10-K 1 v344975_10k.htm FORM 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended: December 31, 2012

 

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

 

Commission file number:  000-53223

 

GBS ENTERPRISES INCORPORATED

(Exact name of registrant as specified in its charter)

 

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

 

585 Molly Lane

Woodstock, GA 30189

(Address of principal executive offices)

 

(404) 891-1711

Issuer’s telephone number

 

With a copy to:

Philip Magri, Esq.

The Magri Law Firm, PLLC

11 Broadway, Suite 615

New York, NY 10004

T: (646) 502-5900

F: (646) 826-9200

pmagri@magrilaw.com

www.MagriLaw.com

 

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

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

 

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

Common Stock, $0.001 par value

(Title of class)

 

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

Yes ¨ No x

 

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

Yes ¨ No x

 

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

Yes ¨ No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ Nox

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

 

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

Yes ¨ No x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. At June 30, 2012, the aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately $10,284,666 based on $0.40 (the closing sales price of the Company’s common stock on June 29, 2012).

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of May 17, 2013, there were 30,812,624 shares of common stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 
 

 

TABLE OF CONTENTS

 

    Page
  PART I  
Item 1 Business 4
Item 1A Risk Factors 13
Item 1B Unresolved Staff Comments 24
Item 2 Properties 24
Item 3 Legal Proceedings 24
Item 4 Mine Safety Disclosures 25
     
  PART II  
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25
Item 6 Selected Financial Data 26
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 7A Quantitative and Qualitative Disclosure about Market Risk 40
Item 8 Financial Statements and Supplementary Data 40
Item 9 Change In and Disagreements with Accountants on Accounting and Financial Disclosure 40
Item 9A Controls and Procedures 40
Item 9B Other Information 42
     
  PART III  
Item 10 Directors, Executive Officers and Corporate Governance 43
Item 11 Executive Compensation 48
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 51
Item 13 Certain Relationships and Related Transactions, and Director Independence 52
Item 14 Principal Accounting Fees and Services 54
     
  PART IV  
Item 15 Exhibits, Financial Statement Schedules 54
Signatures   58

 

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EXPLANATORY NOTE

 

As previously reported by the Company on a Form 8-K filed with the Commission on September 20, 2012, on September 19, 2012, the Company changed its fiscal year end from March 31st to December 31st, commencing on December 31, 2012. Prior to this change, the Company’s subsidiaries, with the exception of SD Holdings, Ltd. had December 31st fiscal year ends and in reporting the Company’s financial statements, the Company, incorrectly applied of Rule 3A-02 (“the 93-day rule”) promulgated under Regulation S-X by consolidating those subsidiaries without any adjustments for timing differences in the different period ends. With the change in Company’s fiscal year end, the Company is retroactively adjusting previously released financial statements to reflect this change, beginning with December 31, 2010. Accordingly, the financial statements for the fiscal year ends December 31, 2011 and 2012 have been restated to include the accounts of all consolidated companies for the same twelve month period. The restatement of the Company’s financial statements is not a change from one accounting policy that applies with GAAP to another accounting policy that complies with GAAP.

 

On April 17, 2013, our Common Stock symbol was given the letter “E” (which denotes an SEC filing delinquency) and we received an OTCBB Delinquency Notification which advised us that, pursuant to FINRA Rule 650, unless the delinquency (failure to file our Form 10-K for the fiscal year ended December 31, 2012) was cured by May 17, 2013, our securities would not be eligible for OTCBB quotation. We have prepared and filed this Form 10-K with the SEC required under the Securities Exchange Act of 1934, as amended, to cure the delinquency.

 

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Forward Looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” should,”” expect,” “plan,” “anticipate,” “believe”, “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” included herein that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. The safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 does not apply to this annual report.

 

Unless otherwise noted, all references in this Annual Report on Form 10-K to “GBS Enterprises,” “GBS,” “GBSX,” the “Company,” “we,” “us,” “our” and similar terms and expressions shall mean GBS Enterprises Incorporated, a Nevada corporation, and its subsidiaries, including, but not limited to, GROUP Business Software AG.

 

 

PART I

 

Item 1. Business

 

Overview

 

GBS Enterprises Incorporated, a Nevada corporation (the “Company,” “GBS,” “GBSX,” “we,” “us,” “our” or similar expressions), conducts its primary business through its 50.1% owned subsidiary, GROUP Business Software AG (“GROUP”), a German-based public-company whose stock trades on the Frankfurt Exchange under the stock symbol INW.  GROUP’s software and consulting business is focused on serving IBM’s Lotus Notes and Domino market.  GROUP caters primarily to mid-market and enterprise-size organizations with over 3,500 customers in thirty-eight countries spanning four continents, representing more than 5,000,000 active users of its products.  GROUP’s customers include Abbot, Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota.  GROUP provides IBM Lotus Notes/Domino Application and Transformation technology. Headquartered in Eisenach, Germany, the Company has offices throughout Europe and North America. The Company maintains a website at www.gbsx.us. GROUP maintains a website at www.gbs.com. The information contained in the Company’s and GROUP’s websites is not incorporated by reference herein.

 

The Company’s Common Stock is quoted on the OTC Bulletin Board under the ticker symbol “GBSX.”

 

 

To that end, in 2011, we acquired and developed technologies that help organizations reduce the time, cost, resources and risks associated with these highly complex migration and modernization projects.

 

In 2012, in order to reduce overhead and administrative costs, we decided to restructure the Company’s multilevel subsidiary-structure. During the year ended December 31, 2012, we restructured several subsidiaries. Also, in 2012, we made changes in our management structure, appointed five independent members to our Board of Directors and formed Board committees, including an Audit Committee.

 

Products & Services

 

GBS has grown by consolidating the fragmented Lotus Software market through the acquisition of companies with complementary product, technology or services offerings. GBS has continuously developed its software and service business to service and support GBS’s expanding Lotus customer base.

 

Historically, GROUP has achieved growth by acquiring underperforming companies with complimentary operations and leveraging GROUP’s expertise to turnaround and integrate these companies. Key success factors for this strategy are: enhanced portfolio, positioning GROUP as the ‘one-stop-shop’ for Lotus applications and services, expanded customer support, fast code migration, and cloud enablement/XPages conversion of acquired applications.

 

Going forward, the Company intends focus on potential acquisition targets in the following areas of software and services: Applications and Application Modernizations, Professional Services, Hosting/Outsourcing Services, Administration and IT services, and XPages expertise.

 

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Messaging and Business Applications Software & Solutions

 

GBS Messaging and Business Application Software & Solutions product lines include software and advisory services for email and Instant Messaging (IM) Management, Security, Compliance, Archiving and Productivity, CRM Applications, Governance, Risk & Compliance (GRC) Management software, Workflow and Business Process Management software, ePDF Archiving & Document Management.

 

GBS develops, sells and installs well-known business process and management software suites based on Lotus Notes / Domino and IBM Portal technology, mainly for major international companies and medium-sized customers.

 

Through GBS’s comprehensive messaging software product lines and associated services, Lotus Notes, Microsoft Exchange or SMTP-based-email customers, as well as Lotus Sametime, customers are able to provide their users with secure, efficient and centrally administered use of e-mail and IM while maintaining control over their compliance with current legal requirements and corporate guidelines.

 

Consulting Services

 

GBS develops, sells and orchestrates customer-specific Lotus Domino strategy and consulting services, such as CIO and IT department leader Strategic Advisory Services, Managed Services, Outsourcing, Administration, Assessments and Implementations, Performance Improvements, Custom Application Development, Governance and Security, Technical Support, and Training, as well as Email Migration Services.

 

Based on GBS’s unique concentration of industry talent and expertise, mainly in the areas inside and around IBM Lotus Notes/Domino, inside and around corporate messaging (IBM, Microsoft, SMTP) and inside and around IT environmental and application assessment, analysis and reporting, commercial and governmental customers, as well as Software Integrators (SI) and channel partners, are able to rely on the company’s strategic and tactical advisory services for evaluating, planning, staffing and execution of any customer project. GBS Consulting Services’ global teams of consultants use modern project management techniques, proprietary methodologies and GBS accelerator technologies to complete client projects on time and with reduced risk.

 

We believe that our focus on recruiting and retaining top Lotus expertise positions our team to offer leading-edge Lotus Notes / Domino subject matter knowledge to our customers. GBS consultants have an average of over 12 years’ experience each in Lotus Notes/Domino and its related products and are routinely asked to present at IBM Lotus events including Lotusphere (Connect), 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.

  

Market Trends

 

As IT departments face continuous budget reductions and constant pressure for higher performance and efficiency, CIOs are focusing on modern technologies to support their need for increased scalability, flexibility and lower costs. GBS has identified this demand as a strategic growth opportunity for the company and has placed a significant focus on expanding its Modernizing/Migrating technology.

 

GBS Lotus Application Modernization and Migration

 

GBS Lotus Application Modernization and Migration activities are focused on the IBM Lotus / Domino applications market and the offering spans from expert services and accelerator technologies to modernized, web enabled (also named “cloud” or “cloud computing”) and migrated Lotus applications; and thus ultimately take the Lotus applications from legacy to the future. The foundation of the Modernizing/Migrating Suite Software offering is GBS’s significant R&D investment in a set of methodologies and key technology accelerators to automate the conversion of traditional Notes based client-server applications, into the IBM XPages framework which enables Domino applications to be run and accessed via the Lotus client, a web browser or on a mobile device. The patent-pending software that underpins Modernizing/Migrating was developed by GBS with assistance and guidance from IBM Corporation’s Software Group to ensure alignment with future releases of the IBM Lotus / Domino and XPages technology.

 

Revenue Model

 

GBS generates its revenue from the sale of internally created software, third-party developed software and the delivery of related services, including IT systems planning, administration, support, hosting, implementation and integration.

 

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Our Customers

 

GBS, through its subsidiaries, caters primarily to mid-market and enterprise-size organizations, and has over 3,500 customers in thirty-eight countries spanning four continents, representing more than 5,000,000 active users of its products. The Company’s customers include Abbot, Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota. The Company is a large supplier of applications for IBM’s Lotus Notes and Domino markets, and is heavily dependent on IBM for its revenue.

  

Key Acquisitions in 2011

 

In 2011, we made the following key strategic acquisitions:

 

nPavone AG
nGroupWare, Inc.
nIDC Global, Inc.
nSD Holdings, Ltd.

 

Pavone AG. On April 1, 2011, we acquired 100% of the outstanding common stock of Pavone AG, a German corporation (“Pavone”), for $350,000 in cash and 1,000,000 shares of GBS common stock. The fair value of the GBS common stock was determined to be $4.90 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $583,991 in debt, was $5,843,991. Pavone’s extensive workflow software for Lotus Notes and Domino along with their large customer base is believed to be well suited for GBS Enterprises’ portfolio strategy. We believe our acquisition of Pavone complements our majority ownership in GROUP, and that the acquisition further strengthens our industry position in the market of IBM Lotus Platforms. At December 31, 2012, Pavone had over 2,500 customers and over 150,000 users worldwide.

 

GroupWare, Inc. On June 1, 2011, we acquired 100% of the outstanding common stock of GroupWare, Inc., a Florida corporation (“GroupWare”), for $250,000 and 250,000 shares of GBS common stock. The fair value of the GBS common stock was determined to be $4.34 per share, representing the market value at the end of trading on the date of the acquisition. The total value of the investment, including the assumption of $694,617 in debt was $2,029,617. GroupWare's ePDF server delivers centralized, network-wide PDF solutions for messaging, workflow, document, content and data management. We believe that the acquisition strengthens our migration and modernization offerings 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, our 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.

 

IDC Global, Inc. On July 25, 2011, we acquired 100% of the outstanding common stock of IDC Global, Inc., a Delaware corporation (“IDC”), for 880,000 shares of GBS common stock and $785,000. The fair value of the GBS 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 $4,066,000. IDC services include nationwide network and data center services. IDC delivers customized, high availability technology solutions for WAN, Wireless Services, Co-location & Hosting, Managed Services, and Network Security. IDC Global includes two Data Center facilities located in the downtown Chicago area and Colocation facilities in three other Data Centers in New York, London, England and Frankfurt, Germany. IDC provides internet infrastructure Services (IaaS) to the business community helping customers make the transition from large, static and expensive on-premise computing to dynamic, flexible and cost-effective off-premise computing.

  

SD Holdings, Ltd. On November 1, 2011, we acquired 100% of the outstanding common stock of SD Holdings Ltd., a Mauritius corporation (“SYN”), for $525,529 and 612,874 shares of GBS common stock. The fair value of the GBS common stock was determined to be $2.05 per share, representing the market value at the end of trading on the date of the agreement. SYN owns 100% of Synaptris, Inc., a California corporation (“Synaptris”), and Synaptris Decisions Private Limited, an India company.

 

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 employed 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

 

With the integration of the Synaptris product portfolio, we added another tier of Lotus Notes applications including reporting products, advanced dashboards, and email productivity solutions. Additionally, the Synaptris acquisition included a comprehensive search engine specialized for use with email that is faster and easier to use than other products in the market.

 

In addition to product synergy and additional revenue streams, we expect to derive operational synergy from this acquisition. Synaptris’ presence in India is anticipated to accelerate our plan to expand our product development team particularly for our strategic offerings in India.

 

6
 

 

2012 Highlights

 

nSubsidiary Restructurings in 2012
nChanges in Corporate Governance in 2012

 

Subsidiary Restructurings in 2012

 

In 2012, in order to reduce overhead and administrative costs, we decided to restructure the Company’s multilevel subsidiary-structure. During the year ended December 31, 2012, we restructured the following subsidiaries:

 

nSD Holdings, Ltd./GBS India Private Limited
nPavone AG
nGroupWare AG
nPavone, Ltd.
nebVokus, GmbH
nB.E.R.S. AD (Investment)

 

SD Holdings, Ltd./GBS India Private Limited. On April 1, 2012, we sold SYN and its wholly-owned subsidiaries, Synaptris and Synaptris India, to Lotus for $1,877,232. On July 1, 2012, the Company entered into a purchase agreement with SYN for $1,877,232, which transferred all SYN’s assets, including intellectual property rights, and liabilities of the IntelliPRINT and FewClix product lines, customer contracts and certain employees for operations in a new subsidiary, GBS India Private Limited, an Indian company (“GBS India”). A royalty fee in the amount of approximately $350,000 has been agreed upon for the benefit the Company. Additionally a profit based fee of up to $700,000 may be earned based on license and revenue recognized from the sold IntelliVIEW and IntelliVIEW NXT products. On August 1, 2012, the Company acquired 100% of the outstanding capital stock of GBS India. We anticipate GBS India’s presence in India to accelerate our plan to expand our product development team particularly for our strategic offerings in India.

 

Pavone AG/Groupware AG. On July 6, 2012 and August 9, 2012, wholly-owned subsidiaries Pavone AG and Groupware AG, respectively, were merged and consolidated into one wholly-owned subsidiary, Pavone GmbH. The mergers were consummated solely for administrative purposes.

 

Pavone, Ltd. On July 8, 2012, Pavone, Ltd., a subsidiary of Pavone AG and a shell company, was dissolved. The Company serves the United Kingdom market through GROUP’s subsidiary GBS, Ltd.

 

EbVokus, GmbH. On October 1, 2012, GROUP sold all of the software and operational assets (constituting substantially all of the assets) of its wholly-owned subsidiary, ebVokus GmbH, along with the associated maintenance and project agreements to a non-affiliated third party for a purchase price of approximately $459,000, approximately $258,000 (200,000 Euros: 1 EUR = $1.29 USD on October 1, 2012) was paid at closing and the remaining $201,000 was paid on February 15, 2013 (150,000 Euro: 1EUR = $1.35 USD on February 15, 2013).

 

B.E.R.S. AD. On November 23, 2012, GBS AG sold its entire participation (50%) in B.E.R.S AD for a total of 25,000 BGN.

 

Changes in Corporate Governance in 2012

 

nOn February 24, 2012, Markus R. Ernst was appointed as the Company’s Chief Financial Officer.

 

nOn March 1, 2012, the size of the Board was increased to seven members and the Board appointed David M. Darsch, John A. Moore, Jr., Mohammad Shihadah, Stephen D. Baksa and Woody A. Allen (each, a “New Director” or “Independent Director” and collectively, the “New Directors” or “Independent Directors”) as members of the Board until the next annual meeting of stockholders of the Company or until his respective successor is elected and qualified. On March 1, 2012, the Board formed the following committees and appointed the following directors to serve on such committees:

 

oAudit Committee: John A. Moore, Jr. (Chairman), Woody A, Allen and Gary D. MacDonald
7
 

 

oCompensation Committee: Woody A. Allen (Chairman), David M. Darsch, John A. Moore, Jr., Mohammad Shihadah and Stephen D. Baksa

 

oCorporate Governance, Regulatory and Nominating Committee: Woody A. Allen (Chairman), David M. Darsch, John A. Moore, Jr., Mohammad Shihadah and Stephen D. Baksa

 

nOn July 11, 2012, Joerg Ott resigned as the Chief Executive Officer of the Company. His resignation was not due to a dispute or any disagreements with the Company. He retained his membership on the Company’s Board of Directors (the “Board”), and since July 11, 2012, Mr. Ott has been serving as the Board’s Chairman. Mr. Ott also serves as the Chief Executive Officer of GROUP.  

 

nOn July 11, 2012, the Board appointed Gary D. MacDonald as the Company’s Interim Chief Executive Officer and Managing Director of Worldwide Operations.  

 

Subsidiaries

 

At December 31, 2012, our direct and indirect subsidiaries consisted of the following entities:

 

      Date      Direct (D) or  
      of the      Indirect (I)  
Subsidiary  Headquarters  Acquisition  GBSX Ownership %   Ownership  
                
GROUP Business Software (UK) Ltd.  Manchester (UK)  12/31/2005   50.1%  I*  
GROUP Business Software Corp.  Woodstock, GA (USA)  12/31/2005   50.1%  I*  
GROUP LIVE N.V.  Den Haag  (NL)  12/31/2005   50.1%  I*  
Permessa Corporation  Waltham, MA  (USA)  09/22/2010   50.1%  I*  
Relavis Corporation  Woodstock, GA (USA)  01/08/2007   50.1%  I*  
GROUP Business Software AG  Eisenach (GE)  06/01/2011   50.1%  D  
Pavone GmbH  Boeblingen (GE)  04/01/2011   100%  D  
GroupWare Inc.  Woodstock, GA (USA)  01/06/2011   100%  D  
IDC Global, Inc.  Chicago, IL (USA)  07/25/2011   100%(1)  D  
GBS India Private Limited  Chennai (IN)  07/1/2012   100%  D  

 

*Indirectly held through our 50.1% ownership of GROUP Business Software, AG.

 

(1)On February 1, 2013, we sold 100% of IDC to a cloud network provider in consideration for $4,600,000, subject to certain holdback provisions. See “Subsequent Events” under Item 9B Other Information.

 

8
 

 

We continually seek ways to consolidate our operations and reduce redundancies in order to reduce our overhead and administrative costs and to enhance shareholder value.

 

Intellectual Property

 

We do not own any patents or trademarks.

 

We own the internet domain name, www.gbsx.us. GROUP owns www.gbs.com. The information contained in the Company’s and GROUP’s websites is not incorporated by reference herein. 

 

We generally control access to and use of our proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers, and partners, and our software is protected by U.S. and international copyright laws. Despite our efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses, and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology. In addition, the laws of some foreign countries in which we sell products do not protect our proprietary rights as fully as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competition will not independently develop similar technology.

 

We are also dependent on third-party suppliers for certain software which is embedded in some of our products. Although we believe that the functionality provided by software which is licensed from third parties is obtainable from multiple sources, or could be developed by us if any such third-party licenses were terminated, or not renewed, or if these third parties fail to develop new products in a timely manner, we could be required to develop an alternative approach to the use of such third party functionality, which could require payment of additional fees to third parties or internal development costs and delays that might not be successful in providing the same level of functionality. Such delays, increased costs, or reduced functionality could adversely affect our business, operating results, and financial condition.

 

Research and Development

 

We focus our research and development efforts on developing new products and needed technologies in our strategic areas and markets and to further enhance functionality, reliability, performance and flexibility of existing products. In 2011 and 2012, development teams around the globe, namely in the U.S., Canada, Germany, the United Kingdom, Denmark and India, have been working on the next generation offering, We incurred research and development expenses of approximately $10.2 million in 2012 and $5.0 million 2011.

 

Government Regulation

 

As the internet continues to evolve, increasing regulation by federal, state or foreign agencies and industry groups becomes more likely. For example, we believe increased regulation is likely with respect to the solicitation, collection, processing or use of personal, financial and consumer information as regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection, privacy and data security. In addition, the interpretation and application of consumer and data protection laws and industry standards in the United States, Europe and elsewhere are often uncertain and in flux. The application of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be subject to further regulation, the impact of which cannot be fully understood at this time. Moreover, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data and privacy practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data and privacy practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Also, any new regulation, or interpretation of existing regulation, imposing greater fees or taxes on Web-based services, such as collaboration and data sharing services and audio services, or restricting information exchange over the Web, could result in a decline in the use and adversely affect sales of our Collaboration and Data products and our results of operations.

 

Competition

 

The competitive landscape in the enterprise data center market is intense and changing, and we expect there will be a new class of very large, well-financed, and aggressive competitors, each bringing its own new class of products to address this new market. We also expect to see acquisitions, further industry consolidation, and new alliances among companies as they seek to serve the enterprise data center market.

 

9
 

 

The Company is focused on developing a portfolio of modern software technologies and application services to address the needs of Independent Software Vendors (ISV), data center and businesses of commercial and government organizations.

 

Growth Strategy

 

Based on current market demands for modern, Cloud-based and mobile-device capable business applications, we have acquired and developed a set of unique technologies that help organizations reduce the time, cost, resources and risks associated with modernizing or migrating their existing applications.

 

We generate revenue from subscription and usage fees and related services, including support and strategic consulting services. The subscription period is typically based on a yearly or multi-year contract with our customers. Another sector of our strategic portfolio is a suite of tools and methodologies we have developed to rapidly convert Lotus Notes applications into web and modern mobile applications. This portfolio includes a set of powerful analysis tools known as Insights that identify all of the Lotus Notes applications within an organization and provide metrics about the uses and users of those applications. Because of the nature of Lotus Notes and Domino, the applications within a customer environment tend to be highly distributed and number in the thousands. For many organizations, this fact alone makes it extremely difficult to plan for projects that involve modernizing these applications for use in a browser and on mobile devices or migrating them to another platform. Our technologies help them to dramatically reduce the cost, risk, time and resources associated with these highly complex projects.

 

We generate revenue with our analysis tools by charging a fee for the use of our technology and for the associated cost of the services to produce a report and set of recommendations for the customer. Additional revenues come from consulting services that result from helping our customers to implement those recommendations. For use of our conversion tools, referred to as Modernizing/Migrating, we charge a flat fee for the conversion and additional hourly rates to perform additional supporting development or testing as needed.

 

We also believe there is significant revenue opportunity in licensing these tools to a network of global partners who also have existing presence and expertise in the Lotus Notes and Domino market. We have established partner agreements for the use of the analysis and conversion tools with partners in several countries and directly with IBM.

 

Dependence on IBM

 

Given our focus on the IBM Lotus® Notes and Domino market, significant portions of our revenue are dependent upon our customers’ willingness to make future investments in these platforms. We expect much of our growth to come from our strategic offerings, which are also highly dependent upon the health of the IBM Lotus brand and the cooperation of IBM to promote, sell and/or use the technologies encompassed in our strategic offerings. Should IBM choose not to: promote the Lotus brand; make further investments in the Notes and Domino platform technology itself; or, support the positioning of our products in the market, we might not see the growth we are anticipating and our business could be materially adversely affected.

 

Employees

 

At December 31, 2012, the Company had two executive officers: Gary D. MacDonald (Interim Chief Executive Officer, Managing Director of Worldwide Operations, Executive VP and Chief Development Officer) and Mark R. Ernst (Chief Financial Officer).

 

At December 31, 2012, we had 249 full-time employees and four part-time employees. The disclosure below pertains to the activities of all subsidiaries, including GROUP, our 50.1% subsidiary:

 

The breakdown into the individual departments can be taken from the following overview:

 

Department  At December 31, 2012   At December 31, 2011 
Management and Administration   35    34 
Marketing   15    19 
Research & Development   89    106 
Sales   48    60 
Service   58    91 
Trainee   4    6 
TOTAL   249    316 

 

We believe our relations with employees are good. In certain countries outside the United States, our relations with employees are governed by labor regulations that provide for specific terms of employment between our Company and our employees.

 

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Seasonality

 

Although our business is not inherently seasonal in nature, historically, our revenue in the last quarter of the calendar year is higher than in each other of the remaining three quarters outside of any consolidation effects. We believe this is particularly due to the general spending behavior driven by most of our customer base.

 

 

General Corporate History

 

We were incorporated in Nevada on March 20, 2007 as SWAV Enterprises Ltd. (“SWAV”). SWAV had a different management team and was in a different industry.

 

On April 26, 2010, SWAV purchased certain technology assets of Lotus Holdings Ltd. (“Lotus”) in consideration for an aggregate of 2,265,240 shares of SWAV common stock. Also on April 26, 2010, Lotus (on behalf of the SPPEF Members as discussed below) purchased an aggregate of 11,984,770 shares of SWAV common stock from certain SWAV stockholders for $370,000. As a result of these transactions, Lotus acquired a total of 14,250,010 shares of SWAV common stock which represented approximately 95.0% of the 15,000,000 outstanding shares of SWAV common stock on April 26, 2010.

 

On September 6, 2010, SWAV’s name was changed to GBS Enterprises Incorporated. On October 14, 2010, the Company’s trading symbol on the OTC Bulletin Board was changed from SWAV to GBSX.

 

About Lotus Holdings, Ltd.

 

Lotus is a holding company which was formed under the laws of Gibraltar for the purpose of financing merger and acquisition projects, specifically in the niche market of small or microcap companies listed on the Frankfurt Stock Exchange with complex shareholder structures and whose stock is trading below one Euro (€1.00) per share. 

 

SPPEFs

 

Lotus typically finances its merger and acquisition projects through the use of Special Purpose Private Equity Funds (“SPPEFs”). Typically, SPPEFs are funded by a company’s major shareholders (the “Major Shareholders”) seeking to raise capital for projects and who fund at least 50% of the SPPEF, with the remaining portion being provided through the investment community and network of investors in Lotus. Each SPPEF is co-managed by a representative of the Major Shareholders (the “Representative Secretary”) and an attorney appointed by Lotus (the “Lotus Representative”).

 

On February 25, 2010, a group of shareholders (the “GROUP Major Shareholders”) of GROUP Software AG, a German public company trading on the Frankfurt Stock Exchange under the symbol “INW” (“GROUP”), engaged Lotus to provide financial consulting and advisory services, on a non-exclusive basis, for the primary task of establishing a SPPEF. On March 12, 2010, the GROUP Major Shareholders and Lotus established and funded a SPPEF with $1,400,000, consisting of $1,000,000 from the GROUP Major Shareholders and $400,000 from a Lotus investor (collectively, the “SPPEF Members”).

 

In early April 2010, the SPPEF Members decided to acquire SWAV. As disclosed above, on April 26, 2010, Lotus, on behalf of the SPPEF Members, acquired an aggregate of 11,984,770 shares of SWAV common stock from the selling shareholders of SWAV for an aggregate purchase price of $370,000. The 11,984,770 shares of SWAV common stock shares represented approximately 79.9% of the 15,000,000 outstanding shares of SWAV common stock on April 26, 2010.

 

Transactions following the April 26, 2010 Transaction

 

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

 

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

 

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Reverse Merger

 

After the December 2010 Transaction was completed, the additional GROUP Major Shareholders decided to accept the share swap offer from the Company and to effectuate a reverse merger of GROUP and the Company. To effectuate the reverse merger, on January 5, 2011, the Company repurchased from Lotus an aggregate of 2,361,426 of the 11,984,770 shares of the Company’s common stock originally purchased by Lotus on April 26, 2010. In consideration for these 2,361,426 shares, the Company issued to Lotus a Secured Demand Note, dated January 5, 2011 (the “Second Demand Note”), for the principal amount of $200,000, bearing interest at the rate of 5% per annum. The Second Demand Note was repaid in November 2011.

 

Effective January 6, 2011, pursuant to securities purchase agreements between the Company and the remaining GROUP Major Shareholders, the Company purchased an aggregate of 5,525,735 shares of GROUP common stock from the remaining GROUP Major Shareholders in consideration for the 2,361,426 shares of GBS common stock (the “January 2011 Transaction”). These 5,525,735 GROUP shares represented approximately 21.9% of the outstanding shares of common stock of GROUP. As a result of the December 2010 Transaction and January 2011 Transaction, the Company had acquired an aggregate of 12,641,235 shares of GROUP common stock from the GROUP Major Shareholders in consideration for an aggregate of 5,405,411 shares of GBS common stock, resulting in GBS owning approximately 50.1% of the outstanding GROUP common stock and effectuating a reverse merger of the Company and GROUP whereby GROUP became the accounting acquirer.

 

Additional GROUP Acquisition

 

On February 27, 2012, the Company acquired an additional 883,765 shares of common stock of GROUP from GAVF LLC for an average purchase price of $0.07 per share, or approximately $619,000, after an outstanding loan of GROUP was converted into an aggregate of 1,750,000 shares of GROUP common stock, thereby increasing GROUP’s outstanding common stock to 26,982,000 shares. By acquiring the new shares, the Company increased its ownership of GROUP common stock to an aggregate of 13,525,000 shares, representing approximately 50.1% of the outstanding common stock of GROUP. 

  

Executive Offices

 

Our principal executive office is located at 585 Molly Lane, Woodstock, Georgia 30189 and our telephone number is (404) 891-1711. GROUP’s executive offices are located at Hospitalstrasse 6, 99817 Eisenach, Germany. We maintain a website at www.gbsx.us. GROUP maintains a website at www.gbs.com. The information contained in the Company’s and GROUP’s websites is not incorporated by reference herein. 

 

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Item 1A. Risk Factors

 

Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Annual Report, and in the documents incorporated by reference into this Annual Report, that are not historical facts, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition could vary materially from those stated in any forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K, in the documents incorporated by reference into this Annual Report on Form 10-K or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

 

RISKS RELATED TO OUR BUSINESS AND INDUSTRY 

 

We have a limited operational history.

 

We have a limited history upon which an evaluation of our prospects and future performance can be made. Our proposed operations are subject to all business risks associated with new enterprises. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the expansion of a business operation in an emerging industry, and the continued development of advertising, promotions, and a corresponding customer base. There is a possibility that we could sustain losses in the future, and there are no assurances that we will ever operate profitably.

 

Our current operational strategy is dependent on IBM.

 

We, through our 50.1% ownership of GROUP Business Software AG, are a large supplier of applications for IBM’s Lotus Notes and Domino markets.   We expect much of our growth in the near term to come from our migration and modernization solutions. Should IBM choose to no longer promote its Lotus Notes products, our anticipated growth avenues may be adversely affected. We would likely seek to shift our operations and have to concentrate more heavily on migration and modernization solutions.

 

Our business could be adversely impacted by conditions affecting the information technology market.

 

The demand for our products and services depends substantially upon the general demand for business-related computer appliances and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers, and general economic conditions. Moreover, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Future economic projections for the information technology sector are uncertain as companies continue to reassess their spending for technology projects. If our current and prospective customers engage in restructuring and other efforts to cut costs they may significantly reduce their information technology expenditures. Fluctuations in the demand for our products and services could have a material adverse effect on our business, results of operations and financial condition.

 

Our failure to develop new products and services, integrate acquired products and services or enhance our existing products and services, could adversely affect our business, results of operations and financial condition.

 

The markets for our products and services are characterized by rapid technological changes, evolving industry standards, fluctuations in customer demand, changes in customer requirements and new product and services introductions and enhancements. Our future success depends on our ability to continually enhance our current products and services, integrate acquired products and services, and develop and introduce new products and services that our customers choose to buy. If we fail to keep pace with technological developments, expectations of the emerging markets and customer demands by introducing new products and services and enhancements, our business, results of operations and financial condition could be adversely affected. In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others. If we experience material delays or sales shortfalls with respect to our new products and services or new releases of our current products and services, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition.

 

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In order to be successful, we must attract, engage, retain and integrate key employees, and failure to do so could have an adverse effect on our ability to manage our business.

 

Our success depends, in large part, on our ability to attract, engage, retain, and integrate qualified executives and other key employees throughout all areas of our business. Identifying, developing internally or hiring externally, training and retaining highly-skilled managerial, technical, sales and services, finance and marketing personnel are critical to our future, and competition for experienced employees can be intense. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide a competitive compensation package, including cash- and equity-based compensation. If we do not obtain the stockholder approval needed to granting equity compensation in a competitive manner, our ability to attract, retain, and motivate executives and key employees could be weakened. Failure to successfully hire executives and key employees or the loss of any executives and key employees could have a significant impact on our operations. Further, changes in our management team may be disruptive to our business, and any failure to successfully integrate key new hires or promoted employees could adversely affect our business and results of operations.

 

Adverse changes in general global economic conditions could adversely affect our operating results.

 

As a globally operated company, we are subject to the risks arising from adverse changes in global economic and market conditions. The worldwide economy underwent unprecedented turmoil in the past four years and continues to experience stock market volatility, difficulties in the financial services sector, financial instability related to the sovereign debt situation in Europe, reduced corporate profits and capital spending, and economic uncertainties. Although some of these conditions appear to be abating, there are a number of mixed indicators, the severity and length of time these economic and market conditions may persist is unknown, and the rate and pace of recovery in individual economies is also uncertain. The continuing uncertainty about future global economic conditions could negatively impact our current and prospective customers and result in delays or reductions in technology purchases. As a result, we could experience fewer orders, longer sales cycles, slower adoption of new technologies and increased price competition, any of which could materially and adversely affect our business, results of operations and financial condition. Adverse economic conditions also may negatively impact our ability to obtain payment for outstanding debts owed to us by our customers or other parties with whom we do business.

 

We face intense competition, which could result in customer loss, fewer customer orders and reduced revenues and margins.

 

We sell our products and services in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do. Existing or new products and services that provide alternatives to our products and services could materially impact our ability to compete in these markets. As the markets for our products and services, especially those products in early stages of development, continue to develop, additional companies, including companies with significant market presence in the computer hardware, software, cloud, mobile and related industries, could enter the markets in which we compete and further intensify competition. In addition, we believe price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.

 

Industry consolidation may result in increased competition.

 

Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they had previously offered. Additionally, as IT companies attempt to strengthen or maintain their market positions in the evolving desktop and application virtualization, collaboration and data sharing, mobility, cloud networking and cloud platform markets, these companies continue to seek to deliver comprehensive IT solutions to end users and combine enterprise-level hardware and software solutions that may compete with our virtualization, mobility and collaboration and data sharing solutions. These consolidators or potential consolidators may have significantly greater financial, technical and other resources than we do and may be better positioned to acquire and offer complementary products and services. The companies resulting from these possible combinations may create more compelling product and service offerings and be able to offer greater pricing flexibility or sales and marketing support for such offerings than we can. These heightened competitive pressures could result in a loss of customers or a reduction in our revenues or revenue growth rates, all of which could adversely affect our business, results of operations and financial condition.

 

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Actual or perceived security vulnerabilities in our products and services or cyber attacks on our networks could have a material adverse impact on our business and results of operations.

 

Use of our products and services may involve the transmission and/or storage of data, including in certain instances customers' business and personally identifiable information. Thus, maintaining the security of products, computers, computer networks and data storage resources is a critical issue for us and our customers, as security breaches could result in product or service vulnerabilities and loss of and/or unauthorized access to confidential information. We devote significant resources to address security vulnerabilities in our products and services through engineering more secure products and services, enhancing security and reliability features in our products and services, deploying security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. Experienced hackers, cybercriminals and perpetrators of advanced persistent threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, product or service vulnerabilities or cause shutdowns. These perpetrators of cyber attacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and networks. However, because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until long after being launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our security measures as a result of third-party action, malware, employee error, malfeasance or otherwise could result in:

 

harm to our reputation or brand, which could lead some customers to seek to cancel subscriptions, stop using certain of our products or services, reduce or delay future purchases of our products or services, or use competing products or services;

 

individual and/or class action lawsuits, which could result in financial judgments against us and which would cause us to incur legal fees and costs;

 

state or federal enforcement action, which could result in fines and/or penalties and which would cause us to incur legal fees and costs; and/or

 

additional costs associated with responding to the cyber attack, such as the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities required by credit card associations, and costs incurred by credit card issuers associated with the compromise and additional monitoring of systems for further fraudulent activity.

 

Any of these actions could materially adversely impact our business and results of operations.

 

Regulation of the Web and telecommunications, privacy and data security may adversely affect sales of our products and result in increased compliance costs.

 

As the internet continues to evolve, increasing regulation by federal, state or foreign agencies and industry groups becomes more likely. For example, we believe increased regulation is likely with respect to the solicitation, collection, processing or use of personal, financial and consumer information as regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection, privacy and data security. In addition, the interpretation and application of consumer and data protection laws and industry standards in the United States, Europe and elsewhere are often uncertain and in flux. The application of existing laws to cloud-based solutions is particularly uncertain and cloud-based solutions may be subject to further regulation, the impact of which cannot be fully understood at this time. Moreover, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data and privacy practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data and privacy practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Also, any new regulation, or interpretation of existing regulation, imposing greater fees or taxes on Web-based services, such as collaboration and data sharing services and audio services, or restricting information exchange over the Web, could result in a decline in the use and adversely affect sales of our Collaboration and Data products and our results of operations.

 

Our products could contain errors that could delay the release of new products or that may not be detected until after our products are shipped.

 

Despite significant testing by us and by current and potential customers, our products, especially new products or releases or acquired products, could contain errors. In some cases, these errors may not be discovered until after commercial shipments have been made. Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products. Additionally, our products depend on third-party products, which could contain defects and could reduce the performance of our products or render them useless. Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers, which may have a material adverse effect on our business, financial condition and results of operations.

 

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We may experience outages, data loss and service disruptions of our products, which could significantly and adversely affect our financial condition and operating results.

 

Maintaining and expanding the capacity and geographic footprint of our infrastructure is expensive and complex. Inefficiencies or operational failures, including temporary service outages and temporary or permanent loss of customer data, could diminish the perceived quality and reliability of our services, and result in liability claims by customers and other third parties, damage to our reputation and loss of current and potential customers, any of which could materially and adversely affect our financial condition and results of operations.

 

Our success depends on our ability to attract and retain and further access large enterprise customers.

 

We must retain and continue to expand our ability to reach and access large enterprise customers by adding effective value-added distributors, or VADs, system integrators, or SIs and expanding our direct sales teams and consulting services. Our inability to attract and retain large enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Large enterprise customers usually request special pricing and purchase of multiple years of subscription and maintenance up-front and generally have longer sales cycles, which could negatively impact our revenues. By allowing these customers to purchase multiple years of subscription or maintenance up-front and by granting special pricing, such as bundled pricing or discounts, to these large customers, we may have to defer recognition of some or all of the revenue from such sales. This deferral could reduce our revenues and operating profits for a given reporting period. Additionally, as we attempt to attract and penetrate large enterprise customers, we may need to invest in resources to coordinate among channel partners and internal sales, engineering and consulting resources and increase corporate branding and marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.

 

Changes to our licensing or subscription renewal programs, or bundling of our products, could negatively impact the timing of our recognition of revenue.

 

We continually re-evaluate our licensing programs and subscription renewal programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services. We could implement new licensing programs and subscription renewal programs, including promotional trade-up programs or offering specified enhancements to our current and future product and service lines. Such changes could result in deferring revenue recognition until the specified enhancement is delivered or at the end of the contract term as opposed to upon the initial shipment or licensing of our software product. We could implement different licensing models in certain circumstances, for which we would recognize licensing fees over a longer period, including offering additional products in a SaaS model. Changes to our licensing programs and subscription renewal programs, including the timing of the release of enhancements, upgrades, maintenance releases, the term of the contract, discounts, promotions and other factors, could impact the timing of the recognition of revenue for our products, related enhancements and services and could adversely affect our operating results and financial condition.

 

As we expand our international footprint, we could become subject to additional risks that could harm our business.

 

We conduct significant sales and customer support, development and engineering operations in countries outside of the United States. Our continued growth and profitability could require us to further expand our international operations. To successfully maintain and expand international sales, we may need to establish additional foreign operations, hire additional personnel and recruit additional international resellers. In addition, there is significant competition for entry into high growth markets where we may seek to expand, such as India. Our international operations are subject to a variety of risks, which could cause fluctuations in the results of our international operations. These risks include:

 

compliance with foreign regulatory and market requirements;

 

variability of foreign economic, political and labor conditions;

 

changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by U.S. export laws;

 

longer accounts receivable payment cycles;

 

potentially adverse tax consequences;

 

difficulties in protecting intellectual property;

 

burdens of complying with a wide variety of foreign laws; and

 

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as we generate cash flow in non-U.S. jurisdictions, if required, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner.

 

Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or results of operations.

 

Our business could be harmed if we do not effectively manage our direct sales force alone and in combination with our distribution channels.

 

We utilize a direct sales force, as well as a network of distribution channels, to sell our products and services. We may experience difficulty in hiring, retaining and motivating our direct sales force team, and sales representatives will require substantial amounts of training, including regular updates to cover new and upgraded products and services, particularly in connection with our acquisitions. Moreover, our hires and sales personnel added through our acquisition activity may not become as productive as we would like, as in most cases it takes a significant period of time before they achieve full productivity.

 

Successfully managing the interaction of our direct sales force and channel partners to reach various potential customers for our products and services is a complex process. If we are unsuccessful in balancing the growth and expansion of our various sales channels, growth in one area might harm our relationships or efforts in another channel. In addition, each sales channel has distinct risks and costs, and therefore, our failure to implement the most advantageous balance in the sales model for our products and services could materially and adversely affect our revenue and profitability.

 

If we fail to effectively manage our growth, our future operating results could be adversely affected.

 

Historically, the scope of our operations, the number of our employees and the geographic area of our operations have grown rapidly. In addition, we have acquired both domestic and international companies. This growth and the assimilation of acquired operations and their employees could continue to place a significant strain on our managerial, operational and financial resources as our future acquisition activities accelerate our business expansion. We need to continue to implement and improve additional management and financial systems and controls. We may not be able to manage the current scope of our operations or future growth effectively and still exploit market opportunities for our products and services in a timely and cost-effective way and we may not meet our scalability expectations. Our future operating results could be adversely affected if we are unable to manage our expanding product lines, our marketing and sales organizations and our client support organization to the extent required for any increase in installations of our products.

 

If we do not generate sufficient cash flow from operations in the future, we may not be able to fund our product development efforts and acquisitions or fulfill our future obligations.

 

Our ability to generate sufficient cash flow from operations to fund our operations and product development efforts, including the payment of cash consideration in acquisitions and the payment of our other obligations, depends on a range of economic, competitive and business factors, many of which are outside of our control. We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to liquidate our investments, repatriate cash and investments held in our overseas subsidiaries, sell assets or raise equity or debt financings when needed or desirable. An inability to fund our operations or fulfill outstanding obligations could have a material adverse effect on our business, financial condition and results of operations. For further information, please refer to “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

 

Acquisitions present many risks, and we may not realize the financial and strategic goals we anticipate at the time of an acquisition.

 

Our growth is dependent upon market growth, our ability to enhance existing products and services, and our ability to introduce new products and services on a timely basis. In recent years, we have addressed and intend to continue to address the need to develop new products and services and enhance existing products and services through acquisitions of other companies, product lines and/or technologies. However, acquisitions, including those of high-technology companies, are inherently risky. We cannot provide any assurance that any of our acquisitions or future acquisitions will be successful in helping us reach our financial and strategic goals. The risks we commonly encounter in undertaking, managing and integrating acquisitions are:

 

an uncertain revenue and earnings stream from the acquired company, which could dilute our earnings;

 

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difficulties and delays integrating the personnel, operations, technologies, products and systems of the acquired companies;

 

our ongoing business may be disrupted and our management's attention may be diverted by acquisition, transition or integration activities;

 

the need to implement controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition had lacked such controls, procedures and policies;

 

difficulties managing or integrating an acquired company's technologies or lines of business;

 

potential difficulties in completing projects associated with purchased in-process research and development;

 

entry into markets in which we have no or limited direct prior experience and where competitors have stronger market positions and which are highly competitive;

 

the potential loss of key employees of the acquired company;

 

potential difficulties integrating the acquired products and services into our sales channel;

 

assuming pre-existing contractual relationships of an acquired company that we would not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business;

 

being subject to unfavorable revenue recognition or other accounting treatment as a result of an acquired company's practices; and

 

intellectual property claims or disputes.

 

Our failure to manage growth effectively and successfully integrate acquired companies due to these or other factors could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of our business. We expect that other companies in our industry will compete with us to acquire compatible businesses. This competition could increase prices for businesses and technologies that we would likely pursue, and our competitors may have greater resources than we do to complete these acquisitions.

 

Natural disasters or other unanticipated catastrophes that result in a disruption of our operations could negatively impact our results of operations.

 

Our worldwide operations are dependent on our network infrastructure, internal technology systems and website. We have operations in various domestic and international locations that expose us to additional diverse risks. The occurrence of natural disasters, such as hurricanes, floods or earthquakes, or other unanticipated catastrophes, such as telecommunications failures, cyber-attacks, fires or terrorist attacks, at any of the locations in which we or our key partners, suppliers and customers do business, could cause interruptions in our operations. In addition, even in the absence of direct damage to our operations, large disasters, terrorist attacks or other casualty events could have a significant impact on our partners', suppliers' and customers' businesses, which in turn could result in a negative impact on our results of operations. Extensive or multiple disruptions in our operations, or our partners', suppliers' or customers' businesses, due to natural disasters or other unanticipated catastrophes could have a material adverse effect on our results of operations.

 

Changes or modifications in financial accounting standards may have a material adverse impact on our reported results of operations or financial condition.

 

From time to time, the Financial Accounting Standards Board, or FASB, either alone or jointly with the International Accounting Standards Board, or IASB, promulgates new accounting principles that could have a material adverse impact on our reported results of operations or financial condition. For example, FASB is currently working together with the IASB to converge certain accounting principles and facilitate more comparable financial reporting between companies who are required to follow Generally Accepted Accounting Principles, or GAAP, and those who are required to follow International Financial Reporting Standards, or IFRS. These efforts may result in different accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, among others, revenue recognition, and financial statement presentation. We expect the SEC to make a determination in the future regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS would be costly to implement and may have a material impact on our financial statements and may retroactively adversely affect previously reported transactions.

 

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We may be unable to effectively control our operating expenses, which could negatively impact our profitability.

 

Although we endeavor to effectively control our operating expenses, these expenses, which are based on estimated revenue levels, are relatively fixed in the short term. We cannot ensure that our operating expenses will be lower than our estimated or actual revenues in any given quarter or that we will not incur unanticipated expenses. If we experience a shortfall in revenue in any given quarter or if we incur material unanticipated expenses, we likely will not be able to further reduce operating expenses quickly in response. Any significant shortfall in revenue or the incurrence of material unanticipated expenses could immediately and adversely affect our results of operations for that quarter. Also, due to the fixed nature of many of our expenses and the challenges for revenue growth in the current environment, our income from operations and cash flows from operating and investing activities could be lower than in recent years.

 

In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and certain operating expenses could increase. We believe that we could incur additional costs as we develop, license or buy new technologies or enhancements to our existing products and services. These added costs and royalties could increase our cost of revenues and operating expenses and lower our gross margins. However, we cannot currently quantify the costs for such transactions that have not yet occurred or of these developing trends in our business. In addition, we may need to use a substantial portion of our cash and investments or issue additional shares of our common stock to fund these additional costs.

 

We could change our licensing programs or subscription renewal programs, which could negatively impact the timing of our recognition of revenue.

 

We continually re-evaluate our licensing programs and subscription renewal programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services. We could implement new licensing programs and subscription renewal programs, including promotional trade-up programs or offering specified enhancements to our current and future product and service lines. Such changes could result in deferring revenue recognition until the specified enhancement is delivered or at the end of the contract term as opposed to upon the initial shipment or licensing of our software product. We could implement different licensing models in certain circumstances, for which we would recognize licensing fees over a longer period, including offering additional products in a software-as-a-service model. Changes to our licensing programs and subscription renewal programs, including the timing of the release of enhancements, upgrades, maintenance releases, the term of the contract, discounts, promotions and other factors, could impact the timing of the recognition of revenue for our products, related enhancements and services and could adversely affect our operating results and financial condition.

 

Security vulnerabilities in our products could have a material adverse impact on our results of operations.

 

Maintaining the security of computing devices and networks is a critical issue for us and our customers. We devote significant resources to address security vulnerabilities in our products and services through engineering more secure products and services, enhancing security and reliability features in our products and services, deploying security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. The cost of these measures could reduce our operating margins. Despite these efforts, actual or perceived security vulnerabilities in our products and systems may lead to claims against us and harm our reputation, and could lead some customers to seek to return products, to stop using certain products or services, to reduce or delay future purchases of our products or services, or to use competing products or services. Customers may also increase their expenditures on protecting their existing computer systems from attack, which could delay adoption of new technologies. Further, if our customers suffer any losses or are otherwise harmed in connection with a security incident related to our products or services, we could be subject to liability claims from our customers. Any of these actions by customers could adversely impact our results of operations.

 

Our efforts to protect our intellectual property may not be successful, which could materially and adversely affect our business.

 

We rely primarily on a combination of copyright, trademark, patent and trade secret laws, confidentiality procedures and contractual provisions to protect our other intellectual property. The loss of any material trade secret, trademark, trade name, patent or copyright could have a material adverse effect on our business. Despite our precautions, it could be possible for unauthorized third parties to copy, disclose or reverse engineer certain portions of our products or to otherwise obtain and use our proprietary source code, in which case we could potentially lose future trade secret protection for that source code. If we cannot protect our proprietary source code against unauthorized copying, disclosure or use, unauthorized third parties could develop products similar to or better than ours.

 

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Any patents applied for by us could eventually not be granted or any patent owned by us could be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope we seek, if at all; and if issued, may not provide any meaningful protection or competitive advantage.

 

In addition, our ability to protect our proprietary rights could be affected by differences in international law and the enforceability of licenses. The laws of some foreign countries do not protect our intellectual property to the same extent as do the laws of the United States and Canada. For example, we derive a significant portion of our sales from licensing our products under “click-to-accept” license agreements that are not signed by licensees and electronic enterprise customer licensing arrangements that are delivered electronically, all of which could be unenforceable under the laws of many foreign jurisdictions in which we license our products.

 

Our products, including products obtained through acquisitions, could infringe third-party intellectual property rights, which could result in material litigation costs.

 

We are increasingly subject to infringement claims and may in the future be subject to claims alleging the unauthorized use of a third-party’s code in our products. This may occur for a variety of reasons, including the expansion of our product lines through product development and acquisitions; an increase in patent infringement litigation commenced by non-practicing entities; the increase in the number of competitors in our industry segments and the resulting increase in the number of related products and the overlap in the functionality of those products; and the unauthorized use of a third-party’s code in our product development process. Companies and inventors are more frequently seeking to patent software despite recent developments in the law that may discourage or invalidate such patents. As a result, we could receive more patent infringement claims. Responding to any infringement claim, regardless of its validity, could result in costly litigation costs, monetary damages or injunctive relief or require us to obtain a license to intellectual property rights of those third parties. Licenses may not be available on reasonable terms, on terms compatible with the protection of our proprietary rights, or at all. In addition, attention to these claims could divert our management’s time and attention from developing our business. If a successful claim is made against us and we fail to develop or license a substitute technology or negotiate a suitable settlement arrangement, our business, results of operations, financial condition and cash flows could be materially and adversely affected. In particular, a material adverse impact on our financial statements could occur in the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

  

Perceived risks in Cloud Computing could negatively influence buyers.

 

As the Cloud market develops, adoption could be adversely affected due to concerns with data security and the reliability of third party IT infrastructures and software. Although security and reliability risks can be minimized or mitigated, the mere perception of these risks could hinder our ability to grow our business.

 

Risks related to the disclosure of confidential information of core technology.

 

The independently developed technologies by us, contracts with partners and agreements with cooperated system integrators are all confidential information. We have established strict access limitation level for the personnel in the Company to review and use such information by signing Non-disclosure Agreements with relevant people. The usage and disclosure of such information have been managed stringently by the Company. We also sign a long-term engagement contract with the core technical people who may hold major technologies of the Company. Despite the foregoing measurements adopted by the Company, we cannot assure the confidential information will not be disclosed definitely.

 

Systems failures could harm our business.

 

Temporary or permanent outages of our computers or software equipment could have an adverse effect on our business. Although we have not experienced any catastrophic outages to date, we currently do not have fully redundant systems for our web sites and other services at an alternate site. Therefore, our systems are vulnerable to damage from break-ins, unauthorized access, vandalism, fire, earthquakes, power loss, telecommunications failures and similar events. Although we maintain insurance against fires, earthquakes and general business interruptions, the amount of coverage we have might be insufficient.

 

Experienced computer programmers seeking to intrude or cause harm, or hackers, may attempt to penetrate our network security from time to time.

 

We have not experienced any security breaches to date. However, if a hacker were to penetrate our network security, they could misappropriate proprietary information, cause interruptions in our services, dilute the value of our offerings to customers and damage customer relationships. We might be required to expend significant capital and resources to protect against, or to alleviate, problems caused by hackers. We also may not have a timely remedy against a hacker who is able to penetrate our network security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to system damage, operational disruption, loss of data, litigation and other risks of loss or harm.

 

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We depend on continued performance of and improvements to our computer network.

 

Any failure of our computer systems that causes interruption of our services could result in a loss of business. If sustained or repeated, these performance issues could reduce the attractiveness of our services to consumers and our subscription products and services. Increases in the volume of our web site traffic could also strain the capacity of our existing computer systems, which could lead to slower response times or system failures. We may not be able to project accurately the rate, timing or cost of any increases in our business, or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.

 

Internet commerce security threats could pose a risk to our online sales and overall financial performance.

 

A significant barrier to online commerce is the secure transmission of confidential information over public networks. We rely on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. There can be no assurance that advances in computer capabilities; new discoveries in the field of cryptography or other developments will not result in a compromise or breach of the algorithms used by us and our partners to protect consumer’s transaction data. If any such compromise of security were to occur, it could have a materially adverse effect on our business, prospects, financial condition and results of operations. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Concerns over the security of transactions conducted on the Internet and the privacy of users may also hinder the growth of online services generally, especially as a means of conducting commercial transactions. To the extent that our activities, our partners or third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. There can be no assurance that our security measures will not prevent security breaches or that failure to prevent such security breaches will not have a materially adverse effect on our business, prospects, financial condition and results of operations.

 

Storage of personal information about our customers could pose a security threat.

 

Our policy is not to willfully disclose any individually identifiable information about any user to a third party without the user’s consent. This policy is accessible to users of our services when they initially register. Despite this policy, however, if third persons were able to penetrate our network security or otherwise misappropriate our users’ personal information or credit card information, we could be subject to liability. These could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation. In addition, the Federal Trade Commission and other states have been investigating certain Internet companies regarding their use of personal information. We could incur additional expenses if new regulations regarding the use of personal information are introduced or if they chose to investigate our privacy practices.

 

We have agreed to indemnify our officers and directors against lawsuits to the fullest extent of the law.

 

We are a Nevada corporation. Nevada law permits the indemnification of officers and directors against expenses incurred in successfully defending against a claim. Pursuant to our Articles of Incorporation and Bylaws, we have agreed to indemnify our officers and directors to the fullest extent possible under the Nevada law. In the event that we are found liable for damage or other losses, we would incur substantial and protracted losses in paying any such claims or judgments. Pursuant to those certain letter agreements entered into between the Company and their Officers and each independent director of the Company’s Board of Directors appointed as of March 1, 2012, the Company is also contractually obligated to indemnify each independent director to the fullest extent possible under Nevada law and has obtained Director and Officer insurance coverage in the amount of $5,000,000 per occurrence. There is no guarantee, however, that such coverage or that any insurance coverage would protect us from any damages or loss claims filed against it.

 

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and operating results.

 

Our sales revenue is derived from customers worldwide, and is therefore subject to foreign currency risk. Unstable currency exchange rates that result in dramatic fluctuations against the U.S. Dollar could adversely affect our financial condition and operating results. If we are not able to successfully hedge against the risks associated with currency fluctuations, our financial condition and operating results could be adversely affected.

 

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Liquidity is essential to our businesses and we rely on the planned success of our strategic product lines.

 

The liquidity of the Company is tight and that the valuation and validity of the intangible fixed assets and of the financial fixed assets are depending on the success of the strategic product lines especially but not limited to the area of Applications Modernization. Due to limited business history especially but not limited to Applications Modernization our business plan contains multiple risks and uncertainties. To achieve the planned success is material to us.

  

Our working capital requirements may negatively affect our liquidity and capital resources.

 

Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers decisions especially but not limited to applications modernization projects and the payment terms with our customers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings or other adequate financial resources to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.

 

This could have a material adverse effect on our business, results of operations and financial condition up to a critical level.

 

We are dependent on major customers for future revenue. The loss of all or a substantial portion of our sales to any of these customers or the loss of market share by these customers could have a material adverse impact on us.

 

We highly depend for a substantial portion of our net sales especially but not limited to applications modernization projects. The loss of all or a substantial portion of our sales to any of our major customers could have a material adverse effect on our financial condition and results of operations by reducing cash flows and our ability to spread costs over a larger revenue base. We may make fewer sales to these customers for a variety of reasons, including but not limited to: (1) loss of awarded business; (2) reduced or delayed customer requirements; (3) strikes or other work stoppages affecting production by the customers; or (4) reduced demand for our customers’ products.

 

RISKS RELATED TO OUR COMMON STOCK

 

If we are delinquent in our SEC filings, you may have difficulty selling any shares you purchase.

 

Our Common Stock is currently listed for trading on the Over-The-Counter Electronic Bulletin Board (OTCBB). The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter (OTC) securities. The OTCBB is not an issuer listing service, market or exchange. Although the OTCBB does not have any listing requirements per se, to be eligible for quotation on the OTCBB, issuers must remain current in their filing with the SEC or applicable regulatory authority. Pursuant to FINRA Rule 6530(e), any OTCBB issuer that is delinquent in its reporting obligations three times in a 24-month period and/or is actually removed from the OTCBB for failure to file two times in a 24-month period is ineligible for quotation on the OTCBB for a period of one year. For a security to be eligible for quotation on the OTCBB, FINRA Rule 6530 requires, in part, that the issuer of the security is required to file reports with the Commission. In addition to the foregoing, the issuer of the security must be current in its reporting obligations, subject to a 30 or 60 day grace period, as applicable. An OTCBB issuer will be deemed delinquent in its reporting obligations if the issuer fails to make a required filing when due or has filed an incomplete filing. In order for a filing to be complete, it must contain all required certifications and have been reviewed or audited as applicable, by an accountant registered with the Public Company Accounting Oversight Board.

 

On April 17, 2013, our Common Stock symbol was given the letter “E” (which denotes an SEC filing delinquency) and we received an OTCBB Delinquency Notification which advised us that, pursuant to FINRA Rule 650, unless the delinquency (failure to file our Form 10-K for the fiscal year ended December 31, 2012) was cured, our securities would not be eligible for OTCBB quotation. We prepared and filed this Form 10-K with the SEC as required under the Securities Exchange Act of 1934, as amended, to cure the delinquency. In the event we are unable to file our future reports on time, or at all, or our Common Stock is removed from the OTCBB, we expect our Common Stock will be quoted on the OTC “pink sheets,” where our stockholders may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our Common Stock. In addition, we would be subject to an SEC rule that, if we failed to meet the criteria set forth in such rule, imposes various practice requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. Consequently, such rule may deter broker-dealers from recommending or selling our Common Stock, which may further adversely affect the liquidity of our Common Stock. This would also make it more difficult for us to raise additional capital.

 

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In preparing our consolidated financial statements, our management determined that our disclosure controls and procedures and internal controls were ineffective as of December 31, 2012 and if they continue to be ineffective could result in material misstatements in our financial statements.

 

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As of December 31, 2012, our management has determined that our disclosure controls and procedures and internal controls were ineffective due to weaknesses in our financial closing process.

 

We intend to implement remedial measures designed to address the ineffectiveness of our disclosure controls and procedures and internal controls. If these remedial measures are insufficient to address the ineffectiveness of our disclosure controls and procedures and internal controls, or if material weaknesses or significant deficiencies in our internal control are discovered or occur in the future and the ineffectiveness of our disclosure controls and procedures and internal controls continues, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period financial results, our operating results may be harmed, we may be subject to class action litigation, and our common stock could be removed from the OTCBB. Any failure to address the ineffectiveness of our disclosure controls and procedures could also continue to adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over financial reporting and our disclosure controls and procedures that are required to be included in our annual report on Form 10-K. Internal control deficiencies and ineffective disclosure controls and procedures could also cause investors to lose confidence in our reported financial information. We can give no assurance that the measures we plan to take in the future will remediate the ineffectiveness of our disclosure controls and procedures or that any material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or adequate disclosure controls and procedures or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

 

If we continue to fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

 

If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we discover additional material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. In addition, we cannot be certain that additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the future.

 

Our Common Stock price could continue to be volatile and you could lose the value of your investment.

 

Our stock price has been volatile and has fluctuated significantly in the past. The market price of our common stock could continue to be volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including: technological innovations or new products and services by us or our competitors; additions or departures of key personnel; sales of our common stock; our ability to integrate operations, technology, products and services; our ability to execute our business plan; operating results below expectations; loss of any strategic relationships; industry developments; economic and other external factors; and period-to-period fluctuations in our financial results. Because we have a very limited operating history with no revenues to date, you may consider any one of these factors to be material. Our stock price may fluctuate widely as a result of any of the above. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

Your investment in our stock could lose some or all of its value.

 

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The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

 

The Securities and Exchange Commission adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. If the trading price of our common stock falls below $5.00 per share, the open-market trading of our common stock is subject to the penny stock rules, which imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”.  The term accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.  We believe the penny stock rules discourage investor interest in and limit the marketability of our common stock.

 

FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock.

 

In addition to the “penny stock” rules described above, FINRA adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.  Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

Stockholders should have no expectation of any dividends.

 

The holders of our Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefore.  To date, we have not declared or paid any cash dividends.  The Board of Directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in our business operations.

  

Item 1B. Unresolved Staff Comments

 

Disclosure by the Company is not required under Form 10-K due to the fact that the Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act.

 

Item 2. Properties

 

The Company maintains its executive offices in a 10,000 square foot office space located at 585 Molly Lane, Woodstock, Georgia 30189 pursuant to a lease agreement, dated June 16, 2011, between GROUP and a non-affiliated third party landlord. The term of the lease is from August 1, 2011 to January 31, 2015. Rent from August 1, 2011 to August 31, 2011 was $8,333, From September 1, 2011 to December 31, 2011, the rent was $4,167 per month.  From January 1, 2012 to July 21, 2012, the rent was $8,333 per month.  From August 1, 2012 to July 31, 2013, the rent is $8,750 per month.  From August 1, 2013 to January 31, 2015, the rent will be $9,166.67 per month. The Company believes its current office space is satisfactory for its current operations.

 

GROUP maintains its executive offices in a 5,828 square foot office space located at Hospitalstrasse 6, 99817 Eisenach, Germany. GROUP’s lease agreement for this office is from July 1, 2006 to June 30, 2013 for an annual rent of $46,589 and which can be renewed by GROUP.

 

Item 3. Legal Proceedings

 

We know of no material, active or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

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Item 4. Mine Safety Disclosures

 

Not applicable.

PART II

 

Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

We were incorporated in Nevada on March 20, 2007 as SWAV Enterprises Ltd. (“SWAV”). On September 16, 2010, SWAV changed its name to GBS Enterprises Incorporated. On October 14, 2010, the trading symbol of the Company’s common stock on the OTC Bulletin Board (OTCBB) was changed from SWAV to GBSX.

 

On April 17, 2013, our Common Stock symbol was given the letter “E” (which denotes an SEC filing delinquency) and we received an OTCBB Delinquency Notification which advised us that, pursuant to FINRA Rule 650, unless the delinquency (failure to file our Form 10-K for the fiscal year ended December 31, 2012) was cured, our securities would not be eligible for OTCBB quotation. We prepared and filed this Form 10-K with the SEC as required under the Securities Exchange Act of 1934, as amended, to cure the delinquency. In the event we are unable to file our future reports on time, or at all, or our Common Stock is removed from the OTCBB, we expect our Common Stock will be quoted on the OTC “pink sheets,” where our stockholders may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our Common Stock. In addition, we would be subject to an SEC rule that, if we failed to meet the criteria set forth in such rule, imposes various practice requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. Consequently, such rule may deter broker-dealers from recommending or selling our Common Stock, which may further affect the liquidity of our Common Stock. This would also make it more difficult for us to raise additional capital.

 

The following table sets forth the reported high and low bid quotations for our Common Stock as reported on the OTCBB for each full quarterly period within the two most recent fiscal years. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions. 

 

Fiscal Quarter  High   Low 
         
2011          
January 3rd - March 31st  $5.00   $1.75 
April 1st - June 30th  $4.90   $1.91 
July 1st - September 30th  $4.00   $1.90 
October 1st - December 31st  $2.55   $1.50 
           
2012          
January 3rd - March 31st   $2.55   $1.13 
April 1st – June 30th   $1.20   $0.40 
July 1st – September 30th   $0.41   $0.24 
October 1st – December 31st   $0.51   $0.16 

 

Description of Common Stock

 

We are authorized to issue 75,000,000 shares, par value $0.001 per share, of common stock, of which 29,461,664 shares were issued and outstanding as of December 31, 2012. Holders of common stock are entitled to one vote per share on each matter submitted to a vote at any meeting of stockholders. Shares of common stock do not carry cumulative voting rights and, therefore, holders of a majority of the outstanding shares of common stock will be able to elect the entire Board of Directors, and, if they do so, minority stockholders would not be able to elect any members to the Board of Directors. Our Board of Directors has authority, without action by the stockholders, to issue all or any portion of the authorized but unissued shares of common stock, which would reduce the percentage ownership of the stockholders and which may dilute the book value of the common stock. Stockholders have no pre-emptive rights to acquire additional shares of common stock. The common stock is not subject to redemption and carries no subscription or conversion rights. In the event of liquidation, the shares of common stock are entitled to share equally in corporate assets after satisfaction of all liabilities. The shares of common stock, when issued, will be fully paid and non-assessable.

 

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Holders of common stock are entitled to receive dividends as the board of directors may from time to time declare out of funds legally available for the payment of dividends. We have not paid dividends on common stock and do not anticipate that we will pay dividends in the foreseeable future.

 

All shares of common stock now outstanding are duly authorized, fully paid and non-assessable.  

  

Preferred Stock

 

The Company is currently authorized to issue up to 25,000,000 “blank check” shares of Preferred Stock with all designations, rights and privileges as the Company’s Board of Directors may decide, from time to time, without stockholder approval. As of December 31, 2012, there are no shares of Preferred Stock designated or issued.

 

Transfer Agent

 

Action Stock Transfer Corporation

2469 E. Fort Union Blvd., Suite 214

Salt Lake City, UT 84121

 

Telephone: (801) 274-1088

Fax: (801) 274-1099

Email: justblank2000@yahoo.com

Website: www.actionstocktransfer.com

 

Holders

 

As of December 31, 2012, we had 80 record holders of our Common Stock (not including beneficial owners who hold shares at broker/dealers in “street name”).

 

Dividend Policy

 

While there are no restrictions that limit our ability to pay dividends, we have not paid, and do not currently intend to pay cash dividends on our common stock in the foreseeable future. Our policy is to retain all earnings, if any, to provide funds for the operation and expansion of our business. The declaration of dividends, if any, will be subject to the discretion of our Board of Directors, which may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others.

 

Issuer Purchases of Equity Securities

 

None

 

Item 6. Selected Financial Data.

 

Not applicable

 

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors”, “Cautionary Notice Regarding Forward-Looking Statements” and “Description of Business” sections and elsewhere in this annual report.  We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “predict,” and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the Risk Factors” section of this annual report. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

  

Overview

 

GBS Enterprises Incorporated, a Nevada corporation (the “Company,” “GBS,” “GBSX,” “we,” “us,” “our” or similar expressions), conducts its primary business through its 50.1% owned subsidiary, GROUP Business Software AG (“GROUP”), a German-based public-company whose stock trades on the Frankfurt Exchange under the stock symbol INW. GROUP’s software and consulting business is focused on serving IBM’s Lotus Notes and Domino market. GROUP caters primarily to mid-market and enterprise-size organizations with over 3,500 customers in thirty-eight countries spanning four continents, representing more than 5,000,000 active users of its products. GROUP’s customers include Abbot, Ernst & Young, Deutsche Bank, Bayer, HBSC, Merck and Toyota. GROUP provides IBM Lotus Notes/Domino Application and Transformation technology. Headquartered in Eisenach, Germany, the Company has offices throughout Europe and North America. The Company maintains a website at www.gbsx.us. GROUP maintains a website at www.gbs.com. The information contained in the Company’s and GROUP’s websites is not incorporated by reference herein.

 

The Company’s Common Stock is quoted on the OTC Bulletin Board under the ticker symbol “GBSX.”

 

Products and Services

 

GBS has grown by consolidating the fragmented Lotus Software market through the acquisition of companies with complementary product, technology or services offerings. GBS has continuously developed its software and service business to service and support GBS’s expanding Lotus customer base.

 

Historically, GROUP has achieved growth by acquiring underperforming companies with complimentary operations and leveraging GROUP’s expertise to turnaround and integrate these companies. Key success factors for this strategy are: enhanced portfolio, positioning GROUP as the ‘one-stop-shop’ for Lotus applications and services, expanded customer support, fast code migration, and cloud enablement/XPages conversion of acquired applications.

Going forward, the Company intends focus on potential acquisition targets in the following areas of software and services: Applications and Application Modernizations, Professional Services, Hosting/Outsourcing Services, Administration and IT services, and XPages expertise.

 

Messaging and Business Applications Software & Solutions


GBS Messaging and Business Application Software & Solutions product lines include software and advisory services for email and Instant Messaging (IM) Management, Security, Compliance, Archiving and Productivity, CRM Applications, Governance, Risk & Compliance (GRC) Management software, Workflow and Business Process Management software, ePDF Archiving & Document Management.

 

GBS develops, sells and installs well-known business process and management software suites based on Lotus Notes / Domino and IBM Portal technology, mainly for major international companies and medium-sized customers.

 

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Through GBS’s comprehensive messaging software product lines and associated services, Lotus Notes, Microsoft Exchange or SMTP-based-email customers, as well as Lotus Sametime, customers are able to provide their users with secure, efficient and centrally administered use of e-mail and IM while maintaining control over their compliance with current legal requirements and corporate guidelines.

 

Consulting Services

 

GBS develops, sells and orchestrates customer-specific Lotus Domino strategy and consulting services, such as CIO and IT department leader Strategic Advisory Services, Managed Services, Outsourcing, Administration, Assessments and Implementations, Performance Improvements, Custom Application Development, Governance and Security, Technical Support, and Training, as well as Email Migration Services.

 

Based on GBS’s unique concentration of industry talent and expertise, mainly in the areas inside and around IBM Lotus Notes/Domino, inside and around corporate messaging (IBM, Microsoft, SMTP) and inside and around IT environmental and application assessment, analysis and reporting, commercial and governmental customers, as well as Software Integrators (SI) and channel partners, are able to rely on the company’s strategic and tactical advisory services for evaluating, planning, staffing and execution of any customer project. GBS Consulting Services’ global teams of consultants use modern project management techniques, proprietary methodologies and GBS accelerator technologies to complete client projects on time and with reduced risk.

 

We believe that our focus on recruiting and retaining top Lotus expertise positions our team to offer leading-edge Lotus Notes / Domino subject matter knowledge to our customers. GBS consultants have an average of over 12 years’ experience each in Lotus Notes/Domino and its related products and are routinely asked to present at IBM Lotus events including Lotusphere (Connect), 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.

 

Market Trends

 

As IT departments face continuous budget reductions and constant pressure for higher performance and efficiency, CIOs are focusing on modern technologies to support their need for increased scalability, flexibility and lower costs. GBS has identified this demand as a strategic growth opportunity for the company and has placed a significant focus on expanding its Modernizing/Migrating technology.

 

GBS Lotus Application Modernization and Migration

 

GBS Lotus Application Modernization and Migration activities are focused on the IBM Lotus / Domino applications market and the offering spans from expert services and accelerator technologies to modernized, web enabled (also named “cloud” or “cloud computing”) and migrated Lotus applications; and thus ultimately take the Lotus applications from legacy to the future. The foundation of the Modernizing/Migrating Suite Software offering is GBS’s significant R&D investment in a set of methodologies and key technology accelerators to automate the conversion of traditional Notes based client-server applications, into the IBM XPages framework which enables Domino applications to be run and accessed via the Lotus client, a web browser or on a mobile device. The patent-pending software that underpins Modernizing/Migrating was developed by GBS with assistance and guidance from IBM Corporation’s Software Group to ensure alignment with future releases of the IBM Lotus / Domino and XPages technology.

 

Revenue Model

 

GBS generates its revenue from the sale of internally created software, third-party developed software and the delivery of related services, including IT systems planning, administration, support, hosting, implementation and integration.

 

Strategy and Focus Areas

 

Based on current market demands for modern, Cloud-based and mobile-device capable business applications, we have acquired and developed a set of unique technologies that help organizations reduce the time, cost, resources and risks associated with modernizing or migrating their existing applications.

 

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We generate revenue from subscription and usage fees and related services, including support and strategic consulting services. The subscription period is typically based on a yearly or multi-year contract with our customers. Another sector of our strategic portfolio is a suite of tools and methodologies we have developed to rapidly convert Lotus Notes applications into web and modern mobile applications. This portfolio includes a set of powerful analysis tools known as Insights that identify all of the Lotus Notes applications within an organization and provide metrics about the uses and users of those applications. Because of the nature of Lotus Notes and Domino, the applications within a customer environment tend to be highly distributed and number in the thousands. For many organizations, this fact alone makes it extremely difficult to plan for projects that involve modernizing these applications for use in a browser and on mobile devices or migrating them to another platform. Our technologies help them to dramatically reduce the cost, risk, time and resources associated with these highly complex projects.

 

We generate revenue with our analysis tools by charging a fee for the use of our technology and for the associated cost of the services to produce a report and set of recommendations for the customer. Additional revenues come from consulting services that result from helping our customers to implement those recommendations. For use of our conversion tools, referred to as Modernizing/Migrating, we charge a flat fee for the conversion and additional hourly rates to perform additional supporting development or testing as needed.

We also believe there is significant revenue opportunity in licensing these tools to a network of global partners who also have existing presence and expertise in the Lotus Notes and Domino market. We have established partner agreements for the use of the analysis and conversion tools with partners in several countries and directly with IBM.

 

Results of Operations 

 

Fiscal year ended December 31, 2012 compared to fiscal year ended December 31, 2011

 

 Assets

 

Total Assets decreased from $68,703,394 at December 31, 2011 to $56,802,492 at December 31, 2012.  Total Assets consists of Total Current Assets and Total Non-Current Assets.

 

Total Current Assets

 

At December 31, 2012, our Total Current Assets were $6,444,192 compared to $9,982,991 at December 31, 2011. Total Current Assets consist of: Cash and Cash Equivalents; Accounts Receivable; Inventories; Prepaid Expenses; Other Receivables and Assets held for Sale.

 

nCash and Cash Equivalents decreased from $3,250,821 at December 31, 2011 to $1,154,602 at December 31, 2012 as a result of our investments in the strategic technology areas such as application migration and modernization, cloud technology and the associated costs necessary to build and implement the go to market strategy.  

 

nAccounts Receivable decreased from $5,007,194 at December 31, 2011 to $4,143,448 at December 31, 2012.  

 

nInventories decreased from $236,712 at December 31, 2011 to $ nil at December 31, 2012.  

 

nPrepaid Expenses decreased from $444,147 at December 31, 2011 to $84,304 at December 31, 2012 due to the reclassification of prepaid license payments to a vendor into Intangible Assets.

 

nOther  Receivables decreased from $1,020,010 at December 31, 2011 to $676,976 at December 31, 2012.  Other Receivables consist primarily of derivatives used for hedging held by one business entity, warrants sold with related funding in escrow, and installment payments due from the sale of GROUP Business Software Holding OY together with their Subsidiary GEDYS IntraWare GmbH on February 28, 2010. The decrease was primarily due to an insurance claim of approximately $1,900,000 which was included in the previous year.

 

nAssets held for Sale were increased from $24,107 at December 31, 2011 to $384,862 at December 31, 2012.

 

Total Non-Current Assets

 

At December 31, 2012, our Total Non-Current Assets were $50,358,300, compared to $58,720,403 at December 31, 2011.  Total Non-Current Assets consist of: Property (plant and equipment), Financial Assets, Investments in Related Company, Deferred Tax Assets, Goodwill, Software and Other Assets.

 

nProperty (plant and equipment) decreased from $1,604,994 at December 31, 2011 to $332,839 at December 31, 2012 due primarily to the sale of IDC Global, Inc. and their heavy concentration of fixed assets.

 

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nFinancial Assets decreased from $548,909 at December 31, 2011 to $428,422 at December 31, 2012, which includes long term loans of $427,232 and the non-current portion of the aforementioned sale of GEDYS IntraWare GmbH on February 28, 2010.

 

nDeferred Tax Assets decreased from $2,748,800 at December 31, 2011 to $1,132,103 at December 31, 2012 and consisted of Deferred Tax Assets derived from Financial Assets and Losses carried forward.  

 

nGoodwill  decreased from $39,221,603 at December 31, 2011 to $34,254,881 at December 31, 2012 and consisted of the goodwill associated with nine business entities. During the year ended December 31, 2012, the Company sold SD Holdings, Ltd. and dissolved Pavone Ltd., the effect of which was to reduce the goodwill associated with these subsidiaries. The reduction in goodwill attributed to GROUP Business Software AG (“GROUP”) resulted when the Company purchased additional shares of GROUP as disclosed in Note 2 of the Company’s financial statements.

 

nSoftware decreased from $14,258,610 at December 31, 2011 to $12,207,031 at December 31, 2012 and consists of capitalized development costs, product rights and licenses.  Our capitalized Software includes our expert business developments of $3,779,418, legacy business improvements/developments of $7,545,163, strategic business developments/other of $2,714,568. The decrease from 2011 to 2012 resulted from impairment testing write-downs. The decrease is again primarily based on the business decision to focus on the new CRM product and functional loss of the obsolete CRM.

 

nOther Assets increased from $93,268 at December 31, 2011 to $156,379 at December 31, 2012. This includes reinsurance claims, tax credits, and other deposits.

 

nAssets held for Sale were increased from $nil at December 31, 2011 to $1,846,645 at December 31, 2012.

 

Liabilities

 

Total Liabilities decreased from $24,946,246 at December 31, 2011 to $22,269,060 at December 31, 2012.  Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

 

Total Current Liabilities

 

At December 31, 2012 our Total Current Liabilities were $18,227,184, compared to $19,058,394 at December 31, 2011.  Total Current Liabilities consist of: Notes Payable, Liabilities to Banks, Accounts Payable and Accrued Liabilities, Deferred Income, Other Liabilities and Amounts Due to Related Parties.

 

nNotes Payable increased from $1,381,821 at December 31, 2011 to $2,313,572 at December 31, 2012 and consisted of the exercise of capital components of a convertible bond issue.

 

nLiabilities to Banks decreased from $19,595 at December 31, 2011 to $6,774 at December 31, 2012 on payments of a line of credit held by a subsidiary.   

 

nAccounts Payable and Accrued Liabilities decreased from $6,491,565 at December 31, 2011 to $6,241,733 at December 31, 2012. This includes Trade payables, Tax Accruals and Other Accruals.    

 

nDeferred Income decreased from $6,476,582 at December 31, 2011 to $6,099,570 at December 31, 2012.

 

nOther Liabilities of $4,256,410 at December 31, 2011 decreased to $860,032 at December 31, 2012. As a result of a reclassification of long term to short term liabilities due on the purchase of Permessa Corporation. These payments derived from the purchase of Permessa in 2010 and are now due in the short term.

 

nAmounts Due to Related Parties increased from $432,421 at December 31, 2011 to $2,115,869 at December 31, 2012.

 

nLiabilities held for Sale were increased from $nil at December 31, 2011 to $589,634 at December 31, 2012.

 

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 Total Non-Current Liabilities

 

At December 31, 2012, our Total Non-Current Liabilities were $4,041,876, compared to $5,887,852 at December 31, 2011.  Total Non-Current Liabilities consist of: Liabilities to Banks, Deferred Tax Liabilities, Retirement Benefit Obligation, Other Liabilities.

 

nLiabilities to Banks increased from $3,463,483 at December 31, 2011 to $3,716,102 at December 31, 2012 and consisted of long-term business line of credit due to the Baden-Württembergische Bank.  The increase from 2011 to 2012 in notes payable is due to the funding of expenditures consistent with the advancement of our technology and overall business plan.  

 

nRetirement Benefit Obligation increased from $150,632 at December 31, 2011 to $165,876 at December 31, 2012.

 

nOther Liabilities decreased from $2,273,737 at December 31, 2011 to $nil at December 31, 2012. As a result of a reclassification of long term to short term liabilities due on the purchase of Permessa Corporation. Within the non-current liabilities, an amount of $2,270,000 has been converted into equity of the corresponding subsidiary in February, 2012. In adherence to Regulation S-X Rule 3A-02 this transaction and the resulting reduction of the liabilities will be presented in the Company’s financials as per June 30, 2012.

 

nLiabilities held for Sale were increased from $nil at December 31, 2011 to $159,898 at December 31, 2012.

  

Revenues

 

The Company generates revenue from product Licenses, Maintenance, Third-Party Products, Services and Other Revenue. For the fiscal year ended December 31, 2012, total revenue decreased $2,537,308 from $28,273,092 at December 31, 2011 to $25,735,784 at December 31, 2012. The decline mainly resulted from a $1,944,833 decrease in Service revenues, as a result of the sale of IDC, combined with a net decrease of $592,475 in product and other revenues.

 

The Company operates across 4 primary regions United States, Germany, United Kingdom, and Other. For the fiscal year ended December 31, 2012 revenue across all regions decreased as presented in detail in the Company’s Notes to the Annual Consolidated Financial Statements.

 

Cost of Goods Sold

 

For the fiscal year ended December 31, 2012, our Cost of Goods Sold decreased to $14,615,074 from $15,898,182.  Cost of Goods Sold consists of Cost for Services, Cost for Third-Party Products and Cost for Software Licenses. Within Cost of Goods Sold the associated costs within the product division of revenue increased $62,481, from $5,575,747 at December 31, 2011, to $5,638,228 at December, 31 2012. The associated costs within the services division of revenue decreased $1,345,589, from $10,322,435 at December 31, 2011, to $8,975,846 at December 31, 2012. The gross profit margin remains with 43% (2012) and 44% (2011) on the same level.

  

Operating Expenses

 

For the fiscal year ended December 31, 2012, our Operating Expenses decreased to $19,565,495 from $22,513,690 for the fiscal year ended December 31, 2011.  Operating Expenses consist of Selling Expenses, Administrative Expenses and General Expenses. 

 

For the fiscal year ended December 31, 2012, our Selling Expenses decreased to $12,102,534 from $15,426,600 for the fiscal year ended December 31, 2011.  Selling Expenses consist of costs for the Sales, Marketing and Service units and decreased primarily due to the sale and consolidation of subsidiary companies.

 

For the fiscal year ended December 31, 2012, our Administrative Expenses decreased to $5,962,875 from $6,160,961 for the fiscal year ended December 31, 2011.  Administrative Expenses consist of costs for the management and administration units and decreased primarily due to the sale and consolidation of subsidiary companies.

 

For the fiscal year ended December 31, 2012, our General Expenses increased to $1,500,086 from $926,129 for the fiscal year ended December 31, 2011.

 

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Other Income (Expense)

 

For the fiscal year ended December 31, 2012, Other expense of $1,531,793 compared to Other Expense of $16,267,197 for the fiscal year ended December 31, 2011. Bad debts changes in this category increased for the write off of receivables primarily in our entities no longer functioning due to obsolete technology. Income from a settlement received in the previous fiscal year also was a contributing factor to the change.

 

Income taxes (Expense)

 

As a result of the change in the majority ownership of GROUP Business Software in 2011 and based on the current legal situation, management has determined it is more likely than not that the tax losses carried forward for the fiscal year ended December 31, 2011 will not be available as a deduction to determine taxable income. Therefore, the deferred tax assets from the losses carried forward for GROUP Business Software AG in an amount of $3,691,000 were written off in the fiscal year ended December 31, 2011 and included in income tax expense.

 

For the fiscal year ended December 31, 2012 a statutory tax range from 23% to 34% has been applied resulting in an expected income tax recovery of $7,986,000. Reduced by Price Allocations from Consolidation of $2,798,000, permanent differences of $533,000 and other items as mentioned in Note 27.  The total amount of income tax expense has been $1,054,734.

  

Liquidity & Capital Resources

 

At December 31, 2012, we had $1,154,602 in cash and cash equivalents, compared to $3,250,821 at December 31, 2011. At December 31, 2012, our accumulated stockholders’ deficit was $18,974,582 compared to $12,147,666 at December 31, 2011.

 

In principal, the Company's cash flow depends on the timely and successful market entry of its strategic offerings. The dependency accounts for revenue generated from direct customers engagements, as well as for revenue generated through the partner channel network.

 

Especially for strategic offerings for paradigm shifting technologies, the management's budget plan is based on a series of assumptions regarding market acceptance, readiness and pricing. While management's assumptions are based on market research and customer surveys, assumptions bear the risk of being incorrect and may result in a delay in customer projects and consequently a delay or a reduction in the related strategic offering invoicing. In case these delays have an impact on the Company's liquidity and therefore its ability to support its operations with the necessary cash flow, the Company depends on its ability to generate cash flow from other resources, such as debt financing from related or independent resources or as equity financing from existing shareholders or through the stock market.

 

During the entire fiscal year 2012 and for the first five months of 2013, the Company was in constant contact with internal and external sources for financing. These sources provided the necessary funds to support the working capital needs of the Company; mainly to finance the Company’s strategic offering. There can be no assurances, however, that the Company will be able to obtain additional funds from these or any other sources or that such funds will be sufficient to permit the Company to implement its intended business strategy. In the event, the Company is not able to generate additional funds, management will postpone any strategic investment until the financing will be sufficient. However, management believes as a result of the assets purchased to date, in accordance with the above-mentioned statement, the Company will be able to provide sufficient cash flow to support its standard operations for the next 12 months.

  

To date, we have funded our operations from private financings and operations. In March 2010, we consummated a private placement of Units for $1.25 per Unit for total gross proceeds of $7,555,000 (the “Private Placement”). The net proceeds of this offering were $6,839,327.25. Each Unit consisted of one share of common stock and one warrant exercisable to purchase one share of common stock from the date of grant until the third anniversary of the date of grant for $1.50 per share (the “Private Placement Warrants”). As of December 31, 2012, warrant holders exercised an aggregate of 2,025,000 Private Placement Warrants for gross proceeds to the Company of $3,037,500. If the remaining 4,019,000 Private Placement Warrants were exercised, of which there can be no assurance, the Company would receive $6,028,000 in additional gross proceeds.

 

In March 2012, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with each of five “accredited investors” (as that term is defined by Rule 501(a) of Regulation D promulgated under the Securities Act), one of whom was Stephen D. Baksa, a member of the Board of Directors of the Company, and all of whom were investors in the Private Placement. Pursuant to the Securities Purchase Agreements entered into by the Company and the accredited investors, the Company sold the accredited investors an aggregate of 2,020,000 warrants (the “Investor Warrants”) in consideration for $10.00 per investor. Each Investor Warrant is exercisable to purchase one share of common stock of the Company for a purchase price of $0.50 per share from the date of issuance to the third anniversary date of the date of issuance. As of December 31, 2012, warrant holders exercised an aggregate 905,000 Investor Warrants for gross proceeds to the Company of $457,500. If the remaining 1,120,000 Investor Warrants were exercised, of which there can be no assurance, the Company would receive $560,000 in additional gross proceeds.

 

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In addition to the foregoing, during the fiscal year ended December 31, 2012, we raised capital by consummating the following transactions:    

 

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

 

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

 

nOn July 5, 2012, the Company entered into a convertible promissory note agreement (the “Loan Agreement”) with Mohammad A. Shihadah, a member of the Board. Pursuant to the Loan Agreement, the Company issued a convertible promissory note, dated July 5, 2012 (the “Note”), to Mr. Shihadah for the principal amount of $50,000, bearing interest at a rate of 8% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note. The Note was convertible in full at $0.50 per share into common stock of the Company, if the conversion was not exercised on or before September 30, 2012. If not exercised Mr. Shihadah will receive a 3-year warrant to purchase shares at 50,000 shares of common stock at $0.50 per share. The conversion was not exercised by September 30, 2012, as per the terms of the Loan Agreement Mr. Shihadah was issued a 3-year warrant to purchase shares at 50,000 shares of common stock at $0.50 per share.

 

oAs of May 17, 2013, _______________ is  outstanding under the Note. No principal or interest payments have been made on the Note.

  

nOn July 5, 2012, the Company entered into a convertible promissory note agreement (the “Loan Agreement”) with K Group Ltd. Pursuant to the Loan Agreement, the Company issued a convertible promissory note, dated July 5, 2012 (the “Note”), to K Group Ltd. for the principal amount of $250,000, bearing interest at a rate of 8.5% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note. The Note was convertible in full at $0.50 per share into common stock of the Company, if this conversion if not exercised on or before September 30, 2012. (Did they exercise- if not, change the wording herein) If not exercised K Group Ltd. will receive a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share. The conversion was not exercised by September 30, 2012, as per the terms of the Loan Agreement K Group Ltd. was issued a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share.

 

oAs of May 17, 2013, _______________ is  outstanding under the Note. No principal or interest payments have been made on the Note.

 

nOn July 5, 2012, the Company entered into a convertible promissory note agreement (the “Loan Agreement”) with Vitamin B Venture GmbH. Pursuant to the Loan Agreement, the Company issued a convertible promissory note, dated July 5, 2012 (the “Note”), to Vitamin B Venture GmbH for the principal amount of $252,500, bearing interest at a rate of 8.5% per year and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note. The Note was convertible in full at $0.50 per share into common stock of the Company, if this conversion if not exercised on or before September 30, 2012. If not exercised K Group Ltd. will receive a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share. The conversion was not exercised by September 30, 2012, as per the terms of the Loan Agreement Vitamin B Venture GmbH. was issued a 3-year warrant to purchase shares at 250,000 shares of common stock at $1.00 per share.

  

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oAs of May 17, 2013, _______________  is  outstanding under the Note. No principal or interest payments have been made on the Note.

 

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

 

oIn connection with the execution of the Loan Agreement, on October 26, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.35 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

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

 

oAs of May 17, 2013, _______________  is  outstanding under the Note. No principal or interest payments have been made on the Note.

 

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

 

oIn connection with the execution of the Loan Agreement, on October 26, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 500,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof. On February 12, 2013, Mr. Baksa exercised the right to purchase 250,000 shares of common stock at the exercise price of $0.20.

 

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

 

oAs of May 17, 2013, _______________   is outstanding under the Note. No principal or interest payments have been made on the Note.

 

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nOn November 30, 2012, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with an accredited investor (the “Lender”). Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated November 30, 2012 (the “Note”), to the Lender in the aggregate principal amount of $500,000, bearing an annual interest rate of 20% and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note, without any penalty for prepayment. To secure the obligations of the Company under the Note, the Company granted the Lender a first priority security interest in all of the Company’s right, title and interest in and to the shares of IDC Global, Inc. owned by the Company. The Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

oIn connection with the execution of the Loan Agreement, on November 30, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 250,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

oOn February 12, 2013, the Lender exercised the right to purchase 250,000 shares of common stock at the exercise price of $0.20.

 

oAs of May 17, 2013, _______________   is outstanding under Note. No principal or interest payments have been made on the Note.

 

nOn November 30, 2012, the Company entered into a note purchase and security agreement (the “Loan Agreement”) with an accredited investor (the “Lender”). Pursuant to the Loan Agreement, the Company issued a secured promissory note, dated November 30, 2012 (the “Note”), to the Lender in the aggregate principal amount of $500,000, bearing an annual interest rate of 20% and maturing on the earlier of the first anniversary date of the date of issuance or such other time as described in more detail in the Note, without any penalty for prepayment. To secure the obligations of the Company under the Note, the Company granted the Lender a first priority security interest in all of the Company’s right, title and interest in and to the shares of IDC Global, Inc. owned by the Company. The Note contains customary provisions upon an Event of Default, as more fully described in the full text of the document.

 

oIn connection with the execution of the Loan Agreement, on November 30, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 250,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

oOn February 12, 2013 the Lender exercised the right to purchase 250,000 shares of common stock at the exercise price of $0.20.

 

oAs of May 17, 2013, _______________   is outstanding under Note. No principal or interest payments have been made on the Note.

 

Cash Flows

 

   Fiscal Year Ended
December 31, 2012
   Fiscal Year Ended
December 31, 2011
 
         
Net cash provided (used in) Operating Activities  $1,484,997   $(7,957,372)
Net cash provided (used in) Investing Activities  $(795,922)  $1,733,943 
Net cash provided (used in) Financing Activities  $215,720   $7,484,947 
Effect of exchange rate changes on cash  $(84,689)  $(144,058)
Net increase (decrease) in cash and cash equivalents during the period  $(2,096,220)  $1,505,856 
Cash and cash equivalents, beginning of period  $3,250,821   $1,744,965 
           
Cash and cash equivalents, end of period  $1,154,602   $3,250,821 

 

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Cash provided by operating activities was $1,484,997, an increase of $9,442,369 from the previous year's cash used in operating activities of $7,957,372. This change is primarily due to a decrease in deferred income taxes of $7,353,661, a decrease in accounts payable and other liabilities of $4,574,569, a decrease in net losses of $19,573,469, and an increase in accounts receivable of $2,675,208.

 

Cash used in investing activities was $795,922, an increase of $2,529,865 from the previous year’s cash provided by investing activities of $1,733,943. This change is primarily due to the purchase of intangible assets increasing $1,374,981, and proceeds from sale of subsidiaries decreasing $1,216,820 over the year ended December 31, 2012.

 

Cash provided by financing activities was $215,720, a decrease of $7,269,227 from the previous year’s cash provided by financing activities of $7,484,947. This change is primarily due to a $2,246,800 increase in borrowings and loans from related parties, and a net decrease in capital paid-in of $8,744,642 over the year ended December 31, 2012.   

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.   The areas where critical estimates were made that have significant importance to the financial statements are as follows:

 

  i.         Allowance for doubtful accounts. The company provides for potential bad debts on an account-by-account basis. Bad debts have not been significant and our allowance has been accurate. Non-trade receivables are also scrutinized and allowed for based on expected recovery.

 

  ii.        Allocation of the price paid when acquiring subsidiaries.  When the Company acquires subsidiary companies an allocation of the purchase is required.  The allocation is based on management’s analysis of the value of the net assets, and is based on estimated future cash flows that each component will produce.  Such components might include software, customer lists and other intangible assets that are not readily determinable.  The allocation has a significant impact on the future earnings of the Company as certain assets, customer lists for example, must be amortized and charged to operations over time, while other assets, notably goodwill, does not.

 

  iii. Impairment testing on intangibles and goodwill.  As noted in more detail below, these areas involve numerous estimates as to expected cash flows, expected rates of return and other factors that are difficult to determine and are often out of the Company’s direct control.  

 

   iv. Valuation of deferred tax credits.  The Company provides an allowance for tax recoveries arising from the application of losses carried forward.  An allowance is provided where management has determined that it is less than likely that the loss will be applied and income taxes recovered.

 

Comprehensive Income (Loss)

 

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

 

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Net Income per Common Share

 

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

 

Financial Instruments

 

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

 

Currency Risk

 

We use the US dollar as our reporting currency.  The functional currencies of our significant foreign subsidiaries are the local currency, which includes the Euro, the British pound, the Bulgarian lev and the Indian rupee.  Accordingly, some assets and liabilities are incurred in those currencies and we are subject to foreign currency risks.

 

Fair Value Measurements

 

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

  

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

 

Cash and Cash Equivalents

 

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

 

Inventories

 

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

  

Goodwill and other Intangible Assets

 

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

 

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

 

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

 

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

 

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

 

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

 

Property, Plant and Equipment

 

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

 

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

 

Impairment or Disposal of Long-Lived Assets

  

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

 

Revenue Recognition

 

License Revenues

 

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

 

Software Maintenance Revenues

 

Software maintenance revenues are recognized ratably on a pro-rata basis over the range of the contract period. Our contract periods typically range from one to five years. Vendor-specific objective evidence (“VSOE”) of fair value for software maintenance services is established by the rates charged in stand-alone sales of software maintenance contracts or the stated renewal rate for software maintenance. Customers who are party to software maintenance agreements with us are entitled to receive support, product updates and upgrades on a when-and-if-available basis.

 

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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.

  

Other Provisions

 

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

 

Deferred Taxes

 

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

 

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

 

Recent Accounting Pronouncements 

 

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

 

Principles of Consolidation and Reverse Acquisition

 

As previously disclosed, the Company originally exchanged a total of 5,405,411 shares of common stock in exchange for 50.1% of the outstanding common shares of GROUP (and retained its 50.1% shareholding by acquiring an additional 883,765 shares of GROUP on February 27, 2012). Although the Company was the legal acquirer, the transaction was accounted for as a recapitalization of GROUP in the form of a reverse merger, whereby GROUP became the accounting acquirer and was deemed to have retroactively adopted the capital structure of the Corporation. Accordingly, the accompanying consolidated financial statements reflect the historical consolidated financial statements of GROUP for all periods presented, and do not include the historical financial statements of the Company. All costs associated with the reverse merger transaction were expensed as incurred. Those expenses totaled approximately $300,000 and were included in professional fees in administrative expenses.

 

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

 

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

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

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

  

Item 7A. Quantitative and Qualitative Disclosure about Market Risk.

 

Nor applicable

 

Item 8. Financial Statements and Supplementary Data  

 

Our consolidated financial statements and related financial statement schedule, together with the report of independent registered public accounting firm, appear at pages F-1 through F-38 of this Annual Report on Form 10-K for the year ended December 31, 2012.

 

 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

There have been no changes in or disagreements with our independent registered public accountants on accounting or financial disclosure matters during our two most recent fiscal years.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 2012, our management, with the participation of our Interim Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Interim Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

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Management’s Annual Report on Internal Control Over Financial Reporting (ICFR)

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”), as such term is defined in Rule 13a-15(f) of the Exchange Act. ICFR refers to the process designed by, or under the supervision of, our Interim Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”), and includes those policies and procedures that:

 

  (i) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
  (ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
  (iii) Provide reasonable assurance regarding prevention or timely detection of an unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management has evaluated the effectiveness of the Company’s ICFR as of December 31, 2012. Management based its assessment on the framework set forth in COSO’s Internal Control – Integrated Framework (1992) in conjunction with SEC Release No. 33-8810 entitled “Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities and Exchange Commission” (17 CFR PART 241; Effective June 27, 2007)

 

Because of the material weaknesses described below, management concluded that the Company’s ICFR was not effective as of December 31, 2012:

 

·The Company’s prior lack of sufficient accounting personnel with the requisite knowledge of GAAP and the financial reporting requirements of the SEC, the change Company’s in the fiscal year and restatements for prior periods caused significant delays in the Company’s ICFR.

  

As previously reported by the Company, in September 2012 the Company’s Board of Directors changed the fiscal year end of the Company from March 31st to December 31st, commencing on December 31, 2012. Prior to this change, the Company’s subsidiaries, with the exception of SD Holdings, Ltd. had December 31st fiscal year ends and in reporting the Company’s financial statements, the Company, incorrectly applied Rule 3A-02 (“the 93-day rule”) promulgated under Regulation S-X by consolidating those subsidiaries without any adjustments for timing differences in the different period ends. With the change in the Company’s fiscal year end, the Company is retroactively adjusting previously released financial statements to reflect this change, beginning with December 31, 2010. This has caused a delay in the filing of the Company’s SEC report, including this Form 10K for the fiscal year ended December 31, 2012.

 

To cure the above material weakness, in 2012, management took the following corrective measures to strengthen its control environment and ICFR:

 

(a) In February 2012, we hired a new full-time Chief Financial Officer who performs the following:

nassists with documentation and implementation of policies and procedures and monitoring of controls;
nprepares budgets; and
nprepares financial statements, account reconciliations and journal entries.

 

(b) In March 2012, we created a position within the Company’s accounting and finance team to segregate duties consistent with its control objectives and we increased our personnel resources and technical accounting expertise within the accounting function.

 

(c) In March 2012, our Board of Directors was increased to seven members and five “independent directors” (as defined by Section 10A(m)(3)(ii) of the Exchange Act and Rule 5065(a)(2) of the NASDAQ Marketplace Rules), to the Board of Directors were appointed.

 

(c) In March 2012, our Board of Directors established a standing Audit Committee (comprised of two independent directors and our Interim Chief Executive Officer).

 

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The duties of the Audit Committee include, but are not limited to, ensuring that the Company maintains adequate internal control structures, monitoring relevant aspects of compliance, review and assessment of any potentially significant legal matters facing the Company, the appointment and monitoring of an independent auditor, and final review of the independently audited financial statements. The Audit Committee reports any and all findings to the Company’s Board of Directors, which maintains all final decision making authority regarding any of the aforementioned activities

The Audit Committee met four times in 2012. The purpose of these meetings included, along with the above listed activities, drafting and presenting to the Board for ratification an Audit Committee charter, and to ensure that all duties tasked to the Committee have been fulfilled.

 

The Company believes that the appointment of the new Directors, each of whom qualifies as an “independent director” (as defined by Section 10A(m)(3)(ii) of the Exchange Act and Rule 5065(a)(2) of the NASDAQ Marketplace Rules), as well as the establishment of a standing Audit Committee comprised of a majority of independent directors, one of whom who has been appointed an “audit committee financial expert” (as defined by Item 407(d)(5)(ii) of Regulation S-K) corrected the material weaknesses which had existed prior to March 1, 2012.


While these remedial actions have been implemented, they were not in place for a sufficient period of time to help us certify that material weaknesses have been fully remediated as of the end of calendar year 2012. If the remedial measures described above are insufficient to address any of the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future and we may continue to be delinquent in our filings.

  

Changes in Internal Control Over Financial Reporting (ICFR)

 

During the fourth quarter ended December 31, 2012, there were no changes in our ICFR that have materially affected, or are reasonably likely to materially affect, our ICFR.

 

This annual report does not include an attestation report of our registered public accounting firm regarding ICFR. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report.

 

Item 9B. Other Information.

 

Subsequent Events:

 

Sale of IDC Global, Inc.

 

On February 1, 2013, GBS entered into a Stock Purchase Agreement, dated February 1, 2013 (the “Agreement”), with IDC Global, Inc., a Delaware corporation and a wholly-owned subsidiary of GBS (“IDC”), and Global Telecom & Technology Americas, Inc., a Virginia corporation (“GTT). Pursuant to the Agreement, we sold 100% of the issued and outstanding capital stock of IDC to GTT for a purchase price of $4,600,000 (the “Purchase Price”), subject to certain holdback provisions, including a holdback of $217,477.86 for accounts receivable and which is to be paid by GTT to GBS within one business day of IDC receiving such payment, $334,000 for GroupLive liabilities and liens on IDC which is to be paid by GTT to GBS within three business days that GTT is reasonably satisfied that such liabilities and liens have been removed, less any amounts up to $12,500 which GTT or IDC is required to pay to either satisfy the obligations or purchase replacement equipment; and $528,777.93 for an outstanding dispute which is to be paid by GTT to GBS within three days that GTT is reasonably satisfied has been resolved, subject however to a term of 18 months from the closing date or, if after 18 months, the holdback is used to offset any indemnifications by GBS under the Agreement. The Purchase Price is also subject to adjustment on a dollar-for-dollar basis for adjustments the Net Working Capital (defined as Current Assets minus Current Liabilities) of IDC by GTT within 90 days of closing.  

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

  

The table below sets forth the names, title and ages of our directors and executive officers. Directors hold office until the next annual meeting of the stockholders or until their successors have been elected and qualified. Executive officers serve at the pleasure of the Board and may be removed with or without cause at any time, subject to contractual obligations between the executive officer and the Company, if any.

 

Name:    Position Held with the Company:    Age :    Director
 Since:
Joerg Ott   Chairman of the Board   47   April 26, 2010
             
Gary D. MacDonald  

Interim Chief Executive Officer,

Managing Director of Worldwide Operations,

Executive VP, Chief Corporate Development Officer and Director*

(Principal Executive Officer)

  58   December 2, 2011
             
Markus R. Ernst  

Chief Financial Officer

(Principal Financial and Accounting Officer)

  44  
             
Woody A. Allen   Director*#^   65   March 1, 2012
             
Stephen D. Baksa   Director#^   66   March 1, 2012
             
David M. Darsch   Director#^   55   March 1, 2012
             
John A. Moore, Jr.   Director*#^   59   March 1, 2012
             
Mohammad A. Shihadah   Director#^   59   March 1, 2012

 

*Audit Committee Member

#Compensation Committee Member

^Corporate Governance, Regulatory and Nominating Committee Member

 

Business Experience:

  

Joerg Ott. Since April 26, 2010, Mr. Ott has been serving as the Company’s Chairman of the Board. From April 26, 2010 to July 11, 2012, Mr. Ott served as the Company’s Chief Executive Officer. Since April 2002, Joerg has also been serving as the Chief Executive Officer of GROUP Business Software AG, (a 50.1% subsidiary of the Company). GROUP Business Software AG has been trading at Frankfurt Stock Exchange since early 2000. From December 2000 to October 2002, Joerg was the Chief Executive Officer of Senator AG, a software company specializing in machine translation software. From October 1998 to December 2000, Joerg was the founding General Manager of Global Words GmbH, a technology and services company focusing on multi-lingual telephone based conference service. In 1997, Joerg founded OUTPUT! GmbH, a German based sales training company. Mr. Ott earned his MBA from University of Passau, Germany, focusing on Operations Research and Finance. He is also a Harvard Business School alumnus, graduated in 2009.  

 

Key Attributes, Experience and Skills: Mr. Ott brings his strategic vision for our Company to the Board together with his leadership, business experience and investor relations skills. Mr. Ott has an immense knowledge of our Company, GROUP and other subsidiaries which is beneficial to the Board. Mr. Ott’s service as Chairman bridges a critical gap between the Company’s management and the Board, enabling the Board to benefit from management’s perspective on the Company’s business while the Board performs its oversight function.

 

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Gary D. MacDonald. Since July 11, 2012, Gary D. MacDonald has been serving as the Interim CEO and Managing Director of Worldwide Operations of the Company. Since April 30, 2010, Mr. MacDonald has also been serving as the Executive Vice President and Chief Corporate Development Officer of the Company.  From September 2005 to February 2008, Mr. MacDonald served as the Chief Operating Officer of GROUP. Since February 2008, Mr. MacDonald has been serving as the Chief Corporate Development Officer of GROUP.  From November 2003 to August 2005, Mr. MacDonald served as the Vice President, Corporate Development and Government Relations Officer at Raydiance, Inc., a privately held research company.  From August 1994 to September 2003, Mr. MacDonald served as the Senior Vice President of Sales and Marketing at Kingston Technology Company, a privately held company in the computer hardware industry.  From October 1991 to August 1994, Mr. MacDonald served as the Vice President and Principal of Impediment Incorporated, a privately held company in the computer hardware industry. 

 

Key Attributes, Experience and Skills: Mr. MacDonald brings his invaluable executive experience at GROUP and the Company to the Board, as well as his leadership, operational and investor relations skills. Mr. MacDonald has an immense knowledge of our Company, GROUP and other subsidiaries which enables the Board to benefit from management’s perspective on the Company’s business while the Board performs its oversight function.

  

Markus R. Ernst. Since February 24, 2012, Mr. Ernst has been serving as the Chief Financial Officer of the Company. Mr. Ernst has 20 years of experience in the financial sector of several industries in public and private companies. He has extensive knowledge in both national and international finance and mergers and acquisitions. Since July 201, Mr. Ernst has been serving as a professional consultant to the Management Board of GROUP Business Software AG, a German-based public-company whose stock trades on the Frankfurt Exchange under the stock symbol INW” and which is a 50.1% owned subsidiary of the Company (GROUP”). From August 2000 to June 2011, Mr. Ernst served as the Chief Financial Officer of GROUP. In November 1995, Mr. Ernst worked as a Financial Analyst in corporate management for Gesellschaft für Zahlungssysteme GmbH (“GZS”), a privately held banking transaction processing company that now belongs to First Data Corp. (NYSE: FDC). As a senior executive and Head of Corporate Control for GZS, he was responsible for corporate planning and control. From October 1994 to October 1995, Mr. Ernst worked as a Head of Financial Operations for Seagram Germany, a subsidiary of Seagram Company Ltd., Montreal, Canada. From September 1992 to June 1994, Mr. Ernst worked as a Financial Analyst for IBM in Mainz, Germany and San Jose, California. Mr. Ernst has long time management experience in accounting, budgeting, board presentations, cash management, claims processing, financing, investments, information systems, regulatory relations and strategic planning. In October 1994, Mr. Ernst earned a Master’s Degree in International Management and Industrial Engineering at the University of Applied Science located in Mannheim, Germany and at the University of Applied Science in Ludwigshafen, Germany.

 

Key Attributes, Experience and Skills: Mr. Ernst has extensive experience managing financial operations for publicly traded companies since 2000. He also has extensive knowledge regarding various accounting practices and compliance requirements especially in the United States, Germany and the European Union. Due to the fact that the Company and its subsidiaries are traded in the United States and in Germany, we rely heavily on this expertise.

 

Woody A. Allen. Since March 1, 2012, Mr. Allen has been serving as a member of the Company’s Board of Directors. Mr. Allen is a business strategist, coach and mentor to companies in the United States and Europe. He has more than 35 years’ experience as a C-level executive, including roles as President, Executive Vice President, Chief Financial Officer and Chairman of the Board for publicly traded companies. He has extensive boardroom experience, having served on the Boards of Directors of numerous companies in a wide variety of businesses, ranging from radio broadcasting to semiconductor equipment manufacturing. In1992, Mr. Allen founded Allen Management Services, a privately held company which offers financial guidance, and leadership and executive training, to mid and high level executives of small to medium sized businesses, and has been serving as its President since its founding. Since 2001, Mr. Allen has been serving as the Chief Financial Officer for BIA-Financial Network, a privately held company which offers research and consulting services to local media. From February 2000 to October 2003, Mr. Allen served as the Chairman of the Board of Directors of Precision Auto Care, Inc. (OTC Pink Sheets: PACI), a global franchisor of auto care centers. Since 1998 and through the present, Mr. Allen has been serving as a member of the Board of Directors of Precision Auto Care and the Chairman of its audit committee. Since 2005, Mr. Allen has been serving as a Board member for CEO-CF, a privately held European-based company specializing in facilitating collaboration amongst entrepreneurial CEO’s. Mr. Allen was also the Executive Vice President and Chief Financial Officer for EZ Communications (EZCIA) from 1973 through 1992, and served on the Company’s Board and was Chairman of its Audit Committee from 1979 through 1996, when the Company was sold. He is a certified Master Somatic Coach with Strozzi Institute, a California-based educational organization, and has been published in an anthology entitled, Being Human at Work.” Since 2008, Mr. Allen has also been a colleague with Synthesis-LLC, a New York based training and development organization that mobilizes leadership teams to create increased productivity, satisfaction and value.

 

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Key Attributes, Experience and Skills: Mr. Allen brings to the Board his extensive leadership and managerial skills as an executive and board member of publicly traded companies for more than 35 years. Mr. Allen also brings to the Board his ability to provide financial and leadership guidance obtained by Mr. Allen’s experience with Allen Management Services.

 

Stephen D. Baksa. Since March 1, 2012, Mr. Baksa has been serving as a member of the Company’s Board of Directors. Since November 1, 2011, Mr. Baksa has been serving as a director of Single Touch Systems, Inc. (OTCBB: SITO), a public company engaged in providing innovative mobile media solutions to retailers, advertisers and brands. Mr. Baksa was a General Partner at the Vertical Group from 1989 through 2010, a private equity and venture capital firm focused on the fields of medical technology and biotechnology. He is currently employed at the Vertical Group as an advisor/consultant. For more than 30 years, The Vertical Group has been an early stage investor and major shareholder of some of the medical technology industry’s most successful companies. Before Mr. Baksa joined The Vertical Group, he was co-founder of Paddington Partners, a firm engaged in special situation investing focused on public health care equities. Mr. Baksa holds an M.B.A. from The Rutgers School of Business (1969) and a B.A. in Economics from Gettysburg College (1967).

 

Key Attributes, Experience and Skills: Mr. Baksa brings to the Board his operating and management expertise and entrepreneurial and financial acumen gained through his directorship of a public company as well as being a the General Partner at a private equity and venture capital firm.

  

David M. Darsch. Since March 1, 2012, Mr. Darsch has been serving as a member of the Company’s Board of Directors. Mr. Darsch has more than 30 years of experience as an entrepreneur and managing executive of technology companies. With a strong trans-Atlantic and pan-European focus, Dave has active clients in both the US and Europe. He mentors entrepreneurs and helps them develop business plans that accelerate revenue growth and/or external infusion of capital. Mr. Darsch has been involved in more than ten transactions involving the purchase, sale, merger, or infusion of capital into companies.

 

In 2005, Mr. Darsch founded the pan-European CEO Collaborative Forum (“CEO-CF”) and has been serving as its President since its founding. CEO-CF is an exclusive consortium of high-performing CEO peer groups from high growth companies across the European Union. It provides expert help, peer group collaboration, and coaching for CEOs of European-based companies with pan-European, trans-Atlantic, and trans-Asian market strategies. Current membership and alumni comprises approximately 200 CEOs from over 28 different nationalities and cultures, each sharing the common goal of scaling their companies to significant stakeholder valuation.

In 1979, Mr. Darsch founded and served as CEO of Data Management Design, Inc. a privately held software development company located in Washington, DC, until a systems integrator acquired the company in 1996. During his tenure, the company was recognized as one of the Inc. 500 fastest growing US companies.

 

David has a B.S. in international finance from University of Massachusetts. He has also been a guest lecturer at the MBA level, Dave has provided instruction at many European universities, including INSEAD University in Fontainebleau, France, London School of Business, England, IESE Business School in Barcelona, Spain, University of Chicago, USA, and ESADE University in Barcelona, Spain. He has also presented at the Europe’s 500 Conference and taught courses on entrepreneurship for the European Commission, BBVA, and Terra Lycos in Spain.

 

Key Attributes, Experience and Skills: Mr. Darsch brings to the Board his vast entrepreneurial and managerial experience Board as exemplified by his role with CEO-CF as well as his keen knowledge of the software development industry and ability to advise the Company in achieving substantial growth as exemplified by his transactional experience and role as CEO of Data Management Design, Inc.

 

John A. Moore, Jr. Since March 1, 2012, Mr. Moore has been serving as a member of the Company’s Board of Directors. Mr. Moore has more than 30 years’ experience in private and public company management for information technology firms. From April 1997 to June 2003, Mr. Moore served as the Executive Vice President and Chief Financial Officer of ManTech International Corporation (NASDAQ: MANT) and was directly involved in taking ManTech public in 2002 as well as facilitating a secondary offering. ManTech International is engaged in providing innovative technologies and solutions for mission-critical national security programs for the intelligence community. Since April 27, 2006, Mr. Moore has been serving as a member of the Board of Directors of Horne International, Inc. (OTCBB: HNIN) and Chairman of its Board’s audit and compensation committees. Horne International is an engineering services company engaged in providing integrated, systems approach based solutions to the energy and environmental sectors to both commercial customers and to the U.S. federal government.

 

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From April 2005 to September 2011, Mr. Moore served as a member of the Board of Directors of Paradigm Holdings, Inc. (OTC Pink Sheets: PDHO), a public company engaged in cyber security and information technology services. From 2006 to 2011, Mr. Moore served as the Chairman of the Board of Directors of MOJO Financial Services, Inc., a privately held financial services company. From 2005 to 2007, Mr. Moore served as a member of the Board of Directors of Global Secure Corporation, privately held information technology services company. From 1994 to 2003, Mr. Moore served on the Board of Directors of ManTech International Corporation. From 1997 to 2003, Mr. Moore served on the Board of Directors of GSE Systems Inc. (AMEX: GVP), a public company engaged in simulation technology services. From 2003 to 2009 Mr. Moore served as a member of the Board of Visitors for the University of Maryland’s Smith School of Business. Mr. Moore earned an MBA from the University of Maryland in 1979 and a B.S. Degree in accounting from LaSalle University located in Philadelphia, PA in 1974.

 

Key Attributes, Experience and Skills: Mr. Moore brings to the Board his extensive experience in strategic planning, financial management, corporate compliance, proposal preparation and pricing and SEC reporting obtained through his prior experiences as a member of the Board of Directors of several publicly traded companies.

  

Mohammad A. Shihadah. Since March 1, 2012, Mr. Shihadah has been serving as a member of the Company’s Board of Directors. In 1990, Mr. Shihadah founded Applications Technology, Inc. (AppTek). AppTek, headquartered in McLean, Virginia, is a U.S. company specializing in software development for human language technology (HLT). In November 2011, AppTek was acquired by Science Applications International Corporation (SAIC). Since February 2002, Mr. Shihadah has been serving as a member of the Board of Directors of Ignite Media Solutions, a privately held company engaged in providing pay-per-performance based integrated multi-channel solutions.

 

Mr. Shihadah serves as a member of the Board of Directors of Net2Voice, Inc., a privately held company engaged in the development of multilingual voice-enabled solutions for the Internet and telephone. Mr. Shihadah is also an observer on the Board of Directors of Pixelligent, a privately held entity engaged in nanotechnology.

 

Mr. Shihadah is currently the Managing Director of Bridge Holdings, an investment fund directed for technology startup companies. Mr. Shihadah earned a Master’s degree in 1991 from the University of Oregon in Computer Information Science, and a holds a B.S. Degree in Mathematics from Portland State University.

 

Key Attributes, Experience and Skills: Mr. Shihadah brings to the Board his broad experience in technology companies incubations, establishing the vision, planning and managing the execution of business plans, meeting growth goals and objective, creating value for shareholders and employees, and achieving a successful exit. Mr. Shihadah has 20 years of experience in the field of software design and development, project/program management, and technical consulting.

 

Family Relationships

 

There are no family relationships between or among any of our current directors, executive officers or persons nominated or charged by the Company to become directors or executive officers. There are no family relationships among our executive officers and directors and the executive officers and directors of our direct and indirect subsidiaries.

 

Involvement in Certain Legal Proceedings

 

None of the directors or executive officers has, during the past ten years:

 

(a)Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

(b)Been convicted in a criminal proceeding or subject to a pending criminal proceeding;

 

(c)Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; or

 

(d)Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Code of Ethics

 

We have not yet adopted a Code of Ethics.

 

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Corporate Governance

 

Board Committees:

 

nAudit Committee
nCompensation Committee
nCorporate Governance, Regulatory and Nominating Committee

  

Audit Committee

 

On March 1, 2012, the Board established a standing Audit Committee comprised of John A. Moore, Jr., Woody Allen, and Gary MacDonald; and Mr. Moore was appointed the Chairman of the Audit Committee. Messrs. Moore and Allen each qualify as an “Independent Director” as defined by Section 10A(m)(3)(ii) of the Exchange Act or Rule 5605(a)(2) of the NASDAQ Marketplace Rules. Mr. MacDonald also serves as an executive officer of the Company and its 50.1% subsidiary, GROUP Software AG, a German publicly traded company, and therefore, does not qualify as an “Independent Director.”

 

The Audit Committee assists the Board in fulfilling its responsibility to oversee the conduct and integrity of the Company’s financial reports, internal controls and compliance with legal and regulatory requirements, with ultimate authority to: (i) select, appoint, dismiss, oversee the compensation of and oversee the Company’s independent auditors; (ii) preapprove all auditing and non-auditing services to be provided by the independent auditors (other than non-auditing services that are de minimis); (iii) oversee the independence and qualification of the Company’s independent auditors; (iv) oversee the performance of the Company’s internal audit functions; and (v) prepare any reports of the Committee that are required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.

 

Audit Committee Financial Expert

 

On March 1, 2012, Mr. Moore was unanimously designated by the Board as the “audit committee financial expert” as that term is defined under Item 407(d)(5)(ii) of Regulation S-K based on Mr. Moore’s business experience as reflected above.

 

Compensation Committee

 

March 1, 2012, the Board established a standing Compensation Committee comprised of the Woody A. Allen, Stephen D. Baksa, David A. Darsch, John A. Moore, Jr. and Mohammad Shihadah and Mr. Moore was appointed as the Committee’s Chairman.

 

The Committee is tasked with assisting the Board in establishing and overseeing the Company’s compensation philosophy, policies and practices, including but not limited to those related to incentive compensation and equity-based plans, retention severance and retirement programs, and any other employee benefit plans or programs.

 

Corporate Governance, Regulatory and Nominating Committee


On March 1, 2012, the Board established a standing Compensation, Corporate Governance, Regulatory and Nominating Committee comprised of the Woody A. Allen, Stephen D. Baksa, David A. Darsch, John A. Moore, Jr. and Mohammad Shihadah and Mr. Allen was appointed as the Committee’s Chairman.

 

The purpose of Committee is to develop and recommend to the Board the governance processes and principles applicable to the Company; oversee the periodic evaluation of the Board and committees; and, generally, have a leadership role in shaping the Company’s corporate governance policies.

  

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports that they file.

 

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Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, the following officers and directors failed to file their Section 16(a) forms on a timely basis or at all in 2012.

 

1.Gary D. MacDonald, the Company’s Interim CEO, Managing Director of Worldwide Operations, Executive Vice President, Chief Corporate Development Officer and Board member, has not yet filed a Form 3 or Form 4 with the SEC. Notwithstanding the foregoing, Mr. MacDonald’s beneficial ownership of securities of the Company has been properly disclosed in the Company’s Exchange Act filings with the SEC.
2.Markus R. Ernst, the Company’s Chief Financial Officer, did not timely file his Form 3 with the SEC. Mr. Ernst was appointed as the Chief Financial Officer of the Company on February 24, 2012 and filed his Form 3 with the SEC on March 7, 2012. Notwithstanding the foregoing, Mr. Ernst’s ownership of securities of the Company has been properly disclosed in the Company’s Exchange Act filings with the SEC.
3.Mohammad A. Shihadah did not timely file his Form 3 with the SEC. Mr. Shihadah was elected to the Company’s Board of Directors on March 1, 2012 and filed his Form 3 on April 3, 2012. As of the date of his election, Mr. Shihadah did not beneficially own any securities of the Company nor does he currently beneficially own any securities of the Company.

 

Other than the foregoing, we believe that all filing requirements applicable to our officers, directors and greater than 10% beneficial owners have been satisfied.

 

Item 11. Executive Compensation

 

EXECUTIVE COMPENSATION

 

The following table sets forth all plan and non-plan compensation  for the last two completed fiscal years paid to all individuals who served as the Company’s principal executive officer or acting in similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level,  and other individuals as required by Item 402(m)(2) of Regulation S-K. We refer to all of these individuals collectively as our “named executive officers.”

 

   Fiscal Year             
  Ended             
Name and Principal Position  December 
31,
   Salary
($)
   Bonus
($)
   Total
($)
 
Joerg Ott                     
Chairman and Former CEO (Former PEO)(1)   2012    157,593    0    157,593 
    2011    120,000    0    120,000 
                     
Gary D. McDonald   2012    107,452    15,000    122,452 
Interim CEO, Managing Director of Worldwide Operations,
Executive VP, Chief Corporate Development Officer (Current PEO)(2)
   2011    N/A    N/A    N/A0 
                     
Markus R. Ernst   2012    118,861    0    118,861 
CFO (3)   2011    N/A    N/A    N/A 

 

(1)Joerg Ott served as the Chief Executive Officer (PEO) of the Company from April 26, 2010 to July 11, 2012.
(2)Gary D. McDonald commenced serving as the Interim Chief Executive Officer (PEO) of the Company on July 11, 2012.
(3)Markus R. Ernst commenced serving as the Chief Financial Officer of the Company on February 24, 2012.

 

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Outstanding Equity Awards at Fiscal Year-End

 

As of December 31, 2012, no stock, stock options, or other equity securities were awarded to our named executive officers.

 

Employment Agreements, Termination of Employment and Change-in-Control Arrangements with our Executive Officers

 

Markus R. Ernst 

 

Mr. Ernst has agreed to serve as the Chief Financial Officer of the Company pursuant to a Consultant Services Agreement, dated February 24, 2012 (the “Agreement”), between the Company and Green Minds Venture GmbH, a German corporation wholly-owned by Mr. Ernst (the “Vendor”), from February 24, 2012 to March 31, 2012 (the “Term”). Pursuant to the Agreement, after the Term, Mr. Ernst shall continue serving as the Company’s CFO on a six-month to six-month basis until either party provides the other party written notice at least thirty (30) days prior to expiration of the applicable term.

 

In consideration of the services to be rendered, the Company has agreed to pay the Vendor a base monthly fee (“Base Payment”) of $9,160 plus any taxes, such as a valued added tax (“VAT”), which shall be adjusted from time to time as determined by the Company or the Board based upon the Company's performance as well as the Vendor meeting certain performance objectives. During the term, Vendor will be eligible to earn bonuses as determined by the Board based upon Vendor’s and the Company’s performance in accordance with the terms and conditions of the Agreement.

 

The Company has also agreed to grant the Vendor stock options to acquire 200,000 shares of the Company’s common stock subject to the terms and conditions of the Company’s Stock Option Plan. Pursuant to Section 3(c) of the Plan, no options have been issued as of December 31, 2012, as the Plan is subject to a shareholder vote for approval. The Company shall pay or reimburse Vendor for all reasonable business expenses including, without limitation, cell phones, personal digital assistants (PDA) devices, business travel expenses, reasonably incurred or paid by Vendor in the performance of his responsibilities in accordance with the Company's prevailing policy and practice relating to reimbursements as modified from time to time. Vendor must provide substantiation and documentation of these expenses to the Company in accordance with Company policy in order to receive reimbursement.

  

The Vendor may terminate the Agreement upon six months’ prior written notice or by payment to the Company of an amount equal to the Base Salary in lieu of such notice under the Agreement at any time for any reason. In the event of a termination of the Agreement by the Vendor, he shall be entitled to the Accrued Payments (as defined in the Agreement)

 

The Company may terminate the Agreement with or without “Cause” (as defined in the Agreement) at any time upon prior written notice to Vendor. In the event of a termination of the Agreement for Cause, Vendor shall be entitled only to the Accrued Payments. In the event the Company terminated the Agreement without Cause or if the Vendor terminates the Agreement with “Good Reason” (as defined in the Agreement), the Company has agreed to pay the Vendor all Accrued Expenses as well as a Compensation Package (as defined in the Agreement).

 

Compensation of Directors 

 

The table below reflects fees which have been accrued but not paid to the Company’s directors who are not also “named executive officers.” Only non-executive directors are entitled to receive any compensation for services rendered by them as directors.

 

DIRECTOR COMPENSATION

 

   Fees
Earned
           Non-Equity   Nonqualified
Deferred
         
   or Paid   Stock   Option   Incentive Plan   Compensation   All Other      
   in Cash   Awards   Awards   Compensation   Earnings   Compensation    Total 
Name  ($)   ($)   ($)   ($)   ($)   ($)   ($) 
                             
Woody A. Allen   29,925    0    0    0    0    0    29,925 
Stephen D. Baksa   18,100    0    0    0    0    0    18,100 
David M. Darsch   36,500    0    0    0    0    0    36,500 
John A. Moore, Jr.   30.425    0    0    0    0    0    30,425 
Mohammad A. Shihadah   22,425    0    0    0    0    0    22,425 

 

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Director Agreements

 

General 

 

Pursuant to letter agreements (referenced below) between the Company and each of the independent directors, the Company has agreed to pay each independent director an annual retainer of $10,000 payable on a quarterly basis on the 15th day of each April, July, October and January of each year. The Chairman of the Audit Committee is also to receive an annual retainer of $8,000, payable on a quarterly basis. The Chairmen of the Compensation Committee and the Corporate Governance, Regulatory and Nominating Committee are each to receive an annual retainer of $1,000, payable on a quarterly basis.

 

The Company has agreed to pay each Independent Director $2,000 for each Board meeting (based on four meetings per year). The Company has agreed to pay each Independent Director serving on the Audit Committee a fee of $2,000 for each Audit Committee meeting (based on four meetings per year). The Company has agreed to pay each Independent Director serving on the Compensation Committee and/or the Corporate Governance, Regulatory and Nominating Committee a fee of $2,000 for each meeting of the respective committee (based on one meeting per year).

 

Woody A. Allen

 

Pursuant to a letter agreement, dated January 26, 2012, as amended, the Company has agreed to pay Mr. Allen an annual retainer fee of $12,000 in consideration for serving as an Independent Director of the Board and as the Chairman of the Board’s Compensation Committee and Corporate Governance, Regulatory and Nominating Committee. The Company also agreed to issue Mr. Allen stock options to purchase 25,000 shares of common stock of the Company from the date of grant until the third anniversary from the date of grant for an exercise price equal to the Fair Market Value of the common stock on the date of grant. No options were granted during 2012.

 

Stephen D. Baksa

 

Pursuant to a letter agreement, dated February 24, 2012, as amended, the Company has agreed to pay Mr. Baksa an annual retainer fee of $10,000 in consideration for serving as an Independent Director of the Board. The Company also agreed to issue Mr. Baksa stock options to purchase 25,000 shares of common stock of the Company from the date of grant until the third anniversary from the date of grant for an exercise price equal to the Fair Market Value of the common stock on the date of grant. No options were granted during 2012.

 

David M. Darsch

 

Pursuant to a letter agreement, dated January 26, 2012, as amended, the Company agreed to pay Mr. Darsch an annual retainer fee of $10,000 in consideration for serving as an Independent Director of the Board. The Company also agreed to issue Mr. Darsch stock options to purchase 25,000 shares of common stock of the Company from the date of grant until the third anniversary from the date of grant for an exercise price equal to the Fair Market Value of the common stock on the date of grant. No options were granted during 2012.

 

John A. Moore, Jr.

 

Pursuant to a letter agreement, dated January 26, 2012, as amended, the Company has agreed to pay Mr. Moore an annual retainer fee of $18,000 in consideration for serving as an Independent Director of the Board and Chairman of the Audit Committee. The Company also agreed to issue stock options to Mr. Moore to purchase 25,000 shares of common stock of the Company from the date of grant until the third anniversary from the date of grant for an exercise price equal to the Fair Market Value of the common stock on the date of grant. No options were granted during 2012.

 

Mohammad A. Shihadah

 

Pursuant to a letter agreement, dated January 26, 2012, as amended, the Company has agreed to pay Mr. Shihadah an annual retainer fee of $10,000 in consideration for serving as an Independent Director of the Board. The Company also agreed to issue Mr. Shihadah stock options to purchase 25,000 shares of common stock of the Company from the date of grant until the third anniversary from the date of grant for an exercise price equal to the Fair Market Value of the common stock on the date of grant. No options were granted during 2012.

 

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Term of Office

 

Our directors are elected to hold office for a one year term or until his successor is elected and qualified.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 

   

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information regarding our Common Stock beneficially owned as of May 9, 2013, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding Common Stock, (ii) each executive officer and director, and (iii) all executive officers and directors as a group. In general, a person is deemed to be a beneficial owner of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which the person has the right to acquire beneficial ownership within 60 days.  Shares of Common Stock subject to options, warrants or convertible securities exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person or entity holding such options, warrants or convertible securities but are not deemed outstanding for computing the percentage of any other person. Percentages are determined based on 30,812,624 shares of Common Stock of the Company issued and outstanding as of May 9, 2013. To the best of our knowledge, subject to community and marital property laws, all persons named have sole voting and investment power with respect to such shares, except as otherwise noted.  

 

   Number of Shares   % of Class of 
Name and Address of Beneficial Owner (1)  of Common Stock
(2)
   Stock
Outstanding (3)
 
Executive Officers and Directors:          
Joerg Ott-Chairman   2,190,000(4)   7.1%
           
Gary D. MacDonald - Interim CEO, Managing Director of Worldwide Operations, Exec VP, CDO and Director   100,000    * 
           
Markus R. Ernst - CFO   60,000(5)   * 
           
Woody A. Allen -Director   0      
           
Stephen D. Baksa - Director   3,135,000(6)   10.0%
           
David M. Darsch -Director   0      
           
John A. Moore, Jr.-Director   450,960    1.5%
           
Mohammad A. Shihadah - Director   50,000(7)   * 
           
All Officers and Directors as a group (8 persons)   5,985,960(4)-(7)   9.9%
           
5% Stockholders:          
Edward M. Giles   2,290,000(8)   7.3%
17 Heights Road,          
Plandome, New York 11030          
           
LVM Landwirstchaftlicher Versicherungsverein AG   1,495,000(9)   4.9%
Vorstand Herr Herwig KoldeRing 21          
Muenster, Germany 4826          

 

* Less than 1%  

 

(1) Unless otherwise indicated, the address of the named beneficial owner is c/o GBS Enterprises Incorporated, 585 Molly Lane, Woodstock, GA 30189.

 

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(2) Security ownership information for named beneficial owners (other than executive officers and directors of the Company) is taken from statements filed with the Securities and Exchange Commission pursuant to information made known by the Company and from the Company’s transfer agent.

 

(3) Based on 30,812,624 shares of Common Stock outstanding as of May 9, 2013.

 

(4) Consists of (i) 420,000 shares of Common Stock held directly by Mr. Ott, (ii) 1,550,000 shares of Common Stock held indirectly by Mr. Ott through Vitamin-B Venture GmbH, an entity of which Mr. Ott is the Managing Member and has voting and dispositive control, (iii) 120,000 shares of Common Stock issuable upon the exercise a Warrant held by Mr. Ott and currently exercisable until April 16, 2015 for $1.50 per share, and (iv) 100,000 shares of Common Stock issuable upon the exercise of a Warrant held indirectly by Mr. Ott through Vitamin-B Venture GmbH and currently exercisable until April 30, 2016 for $0.25 per share.

 

(5) Consists of (i) 30,000 shares of Common Stock and (ii) 30,000 shares of Common Stock issuable pursuant to the exercise of a Warrant currently exercisable until May 10, 2015 for $1.50 per share.

 

(6) Consists of (i) 2,285,000 shares of Common Stock held directly by Mr. Baksa, (ii) 300,000 shares of Common Stock indirectly held by Mr. Baksa as co-trustee of two trusts for his adult children, (iii) 450,000 shares of Common Stock issuable upon the exercise of a Warrant held by Mr. Baksa and currently exercisable until March 2015 for $0.50 per share, and (iv) 100,000 shares of Common Stock held by Mr. Baksa issuable upon the exercise a Warrant currently until April 30, 2016 for $0.25 per share. Mr. Baksa disclaims beneficial ownership of the 300,000 shares of Common Stock held by the two-trusts for his adult children.

 

(7) Consists of 50,000 shares of Common Stock issuable pursuant to the exercise of a Warrant currently exercisable until July 5, 2015 for $0.50 per share.

 

(8) Includes (i) 190,000 shares of Common Stock issuable upon the exercise of a Warrant currently exercisable for $0.50 per share and (ii) 250,000 shares of Common Stock issuable upon the exercise of a Warrant currently exercisable for $0.20 per share.

 

(9) Jochen Herwiz has voting and dispositive control over LVM Landwirstchaftlicher Versicherungsverein AG.

  

Changes in Control

 

We are not aware of any arrangements, including any pledge by any person of our securities, the operation of which may result in a change in control of the Company.

  

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Certain Relationships and Related Transactions

 

The following describes transactions, since the beginning of the Company’s last fiscal year, or any currently proposed transaction, in which the Company was or is to be a participant and the amount involved exceeds $ 120,000, and in which any related person had or will have a direct or indirect material interest:

 

nOn March 26, 2012, the Company sold 700,000 common stock purchase warrants to Stephen D. Baksa, a member of the Board of Directors, for $10 under Section 4(2) of the Securities Act. Each warrant enables the holder thereof to purchase one share of Common Stock from the date of issuance until the third anniversary date of the date of issuance for $0.50 per share, subject to adjustment in the event of a stock split, dividend, recapitalization, reclassification and otherwise. On March 26, 2012, Mr. Baksa exercised 250,000 of the warrants to purchase 250,000 shares of Common Stock for an aggregate exercise price of $125,000.

 

nOn April 16, 2012, the Company entered into a Securities Purchase Agreement with Mr. Joerg Ott, the Chairman of the Board and the then Chief Executive Officer of the Company, pursuant to which Mr. Ott purchased an aggregate of 120,000 Units from the Company for an aggregate purchase price of $180,000 ($1.50 per Unit). Each Unit consists of one share of Common Stock and one warrant exercisable to purchase one share of Common Stock of the Company from the date of issuance of the warrant until the third anniversary date of the date of issuance at a price of $1.50 per share, subject to adjustment in the event of a stock split, dividend, recapitalization, reclassification and otherwise.

 

52
 

 

nOn May 10, 2012, the Company sold 30,000 Units to Markus R. Ernst, the Chief Financial Officer of the Company, for a purchase price of $1.50 per unit, for a total purchase price of $45,000. Each unit consists of one share of common stock of the Company and one warrant, allowing the holder to purchase one share of common stock of the Company from the date of issuance until the third anniversary date of the date of issuance for $1.50 per share. The Company sold the units and underlying securities to Mr. Ernst in reliance on Section 4(2) of the Securities Act due to the fact that the issuance was isolated and did not involve a public offering of securities. As of June 30, 2012, the Company has not issued these 30,000 shares of common stock underlying under the units but such shares are deemed to be beneficially owned by Mr. Ernst. The transaction has been disclosed in the Balance Sheet as Subscriptions received.

  

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

 

oIn connection with the execution of the Loan Agreement, on October 26, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 500,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof. On February 12, 2013, Mr. Baksa exercised the right to purchase 250,000 shares of common stock at the exercise price of $0.20.

 

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

 

oAs of May ____, 2013, _______________   is outstanding under the Note. No principal or interest payments have been made on the Note.

 

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

 

oAs of May ____, 2013, _______________   is outstanding under the First GROUP Note. No principal or interest payments have been made on the First GROUP Note.

 

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

  

53
 

 

oAs of May ____, 2013, _______________   is outstanding under the Second GROUP Note. No principal or interest payments have been made on the Second GROUP Note.

 

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

  

Independent Directors

 

The Board has determined that Woody A. Allen, David M. Darsch, John A. Moore, Jr., and Mohammad A. Shihadah each qualifies as an “independent director” as defined by Section 10A(m)(3)(ii) of the Exchange Act and Rule 5065(a)(2) of the NASDAQ Marketplace Rules.

 

Item 14. Principal Accounting Fees and Services

 

K. R. Margetson Ltd., Chartered Accountant (“K.R. Margetson”) is the Company’s independent public accountant. The aggregate fees billed for the two most recently completed fiscal years ended December 31, 2011 and December 31, 2012 for professional services rendered by K.R. Margetson were as follows:

 

   2012   2011 
         
Audit Fees and Audit Related Fees   82,000    57,500 
Tax Fees   -    - 
All Other Fees   10,050    7,360 
Total  $92,050   $64,860 

 

Policy on Pre-Approval by the Board of Services Performed by Independent Auditors

 

We do not use K.R. Margetson Ltd. for financial information system design and implementation. These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally or by other service providers. We do not engage K.R. Margetson Ltd. to provide compliance outsourcing services.

 

Prior to the establishment of a standing Audit Committee of the Company’s Board of Directors on March 1, 2012, the Company’s Board pre-approved all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the Board of Directors either before or after the respective services were rendered. Effective March 1, 2012, the Audit Committee of the Company’s Board of Directors reviews and pre-approves all services to be provided by the Company’s independent auditors.

 

The Board of Directors has considered the nature and amount of fees billed by K.R. Margetson Ltd. and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independence.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

Exhibit
No.:
  Description:   Filed an Exhibit to the following Company SEC Filing
and Incorporated by Reference herein:
3.1   Articles of Incorporation   Form SB-2 (File No: 333-146748) filed January 14, 2008
3.1.1   Certificate of Amendment to Articles of Incorporation, effective September 6, 2010   Form 10-K filed July 16, 2012
3.1.2   Certificate of Amendment to Articles of Incorporation, effective November 22, 2010   Form 10-K/A filed November 7, 2011
3.1.3   Certificate of Incorporation, dated June 5, 2012, of GBS India Private Limited   Form 10-Q filed September 13, 2012
3.2   Bylaws   Form SB-2 (File No: 333-146748) filed January 14, 2008

  

54
 

 

4.1   Form of Private Placement Warrant   Form S-1(File No.: 333-180626) filed April 9, 2012
4.2   Form of Investor Warrant   Form 8-K filed March 30, 2012
4.3   Warrant, dated April 16, 2012, issued to Joerg Ott   Form 10-K filed April 16, 2012
7.1   Letter from Grant Thornton GmbH, addressed to the Securities and Exchange Commission, dated August 27, 2012.   Form 8-K/A filed August 28, 2012
10.1   Subsidiary Stock Purchase Agreement, dated September 21, 2009, between SWAV Enterprises Ltd. and Pui Shan Lam   Form 8-K filed September 21, 2009
10.2   Asset Purchase Agreement, dated April 26, 2010, between SWAV Enterprises Ltd. and Lotus Holdings Limited   Form 8-K filed April 26, 2010
10.3   Non-Affiliate Stock Purchase Agreement, dated April 26, 2010, between the Selling Stockholders and Joerg Ott   Form 8-K filed April 26, 2010
10.4   Affiliate Stock Purchase Agreement, dated April 26, 2010, between the Selling Stockholders and Joerg Ott   Form 8-K filed April 26, 2010
10.5   Subsidiary Stock Purchase Agreement, dated April 26, 2010, between SWAV Enterprises Ltd. and Pui Shan Lam   Form 8-K filed April 26, 2010
10.6   Stock Purchase Agreement, dated November 5, 2010, between GBS Enterprises Incorporated and LVM Landwirtschaftlicher Versicherungsverein AG   Form 10-Q/A filed May 20, 2011
10.7   Stock Purchase Agreement, dated November 3, 2010, between GBS Enterprises Incorporated and MPire Capital City   Form 10-Q/A filed May 20, 2011
10.8   Stock Purchase Agreement, dated November 5, 2010, between GBS Enterprises Incorporated and Stone Mountain Ltd.   Form 10-Q/A filed May 20, 2011
10.9   Stock Purchase Agreement, dated November 3, 2010, between GBS Enterprises Incorporated and Tuomo Tilman   Form 10-Q/A filed May 20, 2011
10.10   Stock Purchase Agreement, dated November 5, 2010, between GBS Enterprises Incorporated and vbv Vitamin B Venture   Form 10-Q/A filed May 20, 2011
10.11   Stock Purchase Agreement, dated November 5, 2010, between GBS Enterprises Incorporated and Jyrki Salminen   Form 10-Q/A filed May 20, 2011
10.12   Stock Purchase Agreement, dated January 5, 2011, between GBS Enterprises Incorporated and Delta Consult LP   Form 10-Q/A filed May 20, 2011
10.13   Stock Purchase Agreement, dated January 5, 2011, between GBS Enterprises Incorporated and GAVF LLC   Form 10-Q/A filed May 20, 2011
10.14   Stock Purchase Agreement, dated January 5, 2011, between GBS Enterprises Incorporated and K Group   Form 10-Q/A filed May 20, 2011
10.15   Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.   Form 8-K filed October 4, 2011
10.16   Amendment, dated October 31, 2011, to that certain Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.   Form S-1(File No.: 333-180626) filed April 9, 2012
10.17   Amendment, dated November 30, 2011, to that certain Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.   Form S-1(File No.: 333-180626) filed April 9, 2012
10.18   Amendment, dated December 16, 2011, to that certain Acquisition Agreement, dated September 27, 2011, by and between GBS Enterprises Incorporated, SD Holdings, Ltd. and the Shareholders of SD Holdings Ltd.   Form S-1(File No.: 333-180626) filed April 9, 2012
10.19   Acquisition Agreement, dated June 1, 2011, by and among GBS Enterprises Incorporated, GroupWare AG and the Selling Stockholder of GroupWare AG   Form 8-K filed June 27, 2011
10.20   Acquisition Agreement, dated July 15, 2011, by and among GBS Enterprises Incorporated, IDC Global, Inc., the IDC Shareholders’ Representative and Management Shareholders’ Representative   Form 8-K filed July 28, 2011
10.21*   Consultant Services Agreement, dated February 24, 2012, between GBS Enterprises Incorporated and Green Minds Venture GmbH   Form 8-K filed February 28, 2012

 

55
 

 

10.22*   Offer Letter, dated January 26, 2012, between the Company and David M. Darsch, as amended   Form 8-K filed March 6, 2012
10.23*   Offer Letter, dated January 26, 2012, between the Company and John A. Moore, Jr., as amended   Form 8-K filed March 6, 2012
10.24*   Offer Letter, dated January 26, 2012, between the Company and Mohammad Shihadah, as amended   Form 8-K filed March 6, 2012
10.25*   Offer Letter, dated February 24, 2012, between the Company and Stephen D. Baksa, as amended   Form 8-K filed March 6, 2012
10.26*   Offer Letter, dated January 23, 2012, between the Company and Woody A. Allen, as amended   Form 8-K filed March 6, 2012
10.27   Securities Purchase Agreement, dated April 16, 2012, between GBS Enterprises Incorporated and Joerg Ott   Form 10-K filed April 16, 2012
10.28   Note Purchase and Security Agreement, dated August 13, 2012, by and between GBS Enterprises Incorporated and John A. Moore, Jr. and Annedenise M. Moore   Form 8-K filed August 16, 2012
10.29   Purchase Agreement, dated June 6, 2012, between GBS Enterprises Incorporated (as Purchaser) and SD Holdings, Ltd. (as Seller)   Form 10-Q filed September 13, 2012
10.30   Purchase Agreement, dated April 2, 2012, between GBS Enterprises Incorporated (as Seller) and Lotus Holdings, Ltd. (as Purchaser)   Form 10-Q filed September 13, 2012
10.31   Transfer Agreement, dated May 21, 2012 (effective as of July 1, 2012), between Synaptris Decisions Private Limited and GBS India Private Limited   Form 10-Q filed September 13, 2012
10.32   Note Purchase and Security Agreement, dated October 26, 2012, by and between GBS Enterprises Incorporated and Stephen D. Baksa   Form 8-K filed November 2, 2012
10.33   Secured Promissory Note, dated October 26,2012, by and between GBS Enterprises Incorporated and Stephen D. Baksa   Form 8-K filed November 2, 2012
10.34   Common Stock Purchase Warrant, issued October 26, 2012, by GBS Enterprises Incorporated to Stephen D. Baksa   Form 8-K filed November 2, 2012
10.35   Note Purchase Agreement, dated October 29, 2012, by and between Group Business Software AG and GBS Enterprises Incorporated   Form 8-K filed November 2, 2012
10.36   Promissory Note, dated October 29, 2012, by and between GROUP Business Software AG and GBS Enterprises Incorporated   Form 8-K filed November 2, 2012
10.37   Note Purchase Agreement, dated November 14, 2012, by and between Group Business Software AG and GBS Enterprises Incorporated   Form 8-K filed November 20, 2012
10.38   Promissory Note, dated November 14, 2012, by and between GROUP Business Software AG and GBS Enterprises Incorporated   Form 8-K filed November 20, 2012
10.39   Note Purchase and Security Agreement, dated November 30, 2012, by and between GBS Enterprises Incorporated and Pike H. Sullivan   Form 8-K filed December 12, 2012
10.40   Secured Promissory Note, dated November 30, 2012, by and between GBS Enterprises Incorporated and Pike H. Sullivan   Form 8-K filed December 12, 2012
10.41   Common Stock Purchase Warrant, issued November 30, 2012, by GBS Enterprises Incorporated to Pike H. Sullivan   Form 8-K filed December 12, 2012
10.42   Secured Promissory Note, dated April 29, 2013, by and between GBS Enterprises Incorporated and Stephen D. Baksa   Form 8-K filed May 2, 2012
10.43   Common Stock Purchase Warrant, issued April 29, 2013, by GBS Enterprises Incorporated to Stephen D. Baksa   Form 8-K filed May 2, 2012
10.44   Common Stock Purchase Warrant, issued April 29, 2013, by GBS Enterprises Incorporated to Stephen D. Baksa   Form 8-K filed May 2, 2012
10.45   Secured Promissory Note, dated April 29, 2013, by and between GBS Enterprises Incorporated and Vitamin B Venture GmbH   Form 8-K filed May 2, 2012

 

 

56
 

 

10.46   Common Stock Purchase Warrant, issued April 29, 2013, by GBS Enterprises Incorporated to Vitamin B Venture GmbH   Form 8-K filed May 2, 2012
10.47   Common Stock Purchase Warrant, issued April 29, 2013, by GBS Enterprises Incorporated to Vitamin B Venture GmbH   Form 8-K filed May 2, 2012
21.1(1)   List of Subsidiaries  
31.1(1)   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive Officer  
31.2(1)   Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Financial and Accounting Officer  
32.1(1)   Section 1350 Certification of Principal Executive Officer  
32.2(1)   Section 1350 Certification of Principal Financial and Accounting Officer  
101.INS(2)   XBRL Instance Document  
101.SCH(2)   XBRL Schema Document  
101.CAL(2)   XBRL Calculation Linkbase Document  
101.DEF(2)   XBRL Definition Linkbase Document  
101.LAB(2)   XBRL Label Linkbase Document  
101.PRE(2)   XBRL Presentation Linkbase Document  

 

*Management Contracts and Compensatory Plans, Contracts or Arrangements.
(1)Filed herewith.

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

 

57
 

 

SIGNATURES

 

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

 

  GBS ENTERPRISES INCORPORATED  
     
  By: /s/ Gary D. MacDonald  
  Gary D. MacDonald  
  Interim Chief Executive Officer  
  (Principal Executive Officer)  
     
  Date: May 17, 2013  

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Signature:   Title:   Date:
         
/s/ Joerg Ott   Chairman of the Board of Directors   May 17, 2013
Joerg Ott        
         
/s/ Gary D. MacDonald   Interim Chief Executive Officer, Managing Director of   May 17, 2013
Gary D. MacDonald   Worldwide Operations, Exec. VP and Chief Corp. Dev. Officer    
     (Principal Executive Officer)    
         
/s/ Markus R. Ernst   Chief Financial Officer   May 17, 2013
Markus R. Ernst   (Principal Financial and Accounting Officer)    
         
/s/ Woody A. Allen   Director   May 17, 2013
Woody A. Allen        
         
/s/ Stephen D. Baksa   Director   May 17, 2013
Stephen D. Baksa        
         
/s/ David M. Darsch   Director   May 17, 2013
David M. Darsch        
         
/s/ John A. Moore, Jr.   Director   May 17, 2013
John A. Moore, Jr.        
         
/s/ Mohammad A. Shihadah   Director   May 17, 2013
Mohammad A. Shihadah        

  

58
 

 

K. R. MARGETSON LTD. Chartered Accountants
Vancouver office  
3rd Floor, 905 West Pender Street  
Vancouver BC V6C 1L6  
Tel:   604.641.4450  
Fax: (toll free) 1.855.603-3228  

 

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

 

To the Stockholders of

GBS Enterprises Incorporated:

 

We have audited the consolidated balance sheets of GBS Enterprises Incorporated as of December 31, 2012 and 2011 and the related consolidated statements of operations, equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express and opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial . An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluation the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, based on our audits these consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of GBS Enterprises Incorporated as of December 31, 2012 and 2011 and the results of its consolidated operations, changes in equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Without qualifying our report, and because of the relative significance of the assets, we note that the reported values of goodwill and other intangibles is contingent upon the Company attaining projected revenues from new product lines. Accordingly, failure to attain those projections would negatively affect those reported values.

 

Vancouver, Canada /s/ K. R. Margetson Ltd.
May 17, 2013 Chartered Accountants

 

59
 

 

GBS Enterprises Incorporated

Annual Consolidated Balance Sheets

December 31, 2012 and December 31, 2011

(Audited)

 

   December 31,2012   December 31,2011 
   $   $ 
Assets          
Current Assets          
Cash and cash equivalents - Note 7   (4,159,318)   (23,732,787)
Accounts Receivable - Note 8   4,914,640    4,886,788 
Inventories - Note 2   -    236,712 
Prepaid expenses - Note 8   160,095    444,147 
Other receivables - Note 10   676,976    1,020,010 
Assets held for Sale - Note 9   2,231,507    24,107 
Total current assets   9,137,820    9,862,585 
           
Property, plant and equipment - Note 11   332,839    1,604,994 
Non - Operating Receivables - Note 12   428,421    548,909 
Investment in related company, at equity - Note 6   -    244,219 
Deferred tax assets - Note 26   4,823,871    3,945,272 
Goodwill - Note 13   36,206,460    39,221,603 
Software - Note 14   13,724,170    14,258,610 
Other assets - Note 15   156,379    93,268 
Total non-current assets   55,672,140    59,916,875 
           
Total assets   64,809,961    69,779,460 
           
Liabilities and stockholders' equity          
Current liabilities          
Notes payable   -    1,381,821 
Liabilities to banks - Note 15   6,774    19,595 
Accounts payables and accrued liabilities - Note 16   10,846,650    6,872,665 
Deferred income - Note 18   6,099,570    6,476,582 
Other liabilities - Note 17   860,032    4,256,410 
Due to related parties - Note   48,068    51,321 
Liability held for sale   749,532    - 
Total current liabilities   18,610,626    19,058,394 
           
Liabilities to banks - Note 19   3,716,101    3,463,483 
Deferred tax liabilities - Note 26   874,551    1,196,472 
Retirement benefit obligation - Note 21   165,876    150,632 
Other liabilities - Note 20   -    2,273,737 
Total non-current liabilities   4,756,528    7,084,324 
           
Total liabilities   23,367,154    26,142,719 
           
Stockholders' equity          
Capital stock - Note 22          
Authorized:          
75,000,000 common shares of $.001 par value each          
25,000,000 peferred shares of $.001 par value each          
Issued and outstanding:          
29,431,664 shares of common stock          
( 27,247,958 shares at December 31, 2011)   29,462    27,248 
Additional paid in capital   49,391,663    47,325,971 
Accumulated deficit   (15,706,308)   (12,147,666)
Other comprehensive income   313,139    494,206 
           
    34,027,957    35,699,759 
Noncontrolling interest in subsidiaries   7,414,850    7,936,983 
           
Total stockholders' equity   41,442,807    43,636,742 
           
Total stockholders' equity and liabilities   64,809,961    69,779,460 

 

Subsequent events - Note 26

 

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GBS Enterprises Incorporated

Annual Consolidated Statements of Operations

For the year ended December 31, 2012 and December 31, 2011

(Audited)

 

  December 31 
   2012   2011 
   $   $ 
         
Revenues - Note 23          
Products   21,266,627    21,787,910 
Services   4,540,349    6,485,182 
    25,806,976    28,273,093 
Cost of goods sold          
Products   5,638,228    5,575,747 
Services   8,711,016    10,322,435 
    14,349,245    15,898,182 
Gross profit   11,457,731    12,374,910 
           
Operating expenses          
Selling expenses   12,102,534    15,426,600 
Administrative expenses   5,837,796    2,858,679 
General expenses   4,458,185    926,129 
    22,398,515    22,513,690 
           
Operating income   (10,940,783)   (10,138,779)
           
Other Income (expense)          
Other Income (expense)   5,806,253    (15,894,738)
Interest income   3,027    33,948 
Interest expense   (453,386)   (406,407)
    5,355,894    (16,267,198)
           
Income (loss) before income taxes   (5,584,889)   (26,405,977)
           
Income tax (income) expense   (1,384,965)   (2,151,211)
           
Income before extraordinary items, discontinued operations   (4,199,924)   (24,254,766)
           
Discontinued operations (net of tax)   40,607    521,979 
           
Extraordinary items (value adjustment on good will)   0    0 
           
Cumulative effect at beginning of year of changes in accounting principles   0    0 
           
Net income (loss) before extraordinary items   (4,159,317)   (23,732,787)
           
Extraordinary items (value adjustment on goodwill)   0    0 
           
Net income (loss)   (4,159,317)   (23,732,787)
Net income (loss) attributable to non controlling interest   (600,676)   (11,567,489)
           
Net income (loss) attributable to stockholders   (3,612,971)   (12,750,279)
           
Other comprehensive income (loss)   (108,443)   (125,751)
Other comprehensive income (loss) attributable to non noncontrolling interest   (54,113)   (62,750)
Other comprehensive income (loss) attributable to stockholders   (54,330)   (63,001)
Net income (loss) and comprehensive income (loss) attributed to stockholders   (3,612,971)   (12,750,279)
           
Net earnings (loss) per share, basic and diluted  $(0.123)  $(0.468)
           
Weighted average number of common stock outstanding, basic and diluted   29,461,664    27,247,958 

 

61
 

 

GBS Enterprises Incorporated

Annual Consolidated Statements of Cash Flows

For the year ended December 31, 2012 and 2011

(Audited)

 

   December 31, 2012   December 31, 2011 
   $   $ 
          
Cash flow from operating activties          
Net loss / net income   (4,159,318)   (23,732,787)
Adjustments          
Deferred income taxes   (556,679)   6,796,982 
Depreciation and amortization   4,816,098    5,035,732 
Write-down of Goodwill and Intangibles   0    0 
Losses from equity investment   46,754    85,599 
Minority interest losses   (600,676)   (143,736)
Changes in operating assets and liabilities:          
Accounts receivable and other assets   536,124    (2,139,084)
Retirement benefit obligation   (15,244)   3,686 
Inventories   263,712    114,172 
Accounts payable and other liabilities   1,181,226    5,755,795 
Net cash provided (used) by operating activities   1,484,997    (7,957,372)
           
Cash flow from investing activties          
Purchase (Sale) of intangible assets   (3,516,593)   (2,141,612)
Purchase of property, plant and equipment   (56,262)   (161,037)
Purchase of Subsidiaries   0    0 
Proceeds from Sale of Subsidiaries   2,498,257    3,715,077 
Increase (Decrease) in Financial assets   278,676    321,515 
Net cash provided (used) in investing activities   (795,922)   1,733,943 
           
Cash flow from financing activties          
Net borrowings - banks   (237,797)   (2,484,597)
Other borrowings   2,273,737    2,460,438 
Capital paid-in   (2,065,692)   6,678,950 
Net cash provided (used) in financing activities   215,720    7,484,947 
           
Effect of exchange rate changes on cash   (84,689)   (144,058)
           
Net increase (decrease) in cash   (2,096,220)   1,505,856 
Cash and cash equivalents - Beginning of the year   3,250,821    1,744,965 
           
Cash and cash equivalents - End of year   1,154,602    3,250,821 

 

62
 

 

GBS Enterprises Incorporated

Annual Consolidated Statements of Equity

For the year ended December 31, 2012 and 2011

(Audited)

 

           Accumulated       Equity     
   Common Stock   Additional   Other       Attributable     
           Paid in   Comprehensive   Accumulated   to Noncontrolling     
   Shares   Amount   Capital   Income (Loss)   Deficit   Interest   Equity 
   #   $   $   $   $   $   $ 
                             
Balance, December 31, 2010   16,500,000    16,500    27,221,755                   27,238,255 
                                    
March 28, 2011, issued with sale of units at $1.25 /unit   6,044,000    6,044    6,672,906                   6,678,950 
                                    
April 1, 2011, issued on purchase of Pavone AG   999,790    1,000    4,899,000                   4,900,000 
                                    
April 1, 2011, Warrants issued for services   -    -    34,000                   34,000 
                                    
June 1, 2011, issued on purchase of GroupWare, Inc.   250,000    250    1,084,750                   1,085,000 
                                    
July 1, 2011, issued on purchase of IDC Global, Inc.   880,000    880    3,255,120                   3,256,000 
                                    
September 27, 2011, issued on purchase of SD Holdings Ltd.   612,874    613    1,255,837                   1,256,450 
                                    
December 13, 2011, warrants exercised at $1.50 /sh   2,020,000    2,020    3,022,950                   3,024,970 
                                    
Net comprehensive loss for the year                                 - 
                                    
Balance, December 31, 2011   27,306,664    27,307    47,446,318    494,206    (12,147,666)   7,936,983    43,757,148 
                                    
March 27, 2012, warrants exercised at $1.50 /sh   5,000    5    7,495                   7,500 
                                    
March 27, 2012, warrants excercised at $.50 /sh   400,000    400    199,600                   200,000 
                                    
March 30, 2012, warrants exercised at $.50 /sh   500,000    500    249,500                   250,000 
                                    
March 31, 2012, warrants issued for services   -    -    270,208                   270,208 
                                    
April 16, 2012, issued on sale of units at $1.50 /unit   120,000    120    179,880                   180,000 
                                    
April 28, 2012, issued on conversion of note into shares at $1.15 /sh   550,000    550    631,950                   632,500 
                                    
April 30, 2012, issued on conversion of note into shares at $1.15 /sh   400,000    400    459,600                   460,000 
                                    
April 30, 2012, issued on conversion of note and debt into shares at $1.15 /sh   150,000    150    172,350                   172,500 
                                    
May 15, 2012, issued on sale of units at $1.50 /unit   30,000    30    44,970                   45,000 
                                    
July 5, 2012, fair value of conversion on issuance of convertible debt   -    -    26,700                   26,700 
                                    
December 21, 2012, warrants issued for services   -    -    2,624                   2,624 
                                    
Net comprehensive loss for the year                                 - 
                                    
Balance, December 31, 2012   29,461,664    29,462    49,691,195    494,206    (12,147,666)   7,936,983    46,004,180 

 

63
 

 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Note 1COMPANY AND BACKROUND

 

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

 

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

 

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

 

Our software and services are designed to mainly serve organizations that have investments in IBM’s Lotus® Notes and Domino platform. The IBM Lotus® Notes and Domino platform is both a system for enterprise email as well as an application platform, meaning that it can be used as both an email system and an environment in which business applications can be deployed and used. This platform was originally brought to market by Lotus Development Corp. in 1989, and was subsequently acquired by IBM in 1995. According to Radicati, in 2011, IBM Lotus Domino will have a worldwide installed base of 189 million mailboxes. Currently, the installed base for On-Premises IBM Lotus Domino mailboxes represents the majority of worldwide IBM Lotus Domino mailboxes, accounting for 87% of worldwide IBM Lotus Domino mailboxes. By 2015, this percentage is expected to decrease to 80%, as hosted email grows in popularity. (The Radicati Group Inc., April 2011, “IBM Lotus Notes/Domino Market Analysis, 2011-2015“)

 

64
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

We, through our subsidiaries, have executed our strategy to acquire companies, which have developed software and specialized services for the Lotus Notes and Domino market. This growth by acquisition strategy has resulted in less competition for our software products; a large concentration of highly skilled employees with unique expertise in the area of Lotus Notes and Domino; staff and physical offices on three continents providing greater access to a global market; significant market awareness and greater market share amongst organizations that use Lotus Notes and Domino; and a comprehensive portfolio of solutions specific to the needs and requirements of organizations which use Lotus Notes and Domino.

 

While our products and services remain in use and demand, over the last several years, the market itself has been undergoing a paradigm shift. New technologies, especially in the areas of Cloud Computing and Mobile applications, have grown in popularity due to the potential cost savings and operational efficiencies they can offer. As organizations make investments in these new technologies, they are faced with highly complex and costly projects to migrate (“migration”) or replace their existing systems that don’t operate in the cloud or on mobile devices (“modernization”) – this includes their existing email and business applications that run on Lotus Notes and Domino.

 

To that end, we have acquired and developed technologies that help organizations reduce the time, cost, resources and risks associated with these highly complex migration and modernization projects.

 

General Corporate History

 

We were incorporated in Nevada on March 20, 2007 as SWAV Enterprises Ltd. (“SWAV”). SWAV was an importer and wholesaler of Chinese manufactured goods.

 

On April 26, 2010, SWAV purchased certain technology assets of Lotus Holdings Ltd. (“Lotus”) 2,265,240 shares of SWAV common stock. Also on April 26, 2010, Lotus (on behalf of the SPPEF Members as discussed below) purchased an aggregate of 11,984,770 of the outstanding shares of common stock from the selling shareholders of SWAV for an aggregate of $370,000. As a result of the two sets of transactions, Lotus owned an aggregate of 14,250,010 shares of common stock of SWAV, representing approximately 95.0% of the 15,000,000 shares of SWAV common stock outstanding on April 26, 2010.

 

65
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

On September 6, 2010, SWAV’s name was changed to GBS Enterprises Incorporated. On October 14, 2010, the Company’s trading symbol on the OTC Bulletin Board was changed from SWAV to GBSX.

 

About Lotus Holdings, Ltd.

 

Lotus is a holding company which was formed under the laws of Gibraltar for the purpose of financing merger and acquisition projects, specifically in the niche market of small or microcap companies listed on the Frankfurt Stock Exchange with complex shareholder structures and whose stock is trading below one Euro (€1.00) per share.

 

SPPEFs

 

Lotus typically finances its merger and acquisition projects through the use of Special Purpose Private Equity Funds (“SPPEFs”). Typically, SPPEFs are funded by a company’s major shareholders (the “Major Shareholders”) seeking to raise capital for projects and who fund at least 50% of the SPPEF, with the remaining portion being provided through the investment community and network of investors in Lotus. Each SPPEF is co-managed by a representative of the company’s Major Shareholders (the “Representative Secretary”) and an attorney appointed by Lotus (the “Lotus Representative”).

 

On February 25, 2010, a group of shareholders (the “GROUP Major Shareholders”) of GROUP Business Software AG, a German public company trading on the Frankfurt Stock Exchange under the symbol “INW” (“GROUP”), engaged Lotus to provide financial consulting and advisory services, on a non-exclusive basis, for the primary task of establishing a SPPEF. On March 12, 2010, the GROUP Major Shareholders and Lotus established and funded a SPPEF with $1,400,000, consisting of $1,000,000 from the GROUP Major Shareholders and $400,000 from a Lotus investor (collectively, the “SPPEF Members”).

 

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

 

66
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Transactions following the acquisition

 

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

 

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

 

Reverse Merger

 

After the December Transaction was completed, the additional GROUP Major Shareholders accepted the share swap offer from the Company and effectuated a reverse merger of GROUP and the Company. To effectuate the reverse merger, on January 5, 2011, the Company repurchased from Lotus an aggregate of 2,361,426 of the 11,984,770 shares of the Company’s common stock originally purchased by Lotus on April 26, 2010. In consideration for these 2,361,426 shares, the Company issued to Lotus a Secured Demand Note, dated January 5, 2011 (the “Second Demand Note”), for the principal amount of $200,000 bearing interest at the rate of 5% per annum. The Second Demand Note was repaid in November 2011.

 

Effective January 6, 2011, pursuant to securities purchase agreements between the Company and the remaining GROUP Major Shareholders, the Company purchased an aggregate of 5,525,735 shares of GROUP common stock from the remaining GROUP Major Shareholders in consideration for an aggregate of 2,361,426 shares of the Company’s common stock (the “January Transaction”). The 5,525,735 GROUP shares represented approximately 21.9% of the outstanding shares of common stock of GROUP. As a result of the December Transaction and January Transaction, the Company purchased an aggregate of 12,641,235 shares of GROUP from the GROUP Major Shareholders in consideration for an aggregate of 5,405,411 shares of the Company’s common stock, resulting in the Company owning approximately 50.1% of the outstanding common stock of GROUP and effectuating a reverse merger of the Company and GROUP whereby GROUP became the accounting acquirer (“the Reverse Merger”).

 

67
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Additional Acquisition

 

On February 27, 2012, the Company acquired an additional 883,765 shares of common stock of GROUP from GAVF LLC for an average purchase price of $.070 per share, or approximately $619,000, after an outstanding loan of GROUP was converted into an aggregate of 1,750,000 shares of GROUP common stock, thereby increasing GROUP’s outstanding common stock to 26,982,000 shares. By acquiring the new shares, the Company increased its ownership of GROUP common stock to an aggregate of 13,525,000 shares, representing approximately 50.1% of the outstanding common stock of GROUP.

 

Acquisition/Dissolution of Subsidiary Companies

 

Pavone AG

 

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

 

68
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

GroupWare, Inc.

 

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

 

IDC Global, Inc.

 

On July 25, 2011, the Company acquired 100% of the issued and outstanding shares of common stock of IDC Global, Inc., a Delaware corporation. Pursuant to the acquisition agreement, dated July 15, 2011, the Company agreed to issue the shareholders an aggregate of 800,000 shares of common stock and made a cash payment of $750,000. The agreement required an additional payment to the management shareholders of 80,000 shares of common stock and signing bonuses to personnel of $35,000. The Company also agreed to reimburse IDC up to $25,000 for incurred accounting and legal fees related to the transaction. The fair value of the common stock was determined to be $3.70 per share, representing the market value at the end of trading on the date of the agreement. The total value of the investment, including $883,005 of debt assumption, was $4,066,000. IDC was a privately held company that provides nationwide network and data center services. IDC delivers customized, high availability technology solutions for WAN, Wireless Services, Co-location & Hosting, Managed Services, and Network Security. IDC Global includes two Data Center facilities located in the downtown Chicago area and Colocation facilities in three other Data Centers in New York, London, England and Frankfurt, Germany. IDC provides internet infrastructure Services (IaaS) to the business community helping customers make the transition from large, static and expensive on-premise computing to dynamic, flexible and cost-effective off-premise computing. IDC is helping customers make the transition from large, static and expensive on-premise computing to dynamic, flexible and cost-effective off-premise computing.

 

SD Holdings, Ltd.

 

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

 

69
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

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

 

GBS India Private Limited

 

Pursuant to an existing transfer agreement, effective July 1, 2012, the Company entered into a purchase agreement with SYN for $1,877,232, which transferred all assets, including intellectual property rights, and liabilities of the IntelliPRINT and FewClix product lines, customer contracts and certain employees for operations in a new subsidiary, GBS India Private Limited, an incorporated entity formed under the Indian Companies Act 1956 (“GBS India”). A royalty fee in the amount of approximately $350,000 has been agreed upon for the benefit the Company. Additionally a profit based fee of up to $700,000 may be earned based on license and revenue recognized from the sold IntelliVIEW and IntelliVIEW NXT products.

 

On August 1, 2012, the Company acquired 100% of the outstanding shares of capital stock of GBS India. We anticipate GBS India’s presence in India to accelerate our plan to expand our product development team particularly for our strategic offerings in India.

 

Pavone AG/Groupware AG

 

On July 6, 2012 and August 9, 2012, wholly-owned subsidiaries Pavone AG and Groupware AG, respectively, were merged into Pavone GmbH. The mergers were consummated solely for administrative purposes. Pavone GmbH is a wholly-owned subsidiary of the Company.

 

Pavone, Ltd.

 

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

 

70
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

EbVokus, GmbH.

 

On October 1, 2012, GROUP sold all of the software and operational  assets (constituting substantially all of the assets) of its wholly-owned subsidiary, ebVokus GmbH, along with the associated maintenance and project agreements to a non-affiliated third party for a purchase price of approximately $459,000, approximately $258,000 (200,000 Euros: 1 EUR = $1.29 USD on October 1, 2012) was paid at closing and the remaining $201,000 was paid on February 15, 2013 (150,000 Euro: 1EUR = $1.35 USD on February 15, 2013).

 

B.E.R.S. AD.

 

On November 23, 2012 GBS AG sold its entire participation (50%) in B.E.R.S AD for a total of 25,000 BGN.

 

Note 2ACCOUNTING POLICIES

 

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, the more significant of which are as follows:

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segment Reporting

 

The Financial Accounting Standards Board (“FASB”) authoritative guidance regarding segment reporting establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it operates in only one segment – the development and maintenance of computer software programs and support products.

 

71
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Comprehensive Income (Loss)

 

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

 

Net Income per Common Share

 

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

 

Financial Instruments

 

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

 

Currency Risk

 

We use the US dollar as our reporting currency. The functional currencies of our significant foreign subsidiaries are the local currency, which includes the Euro, the British pound and the Bulgarian Lev. Accordingly, some assets and liabilities are incurred in those currencies and we are subject to foreign currency risks.

 

72
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Fair Value Measurements

 

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

 

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

 

Cash and cash equivalents

 

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

 

Inventories

 

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

 

Goodwill and other Intangible Assets

 

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

 

73
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

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

 

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

 

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

 

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

 

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

 

Property, Plant and Equipment

 

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

 

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

 

74
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Impairment or Disposal of Long-Lived Assets

 

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

 

Revenue Recognition

 

Sources of Revenues:

 

License revenues

 

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

 

Software maintenance revenues

 

Software maintenance revenues are recognized ratably on a pro-rata basis over the range of the contract period. Our contract periods typically range from one to five years. Vendor-specific objective evidence (“VSOE”) of fair value for software maintenance services is established by the rates charged in stand-alone sales of software maintenance contracts or the stated renewal rate for software maintenance. Customers who are party to software maintenance agreements with us are entitled to receive support, product updates and upgrades on a when-and-if-available basis.

 

Professional services revenues

 

Professional services include pre-project consulting, software design, customization, project management, implementation and training. Professional services are not considered essential to the functionality of our products, as these services do not alter the product capabilities and may be performed by our customers or by other vendors. Professional services engagements performed for a fixed fee, for which we are able to make reasonably dependable estimates of progress toward completion, are recognized on a proportional performance basis based on hours incurred and estimated hours of completion. Professional services engagements that are on a time and materials basis are recognized based on hours incurred. Revenues on all other professional services engagements are recognized upon completion. Our professional services may be sold with software products or on a stand-alone basis. Vendor Specific Objective Evidence (VSOE) of fair value for professional services is based upon the standard rates we charge for such services when sold separately.

 

75
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Foreign Currency Translation

 

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

 

Other Provisions

 

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

 

Deferred Taxes

 

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

 

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

 

76
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Recent Accounting Pronouncements

 

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

 

Off - Balance Sheet Arrangements

 

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

 

Principles of Consolidation and Reverse Merger

 

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 became the accounting acquirer and is deemed to have retroactively adopted the capital structure of the Company. Accordingly, the accompanying consolidated financial statements reflect the historical consolidated financial statements of GROUP for periods presented prior to January 6, 2011. All costs associated with the reverse merger transaction were expensed as incurred. Those expenses totaled approximately $300,000 and were included in professional fees in administrative expenses.

 

77
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

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

 

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

 

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

 

3.CHANGE IN ACCOUNTING POLICIES

 

Fiscal reporting

 

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

 

78
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Note 3SUBSIDIARY COMPANIES

 

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

 

                    
      Stockholders'          Profit  
      Equity   Percentage of      of the   Date
      as of
12.31.12
  

Subscribed
Capital 

      consolidated
quarter
   of the
First
Subsidiary  Headquarters  KUSD   KUSD   in %   Ownership  KUSD   Consolidation
                          
ebVOKUS Software GmbH   Dresden   574    53    50.1%  I   163   01/11/2005
GROUP Business Software (UK) Ltd.  Manchester   (1,334)   24    50.1%  I   (66)  12/31/2005
GROUP Business Software Corp.  Woodstock   (12,328)   1    50.1%  I   (4,367)  12/31/2005
GROUP LIVE N.V.  Den Haag   (1)   132    50.1%  I   4,632   12/31/2005
Permessa Corporation  Waltham   10    0    50.1%  I   682   09/22/2010
Relavis Corporation  Woodstock   (819)   2    50.1%  I   (10)  01/08/2007
GROUP Business Software AG  Eisenach   23,897    35,658    50,1%  I   (655)  06/01/2011
Pavone GmbH  Boeblingen   (1,223)   44    100.0%  D   (503)  01/04/2011
Pavone Ltd.  North Yorkshire   (79)   586    100.0%  D   (4)  01/04/2011
Groupware Inc.  Woodstock   (482)   1    100.0%  D   0   01/06/2011
IDC Global, Inc.  Chicago   2,442    0    100.0%  D   128   07/25/2011
Synaptris, Inc.  San Jose   (777)   3,382    100.0%  D   89   09/27/2011
GBS India  Chennai   101    14    100.0%  D   89   09/30/2012

 

D - Direct Subsidiary
I -   Indirect Subsidiary

 

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

 

nOn April 1, 2012, the Company sold SD Holdings Ltd. (“SYN”), Synaptris and Synaptris India to Lotus Holding, Ltd. for a purchase price of $1,877,232 in an effort to restructure the Company’s multilevel subsidiary-structure derived from historical mergers and acquisitions, and to reduce overhead and administrative costs.

 

nOn July 6, 2012 and August 9, 2012, wholly-owned subsidiaries Pavone AG and Groupware AG, respectively, were merged into Pavone GmbH. The mergers were consummated solely for administrative purposes. Pavone GmbH is a wholly-owned subsidiary of the Company.

 

79
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

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

 

nOn August 1, 2012, the Company acquired 100% of the outstanding shares of capital stock of GBS India.

 

On October 1, 2012, GROUP sold all of the software and operational assets (constituting substantially all of the assets) of its wholly-owned subsidiary, ebVokus GmbH.

 

Note 4CASH AND CASH EQUIVALENTS

 

As of the financial statement date, the Company’s cash and cash equivalents totaled 1,155 KUSD (December 31, 2011 restated year end: 3,251 KUSD). Included in that amount are cash equivalents of 3 KUSD (December 31, 2011 restated year end: 12 KUSD).

 

Note 5ACCOUNTS RECEIVABLE

 

As of the financial statement date, Accounts Receivable was 4,143 KUSD (December 31, 2011 restated year end: 5,007 KUSD). Receivables are generally measured at their nominal value and taking into account all foreseeable risks. Probable default risks are handled with specific allowances for bad debts. With regard to the trade receivables which are neither impaired nor delinquent, there are no indications as of the financial statement date that the debtors will not meet their payment obligations.

 

Note 6PREPAID EXPENSES

 

Prepaid expenses in the amount of 84 KUSD were primarily recorded for prepaid rent and advance on technological collaboration events (December 31, 2011 restated year end: 444 KUSD).

 

Note 7OTHER RECEIVABLES - CURRENT

 

Other Receivables as of the financial statement date were 676 KUSD (December 31, 2011 year end: 1,020 KUSD). The largest individual item under other receivables represents a receivable from a previous insolvency (469 KUSD). Also included are tax assets (177 KUSD) and other prepaid costs (30 KUSD).

 

80
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Note 8ASSETS HELD FOR RESALE

 

On February 1, 2013 IDC Global Inc. ("IDC“), entered into a Stock Purchase Agreement, with Global Telecom & Technology Americas, Inc., a Virginia corporation (“GTT”). GTT is a publicly traded (GTLT:OTC US) cloud network provider. Pursuant to the Agreement, the Company sold 100% of the issued and outstanding shares of capital stock of IDC (the “IDC Shares”) to GTT for an aggregate purchase price of $4,600,000 in cash.

  

   KUSD 
Asset     
Cash     
Other receivables   0.0 
Intangible assets   0.0 
Accruals   0.0 

 

Note 9PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are measured at cost less scheduled straight-line depreciation.

 

Depreciation of the computer hardware listed as office equipment is distributed over a period of three to five years. The depreciation period for other office equipment is three to ten years. Office furnishings are depreciated over a period of eight to ten years. Leasehold Improvements are depreciated up to 40 years.

 

Property, Plant and Equipment
kUSD
  Development
of the cost
   Development
of
accumulated
depreciation
   Balance 
             
Updated 12/31/2011   8,459.5    6,854.5    1,605.0 
Additions   280    339      
Disposals   (1411)   (208)     
Currency differences   118    110      
Reclassifications   (240)   (222)     
Updated 12/31/2012   7,206.5    6,873.7    332.8 

 

81
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Note 10NON-OPERATING RECEIVABLES

 

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

 

   KUSD   KUSD 
   12/31/2012   12/31/2011 
Receivable from sale of GEDYS IntraWare GmbH          
Balance outstanding, payable in monthly installments of $20,006, bearing interest at prime plus .25%, not be greater than 2% per annum   0    777 
Current portion, included in other current receivables   0    233 
    0    544 
Cooperative shares   1    0 
Intercompany Loan Values during the quarter   0    0 
Other long term receivables   427    5 
Balance   428    549 

 

Note 11GOODWILL

 

Goodwill derives from the following business acquisitions:

 

Affiliated Company  Date of the First
Consolidation
  Goodwill
YE 2010
in kUSD
  

Goodwill
YE 2011

in kUSD

   Goodwill
Q2 in
kUSD
   Goodwill
YE 2011
in kUSD
   Goodwill
Q4 2012
in kUSD
 
GROUP Business Software AG  01/06/11   22,519.6    23,302.8    23,302.8    20,194.4    18,492.2 
GROUP Business Software Corp.  12/31/05   2,060.7    2,177.5    2,177.5    2,177.5    2,177.5 
GROUP LIVE N.V.  12/31/05   1,253.2    1,324.2    1,324.2    0.0    0.0 
GROUP Business Software Ltd  12/31/05   2,616.7    2,765.1    2,765.1    2,765.1    2,765.1 
ebVOKUS Software GmbH  01/10/05   419.8    443.6    443.6    443.6    443.6 
Relavis Corporation  01/08/07   6,897.2    7,288.3    7,308.0    0.0    0.0 
Permessa  09/22/10   0.0    2,387.4    2,387.4    2,387.4    2,387.4 
Pavone GmbH  01/04/11             -319.7    4,956.4    5,892.5 
Groupware Inc.  01/06/11             -95.9    994.1    0.0 
IDC  07/25/11             1,155.1    2,994.4    2,994.4 
SD Holding  09/27/11             1,538.6    2,308.7    0.0 
GBS India  09/30/11                       1,053.7 
       35,767.3    39,689.0    41,986.8    39,221.6    36,206.5 

 

During the year ended December 31, 2012, the Company sold SD Holdings, Ltd., ebVokus GmbH. and dissolved Pavone Ltd., the effect of which was to reduce the goodwill associated with these subsidiaries. The reduction in goodwill attributed to GROUP Business Software AG (“GROUP”) resulted when the Company purchased additional shares of GROUP as disclosed in Note 1

 

82
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

Also in early 2012, the Company focused on the then emerging modernization and migration market in general but with a specific concentration towards the IBM Lotus Notes/Domino portion of the market. Also, there was a particular geographic orientation on addressing the needs of the North America segment of that market. Strategically the Company utilized the Transformer technology and a variety of associated analytic tools to position itself in the market. This technology represents the major portion of the Company’s total development expenses of $10.2 million in 2012. In order to align the intangible assets of the company with the fast changing market, management decided to write off the Goodwill in GBS Corp., which is associated to the classical core business entirely in the amount of $2.8 million, to write off the capitalized development until 1/1/12 on the former Transformer technology in the amount of $0.9 million.

 

Note 12SOFTWARE

 

Development costs

 

The costs of developing new software products and updating products already marketed by the Company are generally recognized as expenses in the period in which they arise. Provided they meet the conditions for capitalization as per FASB ASC 985-20-25, they are capitalized. Capitalized development costs can be attributed to the defined products. These products are technically realizable and there is a target market for them.

 

The development costs arising in the reporting period result from the personnel costs attributed to the development work as well as overhead costs, provided that these are related to the development work and do not represent general administrative costs. The ascribable overhead costs are directly recognized.

 

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

 

Concessions, Industrial Property Rights, Licenses

 

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

 

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

 

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

 

83
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

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

 

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

 

Concessions and licenses
kUSD
  Development 
of the cost
   Development 
of 
accumulated
 depreciation
   Balance 
             
Updated 12/31/2011   33,093.8    18,835.2    14,258.6 
Additions   1269    1266      
Disposals   (244)   (5)     
Currency differences   895    736      
Reclassifications   (458)   0      
Updated 12/31/2012   34,555.9    20,831.7    13,724.2 

 

Note 13OTHER ASSETS

 

This includes of 156 KUSD primarily from rent and other security deposits (December 31, 2011 year end: 93 KUSD).

 

Note 14NOTES PAYABLE

 

A breakdown of the Notes Payable of $ 2,313,572 as at December 31, 2012 (December 31, 2011 restated : $1,381,821) is as follows:

 

   Date of      Interest        
   Loan  Principal   Accrued   Total   Due Date
      $   $   $    
   7/5/2012   50,000    2,084    52,084   1/5/2013
   7/5/2012   250,000    10,421    260,421   1/5/2013
   7/5/2012   252,500    10,526    263,026   1/5/2013
   8/13/2012   1,000,000    76,712    1,076,712   8/13/2013
   10/26/2012   1,000,000    36,165    1,036,165   10/26/2013
   11/30/2012   500,000    8,493    508,493   11/30/2013
   11/30/2012   500,000    8,493    508,493   11/30/2013
                     
Total     3,552,500    152,894    3,705,394  
                   
Amounts due to related parties     1,302,500    89,322    1,391,822  
                   
Unrelated     2,250,000    63,572    2,313,572  

 

84
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

On July 5, 2012, the Company entered into a 3 separate unsecured convertible promissory notes, for a total of $552,500 bearing interest at 8.5% and due January 5, 2013. The conversion options were not exercised. Two of the investor whose investments totaled $302,500 were directors

 

The Company also issued common stock purchase warrants, entitling the holders to purchase 550,000 shares of common stock at $0.50 for a period of 3 years from issuance. The discounted value of the loans, using a rate of 20% was determined to be $526,000 and the discount of $26,800 was charge to debt discount and credited to additional paid in capital. The discount was amortized and charged to operations in 2012.

 

On August 13, 2012, the Company entered into a Note Purchase and Security Agreement with John A. Moore, a member of the Board of Directors of the Company, and his spouse (collectively, the “Lender”) pursuant to which the Company sold a secured promissory note (the “Note”) to the Lender in the aggregate principal amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on the first anniversary date of the issuance with a 2% prepayment penalty. To secure the obligations of the Company under the Note, the Company granted the Lender a first priority security interest in the accounts receivable of the Company and its subsidiaries located in the United States of America on a one-for-one (1:1) basis.

 

In connection with the execution of the Loan Agreement, on August 13, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.35 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

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

 

On October 26, 2012, the Company entered into a Note Purchase and Security Agreement pursuant to which the Company sold a secured promissory note to the Lender in the aggregate principal amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on the first anniversary date of the issuance with no prepayment penalty. To secure the obligations of the Company under the Note, the Company granted the Lender all the Company’s right, title and interest in and to its shares of one of its subsidiaries, namely IDC Global, Inc.

 

85
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

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

 

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

 

On November 30, 2012, the Company entered into a two Note Purchase and Security Agreement pursuant to which the Company sold two secured promissory notes to two separate lenders in the aggregate principal amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on the first anniversary date of the issuance with no prepayment penalty. To secure the obligations of the Company under the Note, the Company granted the Lenders all the Company’s right, title and interest in and to its shares of one of its subsidiaries, namely IDC Global, Inc.

 

In connection with the execution of the Loan Agreement, on November 30, 2012, the Company issued the lendes a common stock purchase warrant, pursuant to which the lender are entitled to purchase 500,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

On February 12, 2013, the Lenders exercised the right to purchase 500,000 share of common stock at the exercise price of $0.20 per share.

 

Note 15LIABILITIES TO BANKS - CURRENT

 

Short term liabilities to banks of 7 KUSD (December 31, 2011 year end: 20 KUSD) represent an operating line of credit (6 KUSD), bearing interest at a 3.25% daily periodic rate with a credit limit of 100 KUSD and checks in transit (15 KUSD) at the financial statement date.

 

86
 

 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

  

Note 16ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Trade payables

 

As of the financial statement date, trade accounts payable amounted to 3,426 KUSD (December 31, 2011 restated year end: 2,783 KUSD). Trade payables are carried at their repayment amount and all have a residual term of up to one year.

 

Other Accrual

 

Other provisions are created as of the financial statement date in an amount necessary according to a reasonable commercial appraisal, to cover future payment obligations, perceivable risks and uncertain liabilities of the Company. Amounts deemed to be most likely to occur, in careful assessment, are accrued.

 

KUSD  Status               Currency   Status 
   12/31/2011   Utilization   Dissolution   Increase   Differences   12/31/2012 
                         
Tax provision   32    32    0    57    0    57 
Salary   859    489    24    451    16    861 
Vacation   439    303    30    137    12    315 
                               
Workers Compensation Insurance Association   27    21    0    17    1    25 
Compensation Levy for Non-Employment of Severely Handicapped Persons   17    16    0    18    0    19 
Outstanding Invoices   882    626    60    722    22    1,059 
Annual Financial Statement Costs   401    206    0    0    4    198 
Other Provisions   367    221    0    294    6    446 
Warranties   60    4    0         41    96 
Gesture of Goodwill   160    160                   0 
Provision for Legal Costs   71    4    0         5    73 
Severance   0    0    0    70    0    70 
Total   3,314    2,082    114    1,766    107    3,221 

 

Provisions for salaries of 861 KUSD (December 31, 2011 year end: 859 KUSD) include the provisions created for the variable salaries of the sales staff for the sales objectives reached in this business period.

 

Vacation provisions of 315 KUSD (December 31, 2011 year end: 439 KUSD) include the obligations of GROUP’s companies to their employees for remaining vacation claims from the reporting period. The amount of the provision is calculated on the gross salary of the individual employee plus the employer contribution to social security/medicare and based on the unused vacation days as of the financial statement date.

 

87
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

For liabilities not yet settled, a provision totaling 1,059 KUSD (December 31, 2011 year end: 882 KUSD) was created.

 

Other Provisions of 446 KUSD (December 31, 2011 year end: 367 KUSD) include accruals for Board of Director compensation (46 KUSD) and miscellaneous provisions.

 

Expenses for the audit of the Company and preparation of the annual consolidated financial statements were recognized at 198 KUSD (December 31, 2011 year end: 401 KUSD).

 

A provision for anticipated legal consulting of 73 KUSD was recorded (December 31, 2011 year end: 71 KUSD).

 

For warranty claims, a provision of 96 KUSD (December 31, 2011 year end: 60 KUSD) was created determined by service income.

 

Note 17DEFERRED INCOME

 

Accruals for future periods leading to realization of sales after the financial statement date are reported under deferred income. The deferred income items listed as of the financial statement date in the amount of 6,099 KUSD (December 31, 2011 year end: 6,477 KUSD) primarily include maintenance income collected in advance for the period after the end of the financial statement date. They are amortized on a straight-line basis over their respective contract terms.

 

Note 18OTHER LIABILITIES

 

On July 5, 2012, the Company entered into a 3 separate unsecured convertible promissory notes, for a total of $552,500 bearing interest at 8.5% and due January 5, 2013. The conversion options were not exercised. Two of the investor whose investments totaled $302,500 were directors

 

The Company also issued common stock purchase warrants, entitling the holders to purchase 550,000 shares of common stock at $0.50 for a period of 3 years from issuance. The discounted value of the loans, using a rate of 20% was determined to be $526,000 and the discount of $26,800 was charge to debt discount and credited to additional paid in capital. The discount was amortized and charged to operations in 2012.

 

On August 13 , 2012, the Company entered into a Note Purchase and Security Agreement with John A. Moore, a member of the Board of Directors of the Company, and his spouse (collectively, the “Lender”) pursuant to which the Company sold a secured promissory note (the “Note”) to the Lender in the aggregate principal amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on the first anniversary date of the issuance with a 2% prepayment penalty. To secure the obligations of the Company under the Note, the Company granted the Lender a first priority security interest in the accounts receivable of the Company and its subsidiaries located in the United States of America on a one-for-one (1:1) basis.

 

88
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

In connection with the execution of the Loan Agreement, on August 13, 2012, the Company issued the Lender a common stock purchase warrant (the “Warrant”), pursuant to which the Lender is entitled to purchase 100,000 shares of common stock at an exercise price of $0.35 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

On October 26, 2012, the Company entered into a Note Purchase and Security Agreement pursuant to which the Company sold a secured promissory note to the Lender in the aggregate principal amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on the first anniversary date of the issuance with no prepayment penalty. To secure the obligations of the Company under the Note, the Company granted the Lender all the Company’s right, title and interest in and to its shares of one of its subsidiaries, namely IDC Global, Inc.

 

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

 

On November 30, 2012, the Company entered into a two Note Purchase and Security Agreement pursuant to which the Company sold two secured promissory notes to two separate lenders in the aggregate principal amount of $1,000,000 bearing interest at a rate of 20% per year and maturing on the first anniversary date of the issuance with no prepayment penalty. To secure the obligations of the Company under the Note, the Company granted the lenders all the Company’s right, title and interest in and to its shares of one of its subsidiaries, namely IDC Global, Inc.

 

In connection with the execution of the Loan Agreement, on November 30, 2012, the Company issued the lendesr a common stock purchase warrant, pursuant to which the lender are entitled to purchase 500,000 shares of common stock at an exercise price of $0.20 until the third anniversary date of the date of issuance. The Warrant was issued in a private transaction between the Company and the Lender and was exempt from registration under the Securities and Exchange Act of 1933, as amended, pursuant to Section 4(2) thereof.

 

89
 

 

Notes to the Consolidated Annual Financial Statements

December 31, 2012

GBS Enterprises Incorporated

(Audited)

 

A breakdown of the Notes Payable as at December 31, 2012 is as follows:

 

   Date of  Principal   Interest   Total   Due Date
   Loan      Accrued         
      $   $   $     
   2012-07-05   50,000    2,084    52,084   2013-01-05
   2012-07-05   250,000    10,421    260,421   2013-01-05
   2012-07-05   252,500    10,526    263,026   2013-01-05
   2012-08-13   1,000,000