10QSB 1 ibsg10qsb.htm IBSG 10QSB IBSG 10QSB

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-QSB
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 000-29587


IBSG INTERNATIONAL, INC.

(Name of small business issuer in its charter)
 
 
  Florida
65-0705328
(State or other jurisdiction of incorporation )
(I.R.S. Employer identification No.)
 
1132 Celebration Blvd., Celebration, FL 34747
(Address and Zip Code of Principal Executive Offices)

Securities registered under Section 12(b) of the Exchange Act:
None
 
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
(Title of Class)
 

 
Check whether the issuer: (i) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨ 
 
As of November 14, 2005, there were 45,682,857 shares of the registrant's common stock outstanding.


IBSG INTERNATIONAL, INC.

Part I.
Page
     
     
Item 1.
  
     
 
4
     
 
5
     
 
6
     
 
7
     
     
Item  2
20
     
Item 3.
28
     
     
Part II.
 
     
Item 1.
Legal Proceedings       
29
     
Item 2.
29
 
    
Item 3.
29
     
Item 4.
29
     
Item 5.
Other Information       
29
     
Item 6.
29
     
 
30

-1-

PART I FINANCIAL INFORMATION
 
General
 
The accompanying financial statements have been prepared in accordance with the instructions to Form 10-QSB. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flow, and stockholders’ equity in conformity with generally accepted accounting principles. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements included in the company’s annual report on Form 10-KSB for the year ended December 31, 2004. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the quarter ended September 30, 2005 are not necessarily indicative of the results that can be expected for the year ended December 31, 2005.



-2-



 



IBSG INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2005

-3-


 
Consolidated Balance Sheet
  
September 30, 2005
  
(Unaudited)
  
       
ASSETS
  
       
Current Assets
        
Cash
  
$
645,411
  
Accounts receivable
    
6, 508,279
 
Prepaids
    
151,442
 
Total Current Assets
    
7,305,132
 
         
Equipment, net
    
1,008,217
 
         
Other Assets
        
Prepaids
    
582,336
 
Debt issue costs
    
11,261
 
Deposits
    
2,780
 
Total Other Assets
    
596,377
 
         
Total Assets
  
$
8,909,726
  
         
LIABILITIES AND STOCKHOLDERS' EQUITY
         
Current Liabilities
        
Accounts payable and accrued expenses
  
$
195,982
  
Accrued interest payable
    
37,781
 
Deferred revenue
    
980,968
 
Capital leases payable
    
4,777
 
Convertible promissory note payable, net
    
251,736
 
Total Current Liabilities
    
1,471,244
 
         
Commitments and Contingencies
        
         
Stockholders' Equity
        
Common stock, $0.001 par value, 100,000,000 shares authorized
        
45,682,857 shares issued and outstanding
    
46,772
 
Additional paid in capital
    
14,518,470
 
Accumulated deficit
   
(2,338,458
)
     
12,226,784
 
Less: Deferred consulting
    
(4,788,302
)
Total Stockholders' Equity
    
7,438,482
 
         
Total Liabilities and Stockholders' Equity
  
$
8,909,726
  

-4-


 
Consolidated Statements of Operations
  
(Unaudited)
  
                   
   
Three months ended September 30,
  
Nine months ended September 30,
  
   
2005
  
2004
  
2005
  
2004
  
                   
Sales
  
$
1,379,537
  
$
1,017,147
  
$
3,819,018
  
$
1,855,221
  
                           
Cost of Sales
    
119,162
   
4,388
   
321,842
   
15,368
 
                           
Gross Profit
    
1,260,375
   
1,012,759
   
3,497,176
   
1,839,853
 
                           
Operating Expenses
                          
Amortization and Depreciation
    
77,066
   
123,956
   
231,633
   
294,539
 
Stock based compensation
    
351,724
   
511,101
   
1,150,619
   
3,635,603
 
Bonus shares expense
    
-
   
-
   
19,200
   
-
 
Bad debt expense
   
-
   
-
   
-
   
-
 
Bad debt expense - related party
    
-
   
-
   
9,007
   
-
 
Professional Fees
    
189,028
   
27,103
   
508,150
   
75,163
 
Salary/Wages
    
183,521
   
138,769
   
532,114
   
418,863
 
General and Administrative
    
54,443
   
9,501
   
207,670
   
717,337
 
Total Operating Expenses
    
855,782
   
810,430
   
2,658,394
   
5,141,505
 
                           
Income (Loss) from Operations
    
404,594
   
202,329
   
838,782
   
(3,301,652
)
                           
Other Income (Expense)
                          
Gain on debt settlement
    
-
   
-
   
52,317
   
-
 
Loss on extinguishment of debt - related party
    
-
   
-
   
-
   
(156,765
)
Interest expense
    
(126,792
)
$
(3,905
)
  
(294,096
)
  
(32,155
)
Total Other Income (Expense), net
    
(126,792
)
  
(3,905
)
  
(241,779
)
  
(188,920
)
                           
Net Income (Loss)
  
$
277,802
  
$
198,424
  
$
597,003
  
$
(3,490,572
)
                           
Net Income (Loss) Per Share - Basic
  
$
0.01
  
$
0.01
  
$
0.01
  
$
(0.10
)
                           
Net Income (Loss) Per Share - Diluted
  
$
0.01
  
$
0.01
  
$
0.01
  
$
(0.10
)
                           
Weighted average number of shares outstanding during the period - Basic
    
46,585,740
    
36,098,130
    
45,686,791
    
35,903,892
  
                           
 
Weighted average number of shares outstanding during the period - Diluted
     49,477,301     36,098,130     45,686,791     35,903,892  
                           
                         

 

-5-


 
Consolidated Statements of Cash Flows
  
(Unaudited)
  
           
   
Nine months ended September 30,
  
   
2005
  
2004
  
Cash Flows from Operating Activities:
              
Net income (loss)
  
$
597,003
  
$
(3,301,652
)
Adjustments to reconcile net income (loss) to net cash used in
              
operating activities:
              
Amortization and depreciation
    
231,633
   
294,539
 
Amortization of debt discount costs
    
251,736
       
Bad debt expense
          
162,820
 
Loss on debt extinguishment
          
156,765
 
Recognition of deferred stock based consulting fee
    
940,842
   
-
 
Stock issued for services
    
535,114
   
3,599,902
 
Changes in operating assets and liabilities:
              
(Increase) decrease in:
              
Accounts receivable
    
(1,893,204
)
  
(3,005,075
)
Contributed services by officers, directors, or shareholders
    
141,812
       
Prepaids
    
(726,803
)
  
(23,069
)
Deposits
    
(1,400
)
  
(1,380
)
Other Assets
    
(11,261
)
      
Increase (decrease) in:
            
Accounts payable and accrued expenses
    
(142,742
)
  
94,834
 
Accrued interest payable
    
37,781
   
-
 
Deferred revenue
    
(366,518
)
  
1,177,280
 
Net Cash Used In Operating Activities
    
(406,007
)
  
(845,036
)
               
Cash Flows from Investing Activities:
              
Disbursement for loan - related party
          
(162,820
)
Purchase of equipment
    
(10,689
)
  
(102,522
)
Advances to parent prior to consolidation
    
-
   
(185,513
)
Net Cash Used In Investing Activities
    
(10,689
)
  
(450,855
)
               
Cash Flows from Financing Activities:
              
Proceeds from investment
              
Costs related to investment
              
Proceeds from convertible promissory note, net of issue costs
    
980,275
   
-
 
Repayments of related party borrowings
    
(238,960
)
  
-
 
Payments on Notes Payable
          
(244,725
)
Stock Offering Costs
          
(209,483
)
Repayments of capital leases - principal portion
    
(7,203
)
  
(8,566
)
Proceeds from issuance of common stock, net of offering costs
    
319,575
   
1,786,555
 
Net Cash Provided by Financing Activities
    
1,053,687
   
1,323,781
 
               
Net Increase in Cash
  
$
636,990
  
$
27,890
  
               
Cash at Beginning of Period
    
8,421
   
5,559
 
               
Cash at End of Period
  
$
645,411
  
$
33,449
  
               


-6-
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s most recent 8-K filings and audited financial statements and notes thereto included in its December 31, 2004 Annual Report on Form 10-KSB. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.  Accounting Method

The consolidated financial statements are prepared using the accrual method of accounting. The Company has elected a calendar year end

b. 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 the financial statements and the reported amounts of revenues and expenses during the reporting period.

c.  Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.


-7-
IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

d.  Revenue Recognition

Our license agreements typically run for five years. A first year license fee, inclusive of installation, integration and training, is payable at the initiation of the license. However, neither of our customers paid at the initiation of the license. License maintenance is payable on the second through fifth anniversary date of the license. Each fee covers the license/maintenance fee for one year. Such fees are accounted as unearned revenue and recognized as revenue ratably over each annual period. We recognize revenue in accordance with Statement of Position, or SOP 97-2, “Software Revenue Recognition,” as amended, by Staff Accounting Bulletin No. 104, Revenue Recognition. The Company adopted Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We recognize license revenues when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection of the related receivables is probable, delivery of the license has occurred and the customer has accepted the license (including the expiration of an acceptance period) if the terms of the contract include an acceptance requirement. Licenses are considered delivered once a license agreement has been entered into between the customer and the Company. Actual access to the software, due to the web nature of the software, is provided upon a mutually agreed schedule but the license fee due at time of conveyance and is not contingent upon the customer providing the hardware, staff for training or scheduling conflicts in general. Training and installation are included in the license fee and can be delivered at any time after the license has been conveyed. A portion of the year one license revenue and any subsequent years licenses are amortized on an annual basis commensurate with the start of the license agreement and then each subsequent anniversary date of the license and recognized generally in 12 periods (months) per year. In the event that we grant a customer the right to specified upgrades and vendor-specific objective evidence of fair value exists for such upgrades, value to the customer is determined on a stand-alone basis and there is objective and reliable evidence of fair value of the undelivered elements. Professional services and other revenues, when sold with subscription and support offerings, are accounted for separately until we have delivered the specified upgrade or additional service. If professional services are essential to the functionality of the other elements of the arrangement, we defer recognition of revenue until we have satisfied our professional services obligations. To date, professional services have not been essential to the functionality of the other elements, and thus have been accounted for separately.


-8-
IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

d.  Revenue Recognition (Continued)

We consider a non-cancelable agreement signed by the customer and us to be evidence of an arrangement. Delivery is considered to occur when media containing the licensed programs is provided to a common carrier, or the customer is given electronic access to the licensed software. Our typical end user license agreements do not contain acceptance clauses. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment. If the fee is not fixed or determinable, we recognize revenue as the amounts become due and payable. Probable assurance of collection is based upon our assessment of the customer’s financial condition through review of their current financial statements or credit reports. Additional consideration is given to the type of customer. Most of our customers are government or quasi-government agencies and are thus considered low collection risk although payments could take as long as 12 months to be brought current by the customer due to the slow pay nature of such entities. Late payments and interest can be assessed based on unpaid balances on a monthly basis. Contracts do not include Rights of Return. They do include cancellation clauses available to both parties for material breaches of contracts.

For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. If we determine that collection is not probable, we will defer the revenue and recognize the revenue upon cash collection. When our software licenses contain multiple elements, we allocate revenue to each element based on the relative fair values of the elements. Multiple element arrangements generally include post-contract support (PCS or maintenance), software products, and end-user subscriptions with billings recorded as received and in some cases, other professional services. Revenue from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as PCS, based on the relative fair values of the elements specific to us. Our determination of fair value of each element in multi-element arrangements is based on vendor-specific objective evidence, which is generally determined by sales of the individual element to third parties or by reference to a renewal rate specified in the related arrangement.

Where vendor-specific objective evidence of fair-value exists for all undelivered elements, but evidence does not exist for one or more delivered elements, we account for the delivered elements in accordance with the Residual Method prescribed by SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. In most cases, the bundled multiple elements include PCS and the software product. In such cases, when vendor-specific objective evidence of fair value exists for all of the undelivered elements (most commonly PCS), the residual or remaining amount is recognized as revenue and the PCS is recognized ratably over the PCS term, which is typically 12 months.


-9-
IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

d.  Revenue Recognition (Continued)

Revenues from professional services consist of training and implementation services. Training revenues are recognized as the services are performed. Professional services are not considered essential to the functionality of the other elements of the arrangement and are accounted for as a separate element. Professional services are recognized as the services are performed for time and materials contracts or upon achievement of milestones on fixed price contracts. A provision for estimated losses on fixed-price professional services contracts is recognized in the period in which the loss becomes known.

Deferred revenues include amounts billed to customers for which revenue has not yet been recognized that generally results from deferred maintenance, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Deferred revenue is recognized upon delivery of our products, as services are rendered, or as other requirements requiring deferral under SOP 97-2 are satisfied.

Our licenses for the state of California for each regional office are sold for $50,000 each for the first year. The Company recognizes 65% of the license fee or $32,500 as revenue upon the activation of the license by a regional office. The balance of 35% is amortized on a straight line basis over a one year period. During the nine months ended September 30, 2005 we activated 19 licenses for regional offices.

Our licenses for the Corporate Affairs Commission (Government of Nigeria) consisted of the following: 1) 1st year license fee of a 5 year term effective from June 1, 2004 to June 1, 2005 for $250,000. Of this amount $162,500 was recognized upon the activation of the license and the balance of $87,500 is being amortized on a straight line basis over the 1 year period. 2) A subscription fee for 35,000 businesses at $6.00 per business per month for a period of three (3) months total invoice of $630,000. All of this revenue was recognized in the period of June 1, 2004 to September 1, 2004. 3) A subscription fee for 35,000 businesses for the next three months which is being recognized on a straight line basis for the period from September 2004 to November 1, 2004 total invoice of $840,000, and 4) a subscription fee for 35,000 businesses for the six months ended June 1, 2005. The invoice was for $1,260,000 of which $210,000 was recognized for December 2004 and the balance of $1,020,000 is deferred for 2005. In the period of January 1, 2005 to June 30, 2005, $1,020,000 was recognized on the balance of $1,020,000 that was deferred the prior period, leaving a deferred balance of $0.00. There was also $22,055 from the invoicing of the 1 year license was also recognized in the period ending June 30, 2005, leaving a deferred balance of $20,136.00 which was recognized in the 2nd quarter for the balance of the contract. A subscription fee for 35,000 businesses for the period of July 1, 2005 to September 30, 2005 of $630,000 was recognized.

-10-
 
IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

d.  Revenue Recognition (Continued)

Our licenses for the organization, Buzgate for the first year contract at $100,000. The Company recognizes 65% of the license fee or $65,000 as revenue upon the activation of the agreement. The balance of 35% is amortized on a straight line basis over a one year period. This contract will be financed by the Company. Per the contract the Company will receive 60% instead of the standard 30% of all Subscription Fees from here on.

Our licenses for the state of New Hampshire SBDC were sold for $40,000 for the first year which is a direct linkage to Buzgate. The Company recognizes 65% of the license fee or $26,000 as revenue upon the activation of the agreement. The balance of 35% is amortized on a straight line basis over a one year period. Under this arrangement, the Company will receive 60% instead of the standard 30% of all Subscription Fees.

Our licenses for the Veterans Corporation were sold for $40,000 for the first year license which is a direct linkage to Buzgate. The Company recognizes 65% of the license fee or $26,000 as revenue upon the activation of the agreement. The balance of 35% is amortized on a straight line basis over a one year period. Under this arrangement, the Company will receive 60% instead of the standard 30% of all Subscription Fees.

 

Allowance for Doubtful Accounts and Sales Returns

We maintain an allowance for doubtful accounts and a sales return allowance to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts may be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider (i) the type of entity (government, commercial, retail) and the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable, such as whether it derives from license, professional services or maintenance
revenue; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customers industry, whether the entity is government, as well as general economic conditions, among other factors.

-11-

IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

Should any of these factors change, the estimates that we make may also change, which could impact our future provision for doubtful accounts. For example, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtful accounts could be required.

We currently have six (6) customers, the State of California, the Government of Nigeria, BuzGate, the state of Connecticut, the state of New Hampshire and the Veterans Corporations. This does not reflect sub-licenses of our customers. Our accounts receivable are as follows at September 30, 2005:

Corporate Affairs Commission (Nigeria)
  
$
3,731,729
  
State of California 
    
2,545,000
  
BuzGate 
    
101,550
  
Connecticut 
    
50,000
  
New Hampshire
    
40,000
  
Veterans Corporation
    
40,000
  
         
   
$
6,508,279
  





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

We recognized revenue of the following amounts for the nine months ended September 30, 2005:

Corporate Affairs Commission (Nigeria)
  
$
2,364,327
  
State of California
    
1,282,413
  
BuzGate
    
83,367
  
Connecticut
    
36,911
  
New Hampshire
    
26,000
  
Veterans Corporation
    
26,000
  
         
   
$
3,819,018
  

Deferred revenue consisted of the following at September 30, 2005:

Corporate Affairs Commission (Nigeria)
  
$
644,373
  
State of California
    
278,874
  
         
BuzGate
    
16,632
  
Connecticut
    
13,089
  
New Hampshire
    
14,000
  
Veterans Corporation
    
14,000
  
         
   
$
980,968
  



-12-


IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

e.  Equity Transactions

Equity transactions for consideration other than cash are valued at the closing trading price of the Company’s common stock on the date of authorization.

f. Depreciation and Amortization

The Company is depreciating its furniture on a straight-line basis over 5 years and equipment on a straight-line basis over a three-year period. The software acquired is being amortized on a straight line over a five-year period.

NOTE 3 -  RELATED PARTY TRANSACTIONS

During the period ended September 30, 2005, the Company made cash payments of $243,648 on the notes payable to related parties.

The President of the Company is being compensated at $150,000 per the year ended December 31, 2004 and $180,000 for 2005. No formal employment agreement exists. The President of the Company contributed accrued salary of $120,000 to capital as of June 30, 2005. The President of the Company contributed $26,500 to additional paid in capital as of September 30,2005.

The Company loaned $9,007 in the period ended June 30, 2005, $171,072 in the year ended December 31, 2004 and $115,231 in the year ended December 31, 2003 to Commerce, Inc. These amounts were deemed to be uncollectible due to Commerce’s bankruptcy filing. Accordingly the Company recorded a bad debt expenses of $171,072 and $115,231 for the years ended December 31, 2004 and 2003, respectively. In the period ended June 30, 2005 the Company will record a bad debt of $9,007. The company’s president is a former officer and director of Commerce. He served as Commerce’s president and as a director for seven years prior to his extended personal leave in September of 2002 and resignation in February 2003.
 
NOTE 4 - EQUITY ISSUANCES

In January 2005, the Company issued 996,667 shares of common stock for cash valued at $0.15 per share.

In January 2005, the Company issued 28,571 shares of common stock for cash valued at $0.175 per share.

In January 2005, the Company issued 125,000 shares of common stock for fund raising valued at $0.51 per share, which was the closing price on the date of issue.


-13-
 
IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 4 -  EQUITY ISSUANCES (Continued)

Pursuant to the private placements for cash mentioned previously, the Company was required to issue additional shares of common stock to the various parties because the closing bid price of the Company’s stock was not $1.00 at the time of the SB-2 filing. Accordingly, the Company issued an additional 2,222,779 shares of common stock to the private placement investors for their cash purchases. These individuals did not contribute any services or other items to the Company. These shares were valued at $0.00 per share.

In February 2005, the Company issued 1,466,666 shares of common stock for cash valued at $0.15 per share.

In February 2005, the Company issued 30,149 shares of common stock for fund raising valued at $0.33 per share, which was the closing price on the date of issue.

In February 2005, the Company issued 300,000 shares of common stock for fund raising valued at $0.35 per share, which was the closing price on the date of issue.

In February 2005, the Company issued 100,000 shares of common stock under Bonus Shares, valued at $0.36 per share, which was the closing price on the date of issue.

In February 2005, the Company issued 85,714 shares of common stock for cash valued at $0.175 per share.

In March 2005, the Company issued 130,000 shares of common stock for services rendered valued at $0.36 per share, which was the closing price on the date of issue.

In March 2005, the Company issued 3,100 shares of common stock for fund raising valued $0.29 per share, which was the closing price on the date of issue.

In March 2005, the Company canceled (30,000) shares of common stock, which was originally issued on June 10, 2004 as Bonus Shares valued at $0.56 per share, which was the closing price on the date of issue.

In May 2005, the Company issued 2,000,000 shares of common stock for Board of Directors compensation for services for the entire year of 2005, part was recorded as an expense and part was deferred, valued at $0.20 per share, which was the closing price on the date of issue.

In June 2005, additional shares were issued due to a calculation error on the original shares issued in January 2005 for the pursuant to private placement for cash mentioned previously, the Company was required to issue additional shares of common stock to various parties because the closing price of the Company’s stock was not $1.00 at time of original SB2 filing. Accordingly, the Company issued an additional 619,009 shares of common stock to the private placement investors for their cash purchases. These individuals did not contribute any services or other items to the Company. These shares were valued at $0.01 per share.
-14-

IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 4 -  EQUITY ISSUANCES (Continued)

In August 2005, the Company issued 40,000 shares of common stock for services rendered valued at $.124 per share which was the closing price on the date of issue.

In August 2005, the Company issued 45,000 shares of common stock for services, valued at $0.11 per share, which was the closing price on the date of issue.

NOTE 5 -  COMMITMENTS AND CONTINGENCIES

The Company in April 2005 made a settlement agreement with American Express for payment of $52,317 of the $105,000 owed, which has been paid and forgiveness of the balance, recorded under “Gain on Debt Settlement”.

NOTE 6 -  WARRANTS

On September 7, 2004 the Company entered into a consulting agreement with Redwood Consultants, LLC. As consideration for the consulting agreement, the Company granted 325,000 warrants exercisable at $0.55 per warrant, 325,000 warrants exercisable at $0.75 per warrant, 325,000 warrants exercisable at $1.00 per warrant and 500,000 warrants exercisable at $1.75 per warrant. The Company calculated the fair value of the warrants using the Black-Scholes fair value model and determined that the fair value of the warrants was $216,366. The Company expensed the warrants immediately because the warrants are non-refundable and are not a prepayment for future services.

NOTE 7 - GOING CONCERN

The Company’s condensed consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred cumulative operating losses through September 30, 2005 of $2,338,458. Revenues had not been sufficient to cover its operating costs and to allow it to continue as a going concern. The potential proceeds from the sale of common stock, other contemplated debt and equity financing, and increases in operating revenues from new development would enable the Company to continue as a going concern. There can be no assurance that the Company can or will be able to complete any debt or equity financing. If these are
not successful, management is committed to meeting the operational cash flow needs of the Company.

-15-

IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005


NOTE 8 - NOTE PAYABLE: LH ASSOCIATES

In the period ended March 31, 2005, the Company secured a $1 Million Investment.

Securities Issued:
• $1 million Senior Secured Convertible Notes (the "Notes") and
• Class A and Class B common stock purchase warrants.


Coupon:
7% annual, payable semiannually in cash or at the option of the investor in common stock. If an event of default occurs at any time after the Issue Date and is not cured within 20 days, the Default Rate of 15% per annum applies.

Principal Repayments:
On the 12th month anniversary of the Closing Date, the Company shall be required to make principal repayments based on the following schedule: o Equal monthly installments for the remainder of the note in cash or at the option of the Company in stock at a price equal to a 15% discount of the company’s common stock price at time of repayment with a maximum price of a discount of 15% off the company’s common stock price at the Issue Date.

Maturity:
The Notes will mature 24 months after the Issue Date.

Seniority and Security:
The Notes will be senior to any and all indebtedness of The Company except for a bank line currently being negotiated for up to $500,000 and will be secured substantially by all assets of the Company and its subsidiaries. At the option of the investor this may be waived. Notwithstanding the foregoing, Investor agrees to sign the appropriate subordination documents requested by the bank.


Conversion Price:
The Notes issued will be convertible at the option of the holder, at a fixed price of Price $.29, however, if the Company’s revenues for fiscal 2004 were not at least $5,000,000 and revenue results for the first quarter of fiscal 2005 are not at least $2,000,000 then the conversion price will be reduced by one third. For the purposes of this transaction only, revenue is defined as both recognized and deferred revenue.

Effective Date:
The day the Registration Statement is declared effective.


-16-

IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 8 -  NOTE PAYABLE: LH ASSOCIATES (Continued)


Class A Warrants:
The investors received Class A Warrants to purchase 3,225,807 shares. The Class A Warrants: warrants shall have a 5-year life and an exercise price of $.312. The warrants shall be re-priced if the Company does not have revenues of at least $20 million for 2005 based on the following schedule:
 
Less than $20m — 15% discounted
Less than $15m - 30% discounted
Less than $10m - 45% discounted

Forced Conversion Feature:
If, following the Effective Date, all of the Milestones specified below are satisfied on each trading day occurring during any period of ten consecutive trading days, then the Company may force conversion of the Notes by delivering to the Investors written notice thereof (a “Forced Conversion Notice”) on the business day immediately following the last day of such period (the “Forced Conversion Date”). The Forced Conversion Notice will specify the aggregate principal amount of the Notes that is subject to the forced conversion, which amount (i) shall not exceed 35% of the aggregate dollar volume traded on the Company’s principal market during the seven (7) trading days immediately preceding the Forced Conversion Date and (ii) shall be allocated among the Investors on a pro rata basis. On the Forced Conversion Date, each Investor will be deemed to have converted an amount of principal of its Debenture equal to (A) its pro rata share of the aggregate principal amount specified in the Forced Conversion Notice minus (B) the amount of principal converted by such Investor during the twenty trading days immediately preceding the Forced Conversion Date.

Milestones:
(a) The Registration Statement must be effective and available for resale of the Conversion Shares and Warrant Shares by the Investors.
(b) The closing bid price for the common stock must be above $.60.
(c) No event of default, or event that could become an event of default, shall have occurred.
(d) The issuance pursuant to the Forced Conversion does not cause (i) the number of shares beneficially owned by any Investor to exceed 4.9% of the number of shares then outstanding.


-17-

IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 8 - NOTE PAYABLE: LH ASSOCIATES (Continued)

Anti-dilution Rights:
Should the company sell any Common shares or any instrument convertible into such, at a price per share that is less than the conversion price, then the conversion price shall automatically be lowered to that new price.


Restrictions on other financing:
The Company will be restricted from borrowing money or issuing debt securities in the public or private markets until the Effective Date except for the Bank line disclosed in Seniority.


 Insider Lock -up:
The insiders will be locked up to sell their shares in the company unless the stock price is over $.65 and then subject to Regulation 144 selling rules, However, they may sell if the stock is below $.65 only after 9 months of the registration being effective, subject to rule 144.

Future Offerings:
For a period of up to 1 year from the Effective Date, the investor will retain the right to participate in public or private offerings of The Company’s equity and equity linked securities (including anything convertible into equity) and will be eligible to participate in up to at least 20%.

Fundamental Change:
Upon a Fundamental Change, the Investor(s) will have the right to put the security to The Company at 105% of outstanding principal, plus unpaid accrued unpaid interest. A merger or other change of control transaction shall constitute a Fundamental Change.


Registration Rights: 
Registrant shall file a registration statement with the SEC covering the resale and distribution by the investors of all shares which may be received by the investors upon conversion of Notes and exercise of the Warrants within 40 days of the Closing Date, which Registration Statement shall be declared effective within 135 days of such Closing Date. Penalties: If the Registration Statement is not effective within 135 days from the Issue Date or if the Company does not respond to an SEC comment within 10 business days or if the effective registration is unavailable to the Investors for more than twenty (20) days during a 365-day period, a 2% penalty per month will be assessed until the Registration Statement is declared effective or becomes available. The penalty will be payable monthly in cash.


-18-

IBSG INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005

NOTE 8 - NOTE PAYABLE: LH ASSOCIATES (Continued)

Class B Warrants:
The investors received Class B Warrants to purchase 322,581 shares. The Class B Warrants have a 180-day life post effective registration and an exercise price of $.26 per share.


Due Diligence Fee:
2% (two percent) of investment payable out of the escrow account upon closing.

The Company has valued the warrants granted at $882,103 using the Black Scholes model. The Company has valued the beneficial conversion feature of the note at $97,172. These amounts along with $19,725 have been presented as contra debt accounts. The value of the warrants, beneficial feature, other costs are being amortized to interest expense over the life of the loan. Amortization expense for the nine months ended September 30, 2005 was $251,736. The net value of the note payable as of September 30, 2005 was $251,736.



-19-
 
 
Management’s Discussion and Analysis contains various “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-QSB, including, without limitation, statements related to anticipated cash flow sources and uses, and words including but not limited to “anticipates”, “believes”, “plans”, “expects”, “future” and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company’s business, including but not limited to, reliance on key customers and competition in its markets, market demand, product performance, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company adopted at management’s discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC in terms of recognition of software licenses and recurring revenue. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
 
Management’s Discussion and Analysis of Consolidated Results of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements included herein. Further, this quarterly report on Form 10-QSB should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements included in its 2004 Annual Report on Form 10-KSB. In addition, you are urged to read this report in conjunction with the risk factors described herein.
  
Overview     
 
IBSG International, Inc. ("IBSGI" or the "Company") is a holding company for two software subsidiaries and one system development subsidiary: Intelligent Business Systems Group, Inc. ("IBSG"), a provider of turn-key digital service center software; and Secure Blue, Inc., a Sarbanes-Oxley and security software, Intelligent Business Systems Development, Inc. (IBSD) a provider of IT services
 
The IBSG offers enterprise solutions designed to enhance the operating efficiency and create revenue for State Small Business Development Centers, business associations (e.g., Chambers of Commerce) and Fortune 1000 corporations through the licensing of its unique turnkey digital service center software, which provides a broad range of digital budgetary, administrative and commercial services (B2B, e-commerce, government to business and enterprise business services) on a single platform known as the Biz World Pro (copyrighted).
 
The Company’s other subsidiary, Secure Blue, Inc. provides, in management’s opinion, an economical Sarbanes-Oxley (SOX) compliant and security software called Secure Blue Pro. This product is targeted to small and mid cap public companies as well as private companies that work with public companies and must be in compliance with SOX as a result of working with a public company.
As software providers, system integrators and Application Service Provider, IBSG, Inc. and Secure Blue, Inc. generate their revenue from license sales, system modifications, and system support and a percentage of monthly customer fees. The typical IBSG/Secure Blue license agreement has a five-year term, but, being updated on an annual basis, has historically been renewed upon expiration (to date the Company has had only one licensee not renew, due to the expiration of the licensee's contract with their client).
 
 
-20-
Critical Accounting Policies and Estimates
 
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. A critical accounting policy is one that is both very important to the portrayal of our financial condition and results, and requires management’s most difficult, subjective or complex judgments. Typically, the circumstances that make these judgments difficult, subjective and/or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. We believe the accounting policies below represent our critical accounting policies:
 
      • Revenue recognition;
      • Estimating sales returns and the allowance for doubtful accounts;
      • Value of long lived assets including purchased software;
      • Valuation of services paid for with common stock.
 
Revenue Recognition. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
 
We recognize revenue in accordance with Statement of Position, or SOP 97-2, “Software Revenue Recognition,” as amended, by Staff Accounting Bulletin No. 104, Revenue Recognition. The Company adopted Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We recognize license revenues when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection of the related receivables is probable, delivery of the license has occurred and the customer has accepted the license (including the expiration of an acceptance period) if the terms of the contract include an acceptance requirement. Licenses are considered delivered once a license agreement has been entered into between the customer and the Company. Actual access to the software, due to the web nature of the software, is provided upon a mutually agreed schedule but the license fee due at time of conveyance and is not contingent upon the customer providing the hardware, staff for training or scheduling conflicts in general. Training and installation are included in the license fee and can be delivered at any time after the license has been conveyed. A portion of the year one license revenue and any subsequent years licenses are amortized on an annual basis commensurate with the start of the license agreement and then each subsequent anniversary date of the license and recognized generally in 12 periods (months) per year. The revenue recognition policy is as follows; 65% of the year one license recognized upfront to cover the costs related to the installation, testing, training and the initial investment/purchase of the license of the System. This revenue is recognized in month one. The original agreement on the purchase of the license of System was to be paid within a payment schedule over a period of time in order to recoup implementation costs. It was agreed that on an average taking 65% license fee would cover this cost, the initial expenses of the employees’ time on business development which includes assisting the customer with public awareness and providing initial marketing assistance and guidance in developing a list of prospect sub-license candidates as well as presentation assistance for the same and initial profit for the license sale. The balance in deferred would be maintenance costs for the remainder of the first year and gross profit. The average contract length is five years. As stated in paragraph 27 of SOP 97-2, the customer intends to utilize the system over that period of time as an integral part of their overall operation and as such can continue to be reflected as fixed or determinable. The length of time that a customer is projected to bring invoices current is 12 months and believed to be atypical for these types of contracts but is expected by management to reduce in time to no more then 9 months to be brought current at such time as our receivables become part of the customers’ accounts payable system. Based on paragraph 28 of SOP 97-2, our contracts are generally long term (greater then 12 months
and payments on invoices are not expected to be longer than 12 months, the fee is therefore recognized as fixed and determinable as set forth in paragraph 28.
 
 In the event that we grant a customer the right to specified upgrades and vendor-specific objective evidence of fair value exists for such upgrades, value to the customer is determined on a stand-alone basis and there is objective and reliable evidence of fair value of the undelivered elements. Professional services and other revenues, when sold with subscription and support offerings, are accounted for separately until we have delivered the specified upgrade or additional service. If professional services are essential to the functionality of the other elements of the arrangement, we defer recognition of revenue until we have satisfied our professional services obligations. To date, professional services have not been essential to the functionality of the other elements, and thus have been accounted for separately.
-21-
We consider a non-cancelable agreement signed by the customer and us to be evidence of an arrangement. Delivery is considered to occur when media containing the licensed programs is provided to a common carrier, or the customer is given electronic access to the licensed software. Our typical end user license agreements do not contain acceptance clauses. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment. If the fee is not fixed or determinable, we recognize revenue as the amounts become due and payable. The possibility of cancellation is considered “remote” as stated in paragraphs 33, of SOP 97-2. As directed per paragraph 33, no contingency for cancel ability is required. Therefore there are no funding clauses in our agreements and therefore the Company has not adopted any accounting policies for such conditions. If, in the future, such clauses are added to any license agreements, the Company will develop the appropriate policies as described in paragraphs 32 and 33 of SOP 97-2.

Probable assurance of collection is based upon our assessment of the customer’s financial condition through review of their current financial statements or credit reports. Additional consideration is given to the type of customer. Most of our customers are government or quasi-government agencies and are thus considered low collection risk although payments could take as long as 12 months to be brought current by the customer due to the slow pay nature of such entities. As stated in paragraph 27 of SOP 97-2, the customer intends to utilize the system over that period of time as an integral part of their overall operation and as such can continue to be reflected as fixed or determinable. The length of time that a customer is projected to bring invoices current is 12 months and believed to be atypical for these types of contracts but is expected by management to reduce in time to no more then 9 months to be brought current at such time as our receivables become part of the customers’ accounts payable system. Based on paragraph 28 of SOP 97-2, our contracts are generally long term (greater then 12 months and payments on invoices are not expected to be longer than 12 months, the fee is therefore recognized as fixed and determinable as set forth in paragraph 28. Late payments and interest can be assessed based on unpaid balances on a monthly basis. Contracts do not include Rights of Return. They do include cancellation clauses available to both parties for material breaches of contracts.
 
For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. If we determine that collection is not probable, we will defer the revenue and recognize the revenue upon cash collection. When our software licenses contain multiple elements, we allocate revenue to each element based on the relative fair values of the elements. Multiple element arrangements generally include post-contract support (PCS or maintenance), software products, and end-user subscriptions with billings recorded as received and in some cases, other professional services. Revenue from multiple-element arrangements is allocated to undelivered elements of the arrangement, such as PCS, based on the relative fair values of the elements specific to us. Our determination of fair value of each element in multi-element arrangements is based on vendor-specific objective evidence, which is generally determined by sales of the individual element to third parties or by reference to a renewal rate specified in the related arrangement.
 
Where vendor-specific objective evidence of fair-value exists for all undelivered elements, but evidence does not exist for one or more delivered elements, we account for the delivered elements in accordance with the Residual Method prescribed by SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. In most cases, the bundled multiple elements include PCS and the software product. In such cases, when vendor-specific objective evidence of fair value exists for all of the undelivered elements (most commonly PCS), the residual or remaining amount is recognized as revenue and the PCS is recognized ratably over the PCS term, which is typically 12 months.
 
Revenues from professional services consist of training and implementation services. Training revenues are recognized as the services are performed. Professional services are not considered essential to the functionality of the other elements of the arrangement and are accounted for as a separate element. Professional services are recognized as the services are performed for time and materials contracts or upon achievement of milestones on fixed price contracts. A provision for estimated losses on fixed-price professional services contracts is recognized in the period in which the loss becomes known.
-22-
Deferred revenues include amounts billed to customers for which revenue has not yet been recognized that generally results from deferred maintenance, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Deferred revenue is recognized upon delivery of our products, as services are rendered, or as other requirements requiring deferral under SOP 97-2 are satisfied.
In December 2004, the FASB revised Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation. This statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and the related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. For public entities that are not small business issuers, the implementation of this Statement is required as of the beginning of the first interim or annual reporting period after June 15, 2005. For public entities that are small business issuers, like Coach, the implementation of this Statement, is required as of the beginning of the first interim or annual reporting period after December 15, 2005. Management is required to implement this Statements beginning in fiscal year beginning on January 1, 2006 and they are currently evaluating the impact of implementation of this Statement on the Company.
 
Market for our products
 
The potential market for the BizWorld Data System includes any entity that has a customer, vendor or membership base comprised of small to mid size business enterprises. The potential markets for Secure Blue are public companies required to establish internal control systems. The projected combined market size for both products is greater than $5 billion annually. No assurances can be made that such market shall be realized or result in profitability.
 
 The market for the BizWorld Data System includes state operated Small Business Development Centers, business organizations such as chambers of commerce, large corporations, and other entities which seek to help small and medium size businesses succeed. When Intelligent Business Systems Group, Inc. sells a master “host” license to a state Small Business Development Center or business associations (i.e. chambers of commerce), that entity can sell “sub-licenses’ to the other vertical markets in their respective states or markets, from which Intelligent Business Systems Group, Inc. may receive incremental revenue. This market represents a projected $2.5-$3.5 billion NOT including international application. No assurances can be made that such market shall be realized or result in profitability.
 
Small Business Development Centers
 
Many states operate Small Business Development Centers funded by a combination of US Small Business Administration and state resources. The purpose of these centers is to provide a range of assistance and training to the small and mid-size business sector. We currently have a license agreement with California’s small business development center system which has fifty regional offices, and an agreement with the state of Connecticut to install such a system for their 12 regional offices.
 
Fortune 1000 Corporations
 
Intelligent Business Systems Group, Inc. suggests that Small Business Development Centers seek to sell Corporate Sponsor subscription licenses to Fortune 1000 corporations for an average of $75,000/year. This license would provide the sponsor with unlimited access to the constituent pool of the Small business development centers small-mid size businesses of which a significant percentage are minority owned in order to facilitate the large corporation’s recruitment of small and minority owned businesses as vendors. The System platform permits end users to interact not only with these large corporations, but also among each other. Intelligent Business Systems Group, Inc. anticipates receiving 60% of all such licenses sold. To date no such sponsorship licenses have been sold.
 
Business Associations
 
Other business associations such as local chambers of commerce have membership or offer services to small and medium size businesses. We seek to license the BizWorld Data System to these organizations as a way of providing additional services and generate additional revenues. We currently are in the process of implementing a BizWorld Data System for The Knowledge Institute’s Virtual Business Incubator project called ‘myVBI” which will be offered to its more than 720,000 small business memberships.
-23-
Banking Institutions
 
Many major banking institutions maintain divisions specializing in providing banking services to small-to-medium sized businesses. These banks can add BizWorld access to their customers to encourage their use of the internet to grow their businesses, add another revenue stream to their own business services offerings, and create an excellent new communication tool whereby the bank can pursue enhanced revenue relationships for their existing service offerings.
 
Economic Development Projects
 
These markets reflect a combination of the above market needs. The BizWorld Data System can provide them with similar benefits and the ability to create multiple associations with the other markets in a similar fashion as previously described.
 
Foreign Markets
 
In 2004 we signed a license agreement with an agency of the country of Nigeria. We are positioning the product as a national solution for the support and development of the small to mid size business community and provide access to the same by larger corporations and government entities. By providing the ability to manage developing businesses on the internet while creating a robust internet presence, small to mid size businesses will be enabled for domestic and international business. The Company continues its efforts to develop other international opportunites.
 
Secure Blue Markets
 
Secure Blue will be targeting small to mid size cap public companies. Because of the broad encompassing nature of the SOX legislation, any private company doing business with a public company must be SOX compliant for those records dealing with that business. This market represents a projected value of $3-$4 billion. The market for SOX solutions in the US is projected to grow to $6.9 billion in 2006. Secure Blue is currently targeting sales activity at small and mid-cap public companies with a market valuation of less than $75 million. This is a market sector largely ignored by other vendors. Also, in order for many public companies to ensure that they stay SOX compliant they are demanding that private companies doing business with them are also compliant with many of the major SOX requirements and in particular Sections 404 and 302 relating to internal controls on financial reporting. Currently in the US there are an estimated 10,000 small cap companies and over 100,000 private companies doing business with public companies. No assurances can be made that such market shall be realized or result in profitability.
 
International Markets

Many aspects of the Sarbanes-Oxley Act are to be incorporated into new European legislation later in 2005 and this will lead to rapid growth and a huge global market for SOX solutions well in excess of the US projection. Additionally, foreign companies doing business with US public companies will be required to be SOX compliant as well. It is our objective to establish Secure Blue in the US before expanding into European and Asian markets.
 
Sales & Market Strategy
 
 Intelligent Business Systems Group, Inc. current marketing effort primarily consists of “word of mouth” referrals from existing or potential customers, targeted prospect awareness campaigns, various conventions and trade shows and cold calling entities with resources and marketing research. The most effective and powerful marketing tool is the demonstration of the system and its comprehensive features. Demonstrations and contract negotiations are handled on a personal basis.
 
 To achieve our growth plans Intelligent Business Systems Group, Inc. needs to employ more business developers, present a more visible presence at conventions and accelerate contract implementation. We also anticipate the need to provide enhanced training and marketing services to its customers, which can best be achieved by acquiring existing service companies with expertise in that field. The addition of more technical staff will accelerate contract implementation and add-on work (system modifications) as the customer base is extended. There can be no assurance that we will be able to meet our growth plans or have sufficient financial resources to provide the enhanced services.
-24-
Secure Blue was launched in mid-April of 2005 and in May 2005 we began a series of online, live demos to potential channel partners (i.e. accounting and law firms, brokerage firms and potential end users). Our distribution strategy is to develop third-party channels through professional advisors to small/mid cap companies. These include investor relations firms, law firms, accountancy firms, compliance consultancies, corporate finance advisors, venture capital companies and other strategically important organizations. We are approaching these potential channel partners individually and demonstrating SOX Pro live online to create a dialogue leading to long-term business partnerships. We will continue to focus our sales activity on third-party channels until we are satisfied we can achieve significant traction in the market place. Our third-party channels will attack the end-user market through their existing client base.

In addition we will continue to promote and demonstrate SOX Pro to potential end-users where appropriate. In the longer term we will build a specialist direct sales team focused on specific target sectors within the small/mid cap market selling direct or providing qualified leads to our channel partners.

There can be no assurance that Secure Blue will be able to establish satisfactory channels of distribution for its product or that the product will generate success in the marketplace.
 
Marketing, Sales and Support
 
 We market our products primarily through direct contact of potential customers, referrals from existing customers or potential customers and conferences that are market specific. The key to the marketing of the various products is the ability under the BizWorld product to enable customers to act as channel partners through the ability to sell sub-licenses of the system and provide revenue generating digital service center to their customers. This makes us dependent on the efforts of our customers since we have no direct way to communicate with those parties which may be potential ultimate users of the BizWorld product.
 
Secure Blue has direct market application focusing primarily on the small cap public companies. Secure Blue is currently seeking to establish channel partner arrangements with Investor Relation firms that primarily target the small cap market. Secure Blue will also seek to expand its marketing efforts to include telemarketing and direct target contact through telemarketing firms that specializes in software sales. There can be no assurance that Secure Blue will be able to establish satisfactory channels of distribution for its product or that the product will generate success in the marketplace.
Secure Blue will also seek to expand its marketing efforts to include marketing support for both channel partners and direct sales using PR, advertising, and direct marketing techniques, once the basic distribution infrastructure is in place. Our aims are to make SOX Pro the preferred SOX solution within the small/mid cap market, to prepare the marketplace for our channel partners and to generate good quality, qualified leads for the sales teams.
 
Customer Support
 
Our management believes that strong customer support is crucial to both the initial marketing of its products and maintenance of customer satisfaction, which in turn will enhance our reputation and generate repeat orders. In addition, we believe that customer interaction and feedback involved in our ongoing support functions provide us with information on market trends and customer requirements that is critical to future product development efforts. Intelligent Business Systems Group, Inc. provides toll free and web site support. However, the first line of support is built into the systems through a self diagnostic feature which is enhanced by the system being capable of providing instructions to navigate a user error or auto report a potential system “bug” which is directed to the technical center’s program team which can correct the anomaly on-line and auto down load the correction to all systems.
 
Secure Blue believes that effective and speedy customer support is crucial to the long-term success of SOX Pro. As a mission-critical application, SOX Pro must be totally reliable and the support available must be of the highest order. We will be including 24/7 support as an integral part of the SOX Pro package with an ongoing annual fee of 20% of the first years license cost. Our team based in Florida will provide technical support for end users and channel partners
-25-
Research and Development
 
We believe that our success will depend in large part on our ability to maintain and enhance our current product lines, develop new products, maintain technological competitiveness and meet an expanding range of customer requirements. Our management constantly requests and receives comments on desired functionality or system changes from not only the company’s customers but the customer’s, customer. Our management also intends to hold focus Groups taking a sample population of customers and discussing in an open forum the potential revisions of the various systems.
 
Competition
 
Our management believes that we are the leading provider of digital commerce and management systems for small and medium businesses provided over the internet. However our products compete against a variety of individual software programs designed to provide similar functions for small and medium sized business users. Additionally, many digital commerce solutions are available to small businesses through established internet portals such as Yahoo. Many internet hosting providers help their customers set up e-commerce sites and provide software for such sites. Internet based service providers are increasingly targeting the small and medium business market. A wide variety of consultants market e-commerce solutions to small businesses and offer a more personalized service than are available through small business development centers.         
The marketplace is full of so-called point products offering solutions to various elements of Sarbanes-Oxley compliance. Virtually all of these solutions are heavily biased in price and complexity toward the larger corporation. Secure Blue has a major cost advantage over the competition and is a more comprehensive SOX solution. We have built the solution on a comprehensive and proven security software solution and added sophisticated enhancements such as the PDA access for compliant and sub compliant officers to have access to data on activity of sensitive information. This provides our customer with the required base criteria of SOX which is a secure network with sophisticated functionality of SOX specific monitoring. The majority of the competition has established distribution infrastructures built on a range of existing and complementary products. We are confident that we can leverage the success of the other subsidiary, IBS Group, and their network. Once our third-party channel network is established we will focus on attempting take a significant share of the small-mid cap company market.
 
 Results of Operations for the Three and Nine Months ended September 30, 2005 and 2004
 
The Company maintained a conservative revenue recognition policy related to previously held contracts but has recognized new business or new licenses activated under previous contracts according to conservative recognition policies under GAAP. The Company reflected an increase in sales revenues for the three months ended September 30, 2005 to $1,379,537 compared to sales revenues for the three months ended September 30, 2004 of $1,017,147, an increase of $362,120. The Company reflected an increase in sales revenues for the nine months ended September 30, 2005 to $3,819,018 compared to sales revenues for the nine months ended September 30, 2004 of $1,855,221, an increase of $1,963,797. The Company had deferred revenues for the nine months ended September 30, 2005 of $980,968 (deferred pending recognition based on amortization policies previously stated; See Note 2 of the Financial Statements).
 
Operating Expenses for the Three and Nine Months ended September 30, 2005 and 2004
 
The Company had operating expenses of $855,740 for the three months ended September 30, 2005 compared to operating expenses of $810,430 for the three months ended September 30, 2004, an increase of $45,310, primarily as a result of the increase of general and administrative expenses. The Company had operating expenses of $2,650,417 for the nine months ended September 30, 2005 compared to operating expenses of $4,952,585 for the nine months ended September 30, 2004, a decrease of $2,302,168, primarily as a result of a decrease in stock based compensation and bad debt expense to a related party (Commerce, Inc.; see Note 3), offset by an increase of general and administrative expenses. The expenses we incurred in the quarter ended September 30, 2005, were primarily amortization of consulting services, stock based compensation, depreciation, bad debt expense and general and administrative expenses. This reflects an operating profit for the three months ended September 30, 2005 of $277,843 and an operating profit for the nine months ended September 30, 2005 of $597,043.
-26-
Liquidity and Capital Resources

We incurred cumulative operating losses through September 30, 2005 of $2,338,418. Revenues had not been sufficient to cover its operating costs and to allow it to continue as a going concern. The notes in the unaudited financial statements at and for the quarter ended September 30, 2005, contain an explanatory paragraph raising substantial doubt of the Company’s ability to continue as a going concern. Note 7 to the unaudited financial statements at and for the quarter ended September 30, 2005 describe the conditions which raise this doubt and management’s plans.
 
We addressed our capital requirements in March 2005 by sale of $1,000,000 of Senior Secured Convertible Notes (See Note 8 of the unaudited financial statement). We believe the proceeds of the notes as well as the cash we expect to
generate from operations will enable us to meet our capital needs for at least the next twelve months except as disclosed below.
 
We currently expect to incur substantial expenditures in 2005 for the commercial introduction of Secure Blue’s software products, to revise our BizWorld Pro software to add additional functions and improve ease of use, and implementation and compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. The ultimate costs and benefits of these additional expenditures are not fully known. We may seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.

We currently have four (6) customers, the State of California, the Government of Nigeria, BuzGate, the State of Connecticut, the State of New Hampshire and Veteran Corporation. Our accounts receivable are as follows at September 30, 2005:
 
Corporate Affairs Commission (Nigeria)
  
$
3,731,729
  
State of California
    
2,545,000
  
BuzGate
    
101,500
  
Connecticut
    
50,000
  
New Hampshire                                                                                  
Veteran Corporation
    40,000
40,000		  
 
  
$
6,508,279
  
      FACTORS THAT COULD AFFECT FUTURE RESULTS
 
Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. We have no arrangements or sources of additional capital and may have to curtail our operations if additional capital is needed but is not available
 
Our customers who are generally state government agencies or quasi government business associations can be exceedingly tardy in paying their obligations to us.  We may have to curtail our operations if we do not have sufficient funds to pay for the expenses of operating our business. The Company will use additional commercial market opportunities to offset the slow pay nature of the lucrative government contract market. The Company’s current and projected acquisitions will expand the Company’s retail and private sector markets which should create a blend of payment cycles between the secured government markets and the commercial markets.
-27-
We acquired our enterprise software and began servicing licensees of such software in 2004.   Prior financial information reflects a profitable operation. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in relatively new and rapidly evolving markets. These risks may include:
 
 
·
uncertain commercial acceptance of our products;
 
·
technological obsolescence; and

 
·
Competition

We cannot assure you that we will succeed in addressing these risks. If we fail to do so, our revenue and operating results could be materially harmed.

Our software products are subject to rapid technological change and to compete, we must offer products that achieve market acceptance.

The software industry is characterized by rapid technological change.  To remain competitive, we must continue to improve our existing products to meet the needs of our customers.  We cannot assure you that new products offered by
our competitors may not prove attractive to our clients and potential clients and adversely affect our future revenues.  Our failure to adequately protect our proprietary rights could adversely affect our ability to compete effectively. We rely on a combination of contracts, copyrights, continued evolution of our core product (s) and other security measures in order to establish and protect our proprietary rights. We can offer no assurance that the measures we have taken or may take in the future will prevent misappropriation of our technology or that others will not independently develop similar products, design around our proprietary technology or duplicate our products.
 
Allowance for Doubtful Accounts and Sales Returns. We maintain an allowance for doubtful accounts and a sales return allowance to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts may be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider (i) the type of entity (government, commercial, retail) and the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable, such as whether it derives from license, professional services or maintenance revenue; (iv) our historical provision for doubtful accounts; (v) the credit worthiness of the customer; and (vi) the economic conditions of the customers industry, whether the entity is government, as well as general economic conditions, among other factors.
 
Should any of these factors change, the estimates that we make may also change, which could impact our future provision for doubtful accounts. For example, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtful accounts could be required.

 
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures as of September 30, 2005were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
There have been no material changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the quarter ended September 30, 2005.

-28-



Item 1. Legal Proceedings
 
Not applicable

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

    In August 2005, the Company issued 40,000 shares of common stock for services rendered valued at $.124 per share which was the closing price on the date of issue.

    In August 2005, the Company issued 45,000 shares of common stock for services, valued at $0.11 per share, which was the closing price on the date of issue.
 
Item 3. Defaults upon Senior Securities

    Not applicable

Item 4. Submission of Matters to a Vote of Security Holders
 
    None.

Item 5. Other Information

    Not applicable

Item 6. Exhibits
 
    A. Exhibits:
 


-29-
 


Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Celebration, Florida, on November 14, 2005.
 
 
     
  IBSG INTERNATIONAL, INC.
 
 		  
 		  
 
Date: November 14, 2005 By:   /s/ Michael Rivers
 
Michael Rivers
 
President, Chief Executive Officer 


 
     
  IBSG INTERNATIONAL, INC.
 
 		  
 		  
 
Date: November 14, 2005 By:   /s/ Geoffrey Birch
 
Geoffrey Birch
  Principal Accounting Officer

-30-