this focus, GBS employs 10 of the top 20 most
recognized 'market experts' and thought-leaders in Lotus development and
administration. GBS consultants have an average of over 12 years' experience
each in Lotus Notes/Domino and its related products and are routinely asked to
present at IBM Lotus events including Lotusphere, an annual conference hosted by
IBM Lotus Software.
As a Premier IBM Business Partner - GBS is one of the few partners that can sell
and support licenses for all five IBM software brands: Lotus, WebSphere,
Rational, Tivoli, and DB2.
As IT departments face continuous budget reductions and constant pressure for
higher performance and efficiency, CIOs are focusing on modern technologies to
support their need for increased scalability, flexibility and lower costs. GBS
has identified this demand as a strategic growth opportunity for the company and
has placed a significant focus on expanding its Cloud Computing and
Modernizing/Migrating technology offerings. The strategic opportunities are
served by GBS with two distinct offerings:
1) GROUP Live - Cloud Automation Platform / Cloud Platform-as-a-Service (PaaS)
software and services. and
2) Transformer - Lotus Notes modernization/migration services and technology
GBS Cloud Computing activities are focused on cloud automation solutions and
therefore the Company has made key acquisitions and R&D investments to create an
award winning Cloud Platform-as-a-Service offering. Under the GROUP Live banner,
the GBS PaaS offering has been sold to a variety of enterprise customers, which
use the PaaS software to host internal corporate clouds (Private cloud) and
applications as-a-service to their various internal user groups. GROUP Live has
also be sold and implemented by a number of Independent Software Vendors (ISVs),
which are leveraging the platform to deliver their own Software-as-a-Service
(SaaS) applications to their respective customer bases.
Both of these customer groups enjoy the comprehensive nature of this platform
agnostic PaaS solution and its exceptional change management capabilities
enabling resource flexibility, business agility, scalability and ease-of-use
beyond that which is generally available in the market today.
GBS Lotus Application Modernization and Migration
GBS Lotus Application Modernization and Migration activities are focused on the
IBM Lotus / Domino applications market and the offering spans from expert
services and accelerator technologies to modernize, web enable and migrate Lotus
applications; and thus ultimately take the Lotus applications from legacy to the
future. The foundation of the Transformer Suite Software offering is GBS's
significant R&D investment in a set of methodologies and key technology
accelerators to automate the conversion of traditional Notes based client-server
applications, into the IBM XPages framework which enables Domino applications to
be run and accessed via the Lotus client, a web browser or on a mobile device.
The patent-pending software that underpins Transformer was developed by GBS with
the assistance and guidance from IBM Corporation's Software Group to ensure
alignment with future releases of the IBM Lotus / Domino and XPages technology.
IBM has deemed the Transformer technology a "game changer," and will be
employing it to modernize their clients' applications.
GBS receives four types of revenues for its products and services, including
Licensing, Service, Maintenance, and Subscription. Licensing revenue is derived
from the licensing of applications for Lotus Notes and Domino, which will now
include IBM's marketing of the CAP and DAT products. Service revenue is obtained
from a wide range of consulting, maintenance and support services providedby
Strategy and Focus Areas
The Company is focused on developing a portfolio of Cloud Computing software
technologies and Application Services to address the needs of Independent
Service Providers (ISV's), Data Center providers, as well as commercial and
government organizations. GBSX is pursuing an aggressive growth strategy based
upon highly targeted mergers and acquisitions so as to build its portfolio of
technologies, applications, and services.
In addition to the significant growth potential anticipated through its multiple
partnerships with IBM, GBS also has the potential for dramatic growth from large
strategic partnerships such as with major Cloud platform/OEM players, data
centers, ISV's as well as a variety of large enterprise class and medium sized
end users who are interested in having their own private clouds. GBS also
intends to pursue highly attractive opportunities with a wide variety of other
Cloud vendors including Computer Associates, Dell, HP, Accenture, and Amazon, as
well as with specialized distributors and system integrators.
General Corporate History
We were incorporated in Nevada on March 20, 2007 as SWAV Enterprises Ltd.
("SWAV"). SWAV was an importer and wholesaler of Chinese manufactured goods.
On April 26, 2010, SWAV purchased certain assets of Lotus Holdings Limited
("Lotus") pursuant to an Asset Purchase Agreement in consideration for aggregate
of 2,265,240 shares of SWAV common stock. Lotus is a holding company
specializing in software technology and training services, particularly in the
areas of advanced software development tools, innovative point-of-care
electronic health record (EHR) software, and sales training. Simultaneously with
SWAV's acquisition of Lotus, the SWAV stockholders sold an aggregate of
11,984,770 shares of SWAV common stock to Joerg Ott, our CEO and Chairman, for
an aggregate purchase price of $370,000.
Upon the consummation of the acquisition, the then executive officers and
directors of SWAV resigned and Joerg Ott was appointed as the Company's Chief
Executive Officer, President and Chairman of the Board of Directors. On
September 6, 2010, SWAV's name was changed to GBS Enterprises Incorporated. On
October 14, 2010, the Company's trading symbol on the OTC Bulletin Board was
changed from SWAV to GBSX.
Effective December 30, 2010, the Company acquired approximately 28.2% of the
issued and outstanding shares of common stock of GROUP, pursuant to Share
Purchase Agreements between the Company and several of GROUP's stockholders,
including Mr. Joerg Ott (also the Company's Chairman and Chief Executive
Officer). Pursuant to the Share Purchase Agreements, the Company acquired an
aggregate of 7,115,500 shares of common stock of GROUP in consideration for an
aggregate of 3,043,985 shares of the Company's common stock.
On January 6, 2011, the Company acquired an additional 5,525,735 shares of
common stock of GROUP, representing approximately 21.9% of the issued and
outstanding shares, from several additional GROUP stockholders in consideration
for an aggregate of 2,361,426 shares of the Company's common stock.
In total, the Company purchased an aggregate of 12,641,235 shares of common
stock of GROUP from a total of nine GROUP stockholders in consideration for a
total of 5,405,411 shares of common stock of the Company, resulting in the
Company owning a controlling equity interest of approximately 50.1% in GROUP.
The Company conducts its primary business through GROUP.
As previously reported by the Company on a Form 8-K/A (Amendment No. 2) filed by
the Commission on March 12, 2012, on February 27, 2012, the Company acquired an
additional 883,765 shares of common stock of GROUP to maintain its 50.1%
ownership of GROUP. On February 27, 2012, an outstanding loan of GROUP was
converted into an aggregate of 1,750,000 shares of GROUP common stock, thereby
increasing GROUP's outstanding common stock to 26,982,000 shares. As a result of
the foregoing increase in the number of outstanding shares of GROUP common
stock, the Company increased its ownership of GROUP common stock to an aggregate
of 13,525,000 shares, representing approximately 50.1% of the outstanding common
stock of GROUP. The Company purchased the 883,765 shares of GROUP common stock
from GAVF LLC for an average purchase price of $0.70 per share.
Overview of Cloud Computing Technology and Industry Trends
Cloud computing is a general term for anything that involves delivering hosted
services over the Internet. These services are broadly divided into three
categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and
IaaS providers have massive data centers that can handle the data run over the
cloud, the largest of which is Amazon.com. IBM also participates in this
business and hosts GROUP Live. PaaS providers offer the actual cloud platform
that runs on the IaaS data centers and can deploy the applications (SaaS
products). Some of the leading PaaS providers include Amazon Web Services,
Microsoft Azure Services Platform, Google App Engine, and Rackspace Cloud, along
with GBS's CAP and GROUP Live products. SaaS delivers applications on the cloud,
which simplify product licensing and maintenance. The SaaS market was first
filled by a number of CRM (Customer Relationship Management), ERP (Enterprise
Risk Management) and email applications but has spread into nearly all other
types of software. Leading providers in this space include Salesforce.com,
Google and Zoho as well as IBM's Lotus Live suite. In 2009, SaaS made up the
bulk of cloud computing revenue at $8 billion (Source: IDC, June 2010).
Over the past five years, there has been a migration from on-premise hardware
and software to cloud computing which allows companies to increase efficiency
and reduce cost by paying for software and hardware use on a subscription
basis. In this model, IT managers are able to rent server capacity on an
as-needed basis from a third party, instead of managing a data center
on-premise, and purchasing up-to-date licenses for software based on real-time,
instead of purchasing bundles of licenses or software and upgrading when updates
An October 2010 IBM Tech Trend Survey found that 91% of the 2,000 IT developers
surveyed expect cloud computing to over-take on-premise computing as the primary
way organizations acquire IT over the next five years. An IDC July 2010 report
shows global public cloud-related spending at $16.5 billion in 2009 (4% of the
total IT spending) with the expectation that the market will increase to $55.5
billion by 2014, making up 12% of total IT spending. IDC broke down the market
into five categories, three of which GBS competes in, including Applications,
App Development and Deployment, and Infrastructure Software. These three make up
$13.0 billion of the 2009 total and $40.5 billion in 2014, which leaves plenty
of room for growth for a number of competitors in the market.
The competitive landscape in the enterprise data center market is intense and
changing, and we expect there will be a new class of very large, well-financed,
and aggressive competitors, each bringing its own new class of products to
address this new market. We also expect to see acquisitions, further industry
consolidation, and new alliances among companies as they seek to serve the
enterprise data center market.
The Company is focused on developing a portfolio of Cloud Computing software
technologies and Application Services to address the needs of ISV's, Data Center
providers, as well as commercial and government organizations. GBSX is pursuing
an aggressive growth strategy based upon highly targeted mergers and
acquisitions so as to build its portfolio of technologies, applications, and
Acquisitions of Subsidiary Companies
As previously reported by the Company, during the nine month period ended
December 31, 2011, the Company made four business acquisitions as described
Effective April 1, 2011, the Company entered into an agreement to acquire 100%
of the outstanding common shares of Pavone AG, a German corporation, for
$350,000 in cash and 1,000,000 shares of its common stock. The fair value of the
common stock was determined to be $4.90 per share, representing the market value
at the end of trading on the date of the agreement. The total value of the
investment, including the assumption of $11,261 in debt was $5,261,261. Pavone
is a leader in business process management and optimization technologies.
Pavone's extensive workflow software for Lotus Notes and Domino along with their
large customer base is well suited to GBS Enterprises portfolio strategy. This
acquisition of Pavone complements GBS's majority ownership in GROUP and further
strengthens their leading industry position on the IBM Lotus Platforms and
expands their cloud computing technology offerings beyond the IBM Lotus market.
Pavone currently has offices in Germany and the UK. They have over 2,500
customers and over 150,000 users worldwide. Some of their customers include
Deutsche Bundes Bank, BMW, Linde AG, Philips, British Sugar and Mahle
Effective June 1, 2011, the Company acquired 100% of the outstanding common
shares of GroupWare, Inc., a State of Florida corporation. As consideration the
Company paid $250,000 and issued 250,000 shares of its common stock. The fair
value of the common stock was determined to be $4.34 per share, representing the
market value at the end of trading on the date of the agreement. The total value
of the investment, including the assumption of $219,902 in debt was $1,554,902.
Upon the consummation of the acquisition, the management and board of GroupWare
resigned and Joerg Ott, the Company's Chief Executive Officer and sole director,
was appointed as the Chief Executive Officer and sole director of GroupWare.
GroupWare is based in Lubeck, Germany with offices in St. Petersburg, Florida.
GroupWare's ePDF server delivers centralized, network-wide PDF solutions for
messaging, workflow, document, content and data management.This acquisition
strengthens the GBS Transformer offering, which helps bring IBM Lotus Notes
client applications to the web, by substituting traditional printing methods
provided by the Notes client with simple-to-use print-to-PDF capabilities in the
browser. In addition, GroupWare provides a solution for applications that are
ready to be retired. With the ePDF Server, GBS customers can convert the entire
contents of IBM Lotus Notes and Domino applications to a permanent and secure
archive in PDF or PDF/A format, while preserving their ability to be full-text
searched and ensuring that the critical application data is accessible in the
future, when needed. GBS will deliver the application archiving capabilities via
its GroupLive cloud, making it possible for customers and partners to take
advantage of elastic cloud computing resources to rapidly process the
application contents without the need to dedicate hardware on-site for temporary
or intermittent processing jobs.
IDC Global, Inc.
On July 25, 2011, the Company acquired 100% of the issued and outstanding shares
of common stock of IDC Global, Inc. (IDC"), a Delaware corporation with offices
in Chicago, New York, London and other key cities. Pursuant to the acquisition
agreement of July 15, 2011, the Company agreed to issue the shareholders an
aggregate of 800,000 shares of common stock and make 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 $3.50 per share, representing the market value at the end of
trading on the date of the agreement. The total value of the investment,
including $883,005 of debt assumption was $4,713.005. IDC is a privately held
company that provides nationwide network and data center services. IDC delivers
customized, high availability technology solutions for WAN, Wireless Services,
Co-location & Hosting, Managed Services, and Network Security. IDC has data
centers in Chicago, New York and London and other key cities. IDC is helping
customers make the transition from large, static and expensive on-premise
computing to dynamic, flexible and cost-effective off-premise computing. The
acquisition of IDC provides the Company with the infrastructure needed to
provide a comprehensive end-to-end solution for all customers regardless of
their platforms. It proves especially beneficial to IBM Lotus Domino and Notes
customers who finally have the same options as other platforms.
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 (the
"Selling Shareholders") 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, an India company.
Pursuant to the 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 (i) 700,000 shares of common stock of GBS and (ii)
$525,529. 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
Synaptris' product portfolio improves corporate decision-making by providing
real-time enterprise reporting, user defined dashboards, and comprehensive
analytic capabilities for Lotus Notes / Domino and Java/.NET environments.
Synaptris employs 70 people and has operations in the US, Europe, and India,
with over 2,500 customers in 80 countries, including over one hundred Fortune
1000 companies. Some of their client companies include ABB, Goodyear Tire and
Rubber, Standard Life Insurance, ABN Amro Bank, Dunlop, Caterpillar, Philips
International BV, and Electrolux.
With the integration of the Synaptris product portfolio, GBS will add another
tier of Lotus Notes applications including reporting products, advanced
dashboards, and email productivity solutions. Additionally, the Synaptris
acquisition will bring a comprehensive search engine specialized for use with
email that is faster and easier to use than other products in the market and
which is expected to be made available for XPage applications in the near future
through the GBS Transformer . The GBS Transformer is the only technology in the
marketplace that can convert any legacy Lotus Notes applications into a cloud
ready format. There are over 18 million Lotus Notes applications worldwide.
In addition to product synergy and additional revenue streams, GBS expects to
derive operational synergy from this acquisition. Synaptris' presence in India
is anticipated to accelerate GBS's plan to expand its Development & Service
Center operations for its Transformer 2.0 suite in India. Transformer 2.0
expedites the conversion of client-based applications to Web 2.0-based
applications. The Development & Service Center should further enable GBS a
cost-effective method to rapidly transform (web-enable) large volumes of Lotus
Notes applications. In addition, GBS plans to leverage Synaptris' 135 channel
partners spanning 45 countries to expand its existing worldwide network of
The assets and liabilities of these companies represent their values as of
September 30, 2011 and are included in these consolidated financial statements.
This timing approach is allowed as per Regulation S-X Rule 3A-02.
Results of Operations
Comparison of Consolidated Balance Sheets at December 31, 2011 and March 31,
Total Assets increased from $76,865,929 at March 31, 2011 to $86,710,970 at
December 31, 2011. Total Assets consists of Total Current Assets and Total
At December 31, 2011, our Total Current Assets were $10,239,975, compared to
$17,875,353 at March 31, 2011. Our cash and cash equivalents decreased from
$8,530,864 at March 31, 2011 to $3,537,517 at December 31, 2011. The decrease
was primarily due to the Company's continued expenditures in development of the
Transformer and Cloud Application Platform technologies. Accounts Receivable
decreased from $5,698,320 at March 31, 2011 to $4,544,023 at December 31, 2011.
This decrease was primarily due to seasonality issues in that billings increase
at the beginning of the calendar year for recurring software maintenance and
receivables decline during the year as these maintenance receivables are
collected. Inventories increased from $0 at March 31, 2011 to $264,611 at
December 31, 2011 primarily as the result of the accumulation of work-in-process
labor which will be billed to clients when the projects are completed in the
fourth quarter ending March 31, 2012. Prepaid Expenses decreased from $1,423,281
at March 31, 2011 to $1,097,370 at December 31, 2011 and consisted primarily of
the expensing of prepaid items that consisted of office supplies and materials.
Other receivables consisted of a receivable for anticipated compensation for
damages, security deposits and tax refund claims. Other receivables decreased
from $2,222,887 at March 31, 2011 to $796,454 at December 31, 2011. The decrease
was primarily due to the receipt of a cash payment of $1,901,522 from an
insurance company for damages compensation.
At December 31, 2011, our Total Non-Current Assets were $76,470,995, compared to
$58,990,576 at March 31, 2011. Property, plant and equipment increased from
$298,497 at March 31, 2011 to $2,133,969 at December 31, 2011 due to the
acquisition of IDC whose property, plant and equipment assets consisted
primarily of computer equipment and leasehold improvements used in the
datacenter operations of IDC. For additional details, see Note 5 - Property,
Plant and Equipment in the footnotes to the Interim Consolidated Financial
Our Financial Assets increased from $837,480 at March 31, 2011 to $2,818,310 at
December 31, 2011. The increase resulted from a loan from the Company to GROUP
Business Software AG. This loan would typically be classified as an intercompany
loan and would be eliminated in consolidation; however, because of the
application of the 93-day Rule, the intercompany loan will not be eliminated
until the fourth quarter ending March 31, 2012 due to the one quarter timing
difference between the two companies' financial statements as reflected in the
consolidated statements. Investment in related company was $290,973 at March 31,
2011 and decreased slightly to $285,908 at December 31, 2011. This amount
represents an equity investment in BERS, a Bulgarian development company.
Non-current Prepaid expenses increased from $-0- at March 31, 2011 to $725,178
at December 31, 2011 and consisted primarily of the reclassification of prepaid
taxes to non-current prepaid taxes relating to recent acquisitions. Deferred Tax
Assets increased from $1,136,135 at March 31, 2010 to $3,385,350 at December 31,
2011. The increase resulted from net operating loss carry forwards from the tax
impact of recent losses relating to the operations of GROUP Business Software,
AG, and the Company. Goodwill increased from $39,688,967 at March 31, 2011 to
$49,693,027 at December 31, 2011. The increase was primarily due to the purchase
of Pavone, AG, Groupware, Inc., IDC and SD Holdings which accounted for a total
increase to Goodwill of approximately $9.98 million relating to these acquired
companies. For additional details, see Note 6 - Goodwill in the footnotes to the
Interim Consolidated Financial Statements.
Software increased from $16,514,894 at March 31, 2011 to $17,110,114 at December
31, 2011 and the increase consists of capitalized development costs and
software, product rights and licenses acquired in recent acquisitions during the
period. For additional details, see Note 7 - Software in the footnotes to the
Interim Consolidated Financial Statements.
Other Assets increased from $223,630 at March 31, 2011 to $319,139 at December
31, 2011 and the increase consisted of additional reinsurance payments relating
to an increase in pension obligations.
Total Liabilities increased from $24,285,794 at March 31, 2011 to $25,641,684 at
March 31, 2011. Total Liabilities consists of Total Current Liabilities and
Total Non-Current Liabilities.
At December 31, 2011, our Total Current Liabilities were $18,472,945, compared
to $16,345,733 at March 31, 2011. Notes Payable increased from $1,440,295 at
March 31, 2011 to $1,462,560 at December 31, 2011. The increase is related to
notes payable associated with GROUP Business Software, AG warrants and the notes
were paid off in January 2012. Liabilities to Bank decreased from $50,073 at
March 31, 2011 to $39,073 at December 31, 2011 and the decrease consisted of
payments made to reduce loan balances. The decrease from 2010 to 2011 was
primarily due to a reduction from the bank liabilities. Accounts Payable and
Accrued Liabilities increased from $4,996,748 at March 31, 2011 to $5,489,528 at
December 31, 2011 and consists of Trade payables, Tax accruals and other
accruals. The increase was primarily due to the acquisition of the four
companies previously mentioned which accounts for most of the increase reflected
in the corporate consolidation. Deferred Income increased from $6,208,458 at
March 31, 2011 to $7,200,058 at December 31, 2011 and consists mainly of
maintenance income collected in advance for the period after the end of the
fiscal year. The increase was primarily due to the fact that four new
acquisitions reflecting additional deferred income are included in the corporate
consolidation for the period. Other Liabilities increased from $2,820,002 at
March 31, 2011 to $3,507,192 at December 31, 2011 and the increase consists of
the liabilities assumed relating to the acquisitions of four companies during
the period as previously mentioned. Due to related parties decreased from
$830,156 at March 31, 2011 to $475,579 at December 31, 2011 due to cash payments
made to reduce the obligation during the period. For additional details, see
Note 8 - Related Party Transactions and Balance in the footnotes to the Interim
Consolidated Financial Statements. Shares payable balance reflects the
obligation of the remaining shares owed to SD Holdings resulting from the
acquisition in December 2011. The amount was calculated based on 145,832 shares
of the Company at $2.05 per share. For additional details, see Note 9 - Share
Payable in the footnotes to the Interim Consolidated Financial Statements.
At December 31, 2011 our Total Non-Current Liabilities were $7,168,739, compared
to $7,940,061 at March 31, 2011. The decrease was primarily due to the
reclassification of a portion of the balances to current liabilities.
Non-Current Liabilities to Banks increased from $780,277 at March 31, 2011 to
$3,606,461 at December 31, 2011. The increase consists of a long-term loan
obligation to Baden-Württembergische Bank used for additional software
development during the period relating to the Transformer and Cloud
technologies. Deferred Tax Liabilities decreased from $878,450 at March 31, 2011
to $611,849 at December 31, 2011 and consists of the Deferred Tax Liabilities
from the capitalization of software costs and the depreciation of property,
plant and equipment assets. Retirement Benefit Obligation increased from
$153,962 at March 31, 2011 to $163,648 at December 31, 2011. The increase
consisted of additional obligations for pension plan benefits earned by the
employees during the period. Other Non-Current Liabilities decreased from
$6,127,373 at March 31, 2011 to $2,786,781 at December 31, 2011. The decrease
was primarily the result of a reclassification of Non-Current Other Liabilities
to current other liabilities. Approximately $2.8 million of Non-Current Other
Liabilities relating to the Lotus 911 and Permessa acquisitions was reclassified
to current liabilities during the nine month period ending December 31, 2011.
For the fiscal quarter ended December 31, 2011, our Net Sales increased to
$8,229,318 from $5,362,060 for the fiscal quarter ended December 31, 2010. The
Company generates nets sales from Licenses, Maintenance, Services, Third-Party
Products and Other. This increase is mainly the result of increases in
Transformer sales activity and the impact of four acquisitions made by the
Company during the nine month period ended December 31, 2011.
For the nine months ended December 31, 2011, our Net Sales increased to
$21,320,351 from $17,959,639 for the first nine months ended December 31,
2010. The Revenue with Products decreased from $7,339,748 to $6,980,202 in the
first nine months of the fiscal year. That decrease is mainly driven by a
decrease in 3rdParty Products with a decrease from $4,405,750 to 3,809,661 in
the same time frame. As an impact of the aforementioned acquisitions made by the
Company during the nine months ended December 31, 2011 the Service Revenue
increased from $10,619,891 to $14,340,149.
Cost of Goods Sold
For the fiscal quarter ended December 31, 2011, our Cost of Goods Sold increased
to $4,693,603 from $2,718,728 for the fiscal quarter ended December 31, 2010.
Cost of Goods Sold consists of Cost for Services, Cost for Third-Party Products
and Cost for Software Licenses. The increase was primarily due to the increase
in costs for Software Licenses based on a higher sales volume and a change in
the 3rd party product mix. In addition, the cost of goods sold is higher because
of the increase in salaries and related expenses to fulfill our business
objectives in GROUP Live, our cloud application platform, and our Transformer
For the nine months ended December 31, 2011, our Cost of Goods Sold increased to
$10,843,557 from $8,687,916 for the nine months ended December 31, 2010. The
increase from 2010 to 2011 was on the one hand due to raising the Cost for
Software Licenses based on an increase in lower margin 3rd party products.
Thereof the COGS for Products increased from $3,770,174 to $3,976,750. On the
other hand the Cost of Goods Sold for Services are higher in 2011 compared to
2010 and increased from $4,917,743 to $6,866,807 because of the increase in
salaries and related expenses to fulfill our business objectives in our GROUP
Live, our cloud application platform, and our Transformer portfolio. As of
December 31, 2011, there were 226 people employed by the Company (2010: 122).
Approximately 36% (2010: 29%) were employed in programming activities due to the
extensive Lotus software development and licensing business.
For the fiscal quarter ended December 31, 2011, our Operating Expenses increased
to $6,058,183 from $3,148,526 for the fiscal quarter ended December 31, 2010.
Operating Expenses consist of Selling Expenses, Administrative Expenses and
General Expenses. For the fiscal quarter ended December 31, 2011, our Selling
Expenses increased to $4,308,647 from $2,036,168 for the fiscal quarter ended
December 31, 2010. Selling Expenses consist of the cost for the Sales, Marketing
and Service units. The increase was due to additional recruiting of sales
personnel and additional selling expenses relating to the four acquisitions
previously described. For the fiscal quarter ended December 31, 2011, our
Administrative Expenses increased to $1,589,374 from $715,228 for the fiscal
quarter ended December 31, 2010. Administrative Expenses consist of costs for
the management and administration units. The reason for the increase was
primarily due to the additional administrative expenses associated with the four
acquisitions made during the nine month period ended December 31, 2011. For the
fiscal quarter ended December 31, 2011, our General Expenses decreased to
$160,162 from $397,130 for the fiscal quarter ended December 31, 2010 due to
cost cutting efforts made during the period.
For the nine months ended December 31, 2011, our Operating Expenses increased to
$17,985,032 from $11,241,338 for the nine months ended December 31, 2010. For
the nine months ended December 31, 2011, our Selling Expenses increased to
$12,277,502 from $7,537,061 for the nine months ended December 31, 2010. Selling
Expenses consist of the cost for the Sales, Marketing and Service units. The
increase was due to additional recruiting of sales personnel and additional
selling expenses relating to the four acquisitions previously described.
$2,389,070 of this increase is resulting from the aforementioned acquisitions
made by the company in the nine months ended December 31, 2011. $2,706,754 of
this increase is resulting from additional sales activities around our CRM
portfolio in the North American market. The sale of the two subsidiaries, Gedys
IntraWare GmbH and GROUP Business Software Holding OY in 2010 accounted for a
decrease of Selling Expenses in the amount of $805,036 for the same nine months
period. For the nine months ended December 31, 2011, our Administrative Expenses
increased to $4,846,513 from $2,724,305 for the nine months ended December 31,
2010. Administrative Expenses consist of costs for the management and
administration units. The reason for the increase was primarily due to the
additional administrative expenses associated with the four acquisitions made
during the nine month period ended December 31, 2011 in the amount of $430,144
and an increase in administrative operations by GBS Enterprises Inc. in the
amount of $1,109,219. For the nine months ended December 31, 2011, our General
Expenses decreased to $861,017 from $979,973 for the nine months ended December
31, 2010 due to cost cutting efforts made during the period which exceeded the
additional General Expenses due to the aforementioned acquisitions made by the
company in the amount of $108,451. Overall and due to increased business
activities and as a result of the support of the dual listing within GBS group
the Auditing and Consulting Costs increased for the nine months ended December
31, 2011 to $925,184 from $287,524 for the nine months ended December 31, 2010.
The overall increase in marketing expenses for the nine months ended December
31, 2011 to $1,385,468 by 90.1% from $728,883 for the nine months ended December
31, 2010 and the increase in overall Travel Expenses for the nine months ended
December 31, 2011 to $987,684 from $661,801 for the nine months ended December
31, 2010 is also directly a result of additional business activities and the
growth of the company as a result of the aforementioned acquisitions. Due to the
increase in personnel to 226 employees from 122 employees Communications Costs
increased to $432,934 from $269,206 in the same nine months period.
For the nine-month period ended December 31, 2011, Other Income decreased to $
64,916 from $888,513 for the nine-month period ended December 31, 2010. The
reason for the decrease was primarily due to earnings in the previous year in
relation to the selling of the Assets of Gedys IntraWare GmbH.
The consolidated Statements of Operations also include expenses of $ 2.2 million
directly relating to Group Live, the Company's cloud computing technology
service, and expenses of $ 2.1 million directly relating to the Transformer, the
Company's Lotus Notes application conversion service, for the first nine months
Liquidity & Capital Resources
At December 31, 2011, we had $3,537,517 in cash and cash equivalents, compared
to $8,530,864 at March 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. The Warrants
are only exercisable by the payment of cash. Pursuant to the terms of the
Warrants, the holders of the Warrants 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 Warrants, the Company has the right to redeem
the Warrants for $0.05 per share. The Company has agreed to register the
6,044,000 shares of Common Stock issuable upon the exercise of the Warrants
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1. The Company has not filed such Registration Statement as of the date
of this Form 10-Q. Upon the full exercise of the Warrants, the Company would
receive gross proceeds of $9,066,000.
During the quarter ended December 31, 2011, certain Warrant holders exercised
their Warrants to purchase an aggregate of 2,020,000 shares of Common Stock for
a total purchase price of $3,030,000. The cost of issuance was $5,030, resulting
in net proceeds of $3,024,970.
We intend to use the net proceeds of the exercises of the Warrants to increase
our marketing, advertising and Cloud and Transformer service development teams,
acquisitions and for general corporate working capital purposes.
Management believes that the Company's cash at December 31, 2011and available
credit lines, will be sufficient to meet the Company's working capital
requirements for the next 12 month period. Management believes that as a result
of the assets purchased to date, it will generate additional funds and that it
will be able to obtain additional capital as required to meet projected
For the Nine Month Periods Ended
Cash provided by operating activities $ 53,610 $ 3,530,107
Net cash provided by (used in) Investing Activities $ (7,201,629 ) $ (4,998,857 )
Net cash provided by (used in) Financing Activities $ 2,154,671 $ 1,233,020
Net increase (decrease) in cash and cash equivalents during
$ (4,993,347 ) $ (235,730 )
Cash and cash equivalents, beginning of period $ 8,530,864 $ 1,744,965
Cash and cash equivalents, end of period $ 3,537,517 $ 1,509,235
Cash provided by operating activities for the nine month period ending December
31, 2011 was approximately $54,000, which is about $3.4 million less than the
comparative period ending December 31, 2010. This change is primarily due to the
expenditures made by the Company in developing the Transformer and GROUP Live
technologies. The cash used in investing activities during the nine month period
ending December 31, 2011was approximately $7.2 million, compared to cash used in
investing activities in the comparative period ending December 31, 2010 of
$4,998,857. This increase was primarily due to the investments in the four
acquisitions made during the nine month period ending December 31, 2011 as
previously described. Net cash used in financing activities increased from
$1,233,020 for the nine month period ended December 31, 2010 to $2,154,671 for
the nine month period ended December 31, 2011. The increase was primarily due to
the exercise of warrants in December 2011 resulting in proceeds of $3,024,970
which was offset by a net decrease in borrowings of $870,299 resulting in net
cash provided by financing activities of $2,154,671.
The Company has no significant planned commitments for capital expenditures and
does not anticipate using either internal or external sources of funds for
capital expenditure programs. As a software and services firm, the Company is
not capital intensive and historically has had minimal or no planned capital
expenditures. Therefore, the present or expected future impact on the Company's
liquidity for capital expenditure purposes is minimal and not material.
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 follow:
(a) 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. One significant
item ($1,902,000) which was previously written off was re-evaluated and
reinstated during fiscal 2011. The amount was subsequently paid.
(b) 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 will have 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,
(c) 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. Accordingly, the
Company adopts a conservative approach and has experienced better than
(d) 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.
Net Income per Common Share
FASB Codification topic ("ASC") 260, Earnings per share, requires dual
presentation of basic and diluted earnings per share (EPS) with a reconciliation
of the numerator and denominator of the EPS computations. Basic earnings per
share amounts are based on the weighted average shares of common stock
outstanding. If applicable, diluted earnings per share would assume the
conversion, exercise or issuance of all potential common stock instruments such
as options, warrants and convertible securities, unless the effect is to reduce
a loss or increase earnings per share. Diluted net income (loss) per share on
the potential exercise of the equity-based financial instruments is not
presented where anti-dilutive. Accordingly, although the diluted weighted
average number of common stock outstanding is disclosed on the statements of
operation, the calculated net loss per share is the same for bother basic and
diluted as both are based on the basic weighted average of common stock
outstanding. There were no adjustments required to net income for the period
presented in the computation of diluted earnings per share.
Financial instruments 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
We use the US dollar as our reporting currency. The functional currencies of our
significant foreign subsidiaries are the local currency, which includes the Euro
and the British pound. Accordingly, some assets and liabilities are incurred in
those 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 FASB Codification topic ("ASC") 825, Financial
Instruments, which allows companies to choose to measure eligible financial
instruments and certain other items at fair value that are not required to be
measured at fair value. The Company has not elected the fair value option for
any eligible financial instruments.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of issuance to be cash equivalents.
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
Intangible assets predominately comprise goodwill, acquired software and
capitalized software development services. Intangible assets acquired in
exchange for payment are reflected as acquisition costs. If the development
costs can be capitalized per ASC 985-20-25, these are reflected as ascribable
personnel and overhead costs.
Company created software can be intended for sale to third parties or used by
the Company itself. If the conditions for capitalization are not met, the
expenses are recorded with their effect on profit in the year in which they were
GROUP amortizes intangible assets with a limited useful life to the estimated
residual book value in accordance with ASC regulations. In addition, in special
circumstances according to ASC 350-30, a recoverability test is performed and,
if applicable, unscheduled amortization is considered.
The useful life of acquired software is between three and five years and three
years for Company-designed software.
Intangible assets obtained as part of an acquisition which do not meet the
criteria for a separate entry are identified as goodwill and are reviewed once a
year as to their recoverability in the form of an impairment test. If they are
no longer recoverable, an unscheduled amortization expense entry is performed.
In addition, an impairment test, whereby the appraised fair value of the
invested capital of the reporting segment, (as described in Note 14,) is
compared with the carrying (book) value of its invested capital amount,
If the appraised value of the reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered to be impaired. If the carrying
amount of the reporting unit exceeds the appraised fair value, an impairment
test based on use value is necessary in order to measure the amount of
impairment loss, if any.
Use value is generally used in order to determine the recoverability of goodwill
and intangible assets with an indefinite useful life. The current plan prepared
by the management serves as the basis for this policy. The planning assumptions
are each adjusted for the current state of knowledge. Reasonable assumptions
regarding macroeconomic trends and historical developments are taken into
account in making these adjustments. Future estimated cash flows are essentially
determined based on the expected growth rates of the markets in question.
Property, Plant and Equipment
Property, plant and equipment are valued at acquisition or manufacturing costs,
reduced by scheduled and, if necessary, unscheduled depreciation. Fixed assets
are depreciated on a straight-line basis, prorated over their expected useful
life. Scheduled depreciation is mainly based on useful lives of 3 to 10 years.
If fixed assets are sold, retired or scrapped, the profit or loss arising from
the difference between the net sales proceeds and the residual book value are
included under other operating earnings and expenses.
Impairment or Disposal of Long-Lived Assets
The Company evaluates the recoverability of its fixed assets and other assets in
accordance with FASB Codification topic, 360.10. This guidance requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds its expected cash flows, it is considered to be impaired
and is written down to fair value, which is determined based on either
discounted future cash flows or appraised values. No impairment has been
recognized in the accounts.
Our license revenues consist of revenues earned from the licensing of our
software products. These products are generally licensed on a perpetual basis.
Pricing models have generally been based either upon the physical
infrastructure, such as the number of physical desktop computers or servers, on
which our software runs or on a per user basis. License revenues are recognized
when the elements of revenue recognition for the licensed software are complete,
generally upon electronic shipment of the software and the software key to
provide full access to all functionalities for our customers. In general our
invoices reflect license, service and maintenance components. In the case of
multi element contracts, the revenues allocated to the software license
represent the residual amount of the contract after the fair value of the other
elements has been determined. Certain products of our software offering are
licensed on a subscription basis.
Software Maintenance Revenues
Software maintenance revenues are recognized ratably on a pro-rata basis over
the range of the contract period. Our contract periods typically range from one
to five years. Vendor-specific objective evidence ("VSOE") of fair value for
software maintenance services is established by the rates charged in stand-alone
sales of software maintenance contracts or the stated renewal rate for software
maintenance. Customers who are party to software maintenance agreements with us
are entitled to receive support, product updates and upgrades on a
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.
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.
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
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that, some portion or all of the deferred
tax asset will not be realized. Deferred tax assets and liabilities are adjusted
for the effect of changes in tax laws and rates on the date of enactment.
Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU
2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820,
adding new requirements for disclosures for Levels 1 and 2, separate disclosures
of purchases, sales, issuances, and settlements relating to Level 3 measurements
and clarification of existing fair value disclosures. ASU 2010-06 is effective
for interim and annual periods beginning after December 15, 2009, except for the
requirement to provide Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for fiscal years beginning
after December 15, 2010 (the Company's fiscal year 2012); early adoption is
permitted. The Company does not expect the adoption of ASU 2010-06 to have a
material impact on its results of operations or financial position.
In February 2010, FASB issued ASU 2010-9 Subsequent Events (Topic 855)
Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9").
ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that
is an SEC filer is not required to disclose the date through which subsequent
events have been evaluated. This change alleviates potential conflicts between
Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim
and annual periods ending after June 15, 2010. The Company does not expect the
adoption of ASU 2010-09 to have a material impact on its results of operations
or financial position.
Effective July 1, 2010, we adopted the update to the accounting standard
regarding derivatives and hedging (Topic 815). This update clarifies how to
determine whether embedded credit derivatives, including those interests held in
collateralized debt obligations and synthetic collateralized debt obligations,
should be bifurcated and accounted for separately. The adoption of this standard
did not have a significant impact on our results of operations.
In December 2010, the FASB issued Accounting Standards Update ASU 2010-29,
Disclosure of Supplementary Pro Forma Information for Business Combinations
(Topic 805). The update requires public companies to disclose pro forma
information for business combinations that occur in the current reporting
period. The disclosures include pro forma revenue and earnings of the combined
entity for the current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as of the beginning
of the annual reporting period. This guidance is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010, with
early adoption permitted. The Company's adoption of FASB ASU No. 2010-29
effective December 1, 2010 did not have an impact on the Company's consolidated
results of operations or financial position but did result in additional
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Company's consolidated financial statements
Principles of Consolidation and Reverse Acquisition
As previously disclosed, the Company has exchanged a total of 5,405,411 shares
of common stock in exchange for 50.1% of the outstanding common shares of GROUP.
Although the Company was the legal acquirer, the transaction was accounted for
as a recapitalization of GROUP in the form of a reverse merger, whereby GROUP
becomes the accounting acquirer and is deemed to have retroactively adopted the
capital structure of the Corporation. Accordingly, the accompanying consolidated
financial statements reflect the historical consolidated financial statements of
GROUP for all periods presented, and do not include the historical financial
statements of the Company. All costs associated with the reverse merger
transaction were expensed as incurred. Those expenses totaled approximately
$300,000 and were included in professional fees in administrative expenses.
The Company has based its financial reporting for the consolidation with GROUP
in accordance with FASB Accounting Standard Codification (ASC) 805-40 as it
relates to reverse acquisitions. Goodwill has been measured as the excess of the
fair value of the consideration effectively transferred by the Company, the
acquiree, for financial reporting purposes, over the net amount of the Company's
recognized identifiable assets and liabilities.
We have recorded the acquired assets and liabilities of GBSX on the acquisition
date of January 6, 2011, at their fair value and the operations of GBSX have
been included in the consolidated financial statements since the acquisition
The assets and liabilities of GROUP, the acquirer for financial reporting
purposes, are measured and recognized in the consolidated financial statements
at their precombination carrying amounts in accordance with ASC 805-40-45-2(a).
Therefore, in a reverse acquisition, the non-controlling interest reflects the
non-controlling shareholders' proportionate interest in the pre-combination
carrying amounts of GROUP's net assets even though the non-controlling interests
in other acquisitions are measured at their fair values at the acquisition date.
It should also be noted that the Company and GROUP have different year-end
reporting dates. The Company's fiscal year-end reporting date is March 31 and
GROUP's calendar year-end reporting date is December 31. The consolidation of
these entities for financial reporting purposes has been performed without any
adjustments for timing differences between these two reporting dates in
accordance Regulation S-X Rule 3A-02.
The purpose of the acquisition was to allow GROUP easier access to American
financial markets. Goodwill recognized of $8,705 KUSD was recorded upon
consolidation and was calculated as the value of the consideration given less
the value of the asset received. The resulting goodwill represents the benefit
to be gained by gaining entry into American financial markets.
OFF BALANCE SHEET ARRANGEMENTS
We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder'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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