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| IBIN.PK > SEC Filings for IBIN.PK > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Management's Discussion and Analysis of Consolidated Results of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the consolidated financial statements included herein. Further, this quarterly report on Form 10-Q should be read in conjunction with the Company's Consolidated Financial Statements and Notes to Consolidated Financial Statements included in its 2007 Annual Report on Form 10-KSB. In addition, you are urged to read this report in conjunction with the risk factors described herein.
Overview
IBSG International, Inc. (IBSGI) is a holding company for four software subsidiaries: Intelligent Business Systems Group, Inc. (IBSG), a provider of turn-key digital service center software; Secure Blue, a Sarbanes-Oxley (SOX) and security software solution provider, and Intelligent Business Systems Development Inc. (IBSD), a software development, maintenance and data storage company and IBSGI UK, LTD. (IBSGI UK), a consultant company focused on development of informational technology (IT) projects for multi-national corporations.
IBSG offers BizWorld Pro, a copyrighted and trademarked e-commerce platform, as a solution to enhance the operating efficiency and create revenue for State Small Business Development Centers (or their profit making equivalents), business associations (e.g., Chambers of Commerce) and Fortune 1000 corporations through the licensing of its unique turnkey digital service center software. This software provides a broad range of digital budgetary, administrative and commercial services (B2B, e-commerce, government to business and enterprise business services) on a single platform.
Secure Blue provides an economical SOX compliance and security software suite product called Secure Blue Pro. This product is targeted to small and mid cap public companies as well as private companies that work with public companies that therefore must comply with SOX requirements.
IBSD provides ongoing support for our other subsidiaries; IBSG, Secure Blue, and IBSGI UK. The subsidiary provides development, system support and secure data storage, and maintains offices in both the US and India, where its current offshore development and support team is located.
IBSGI UK, a United Kingdom based subsidiary, provides business development and support to IBSGI's international projects. IBSGI UK maintains relationships with several international government officials at the ministry/secretary level as well as international corporations' offset programs and provides IT projects for these corporations. IBSGI UK is engaged in international business development and consultancy in the technology sector. IBSGI UK's participates in international e-commerce platform (BizWorld Pro, copyrighted and trade mark protected) projects for Small-Midsized Enterprises 'SMEs'. IBSGI's relationship with IBSGI UK has already produced a project in South Africa along with opportunities for similar projects in Africa, Europe, and India.
As software providers, system integrators and application service providers, IBSG generates revenue from license sales, system modifications, systems support, and a percentage of monthly customer fees if and when a license is sold. The typical IBSG license agreement has a five-year term; however, the agreements are updated annually and have historically been renewed upon expiration. Secure Blue is currently a dormant subsidiary and the SOX solution is anticipated to be incorporated into the BizWorld Solution and offered as a Sarbanes-Oxley solution for an additional monthly cost per business as an optional feature. IBSGI UK, in conjunction with IBSGI, generates all international contract revenues. IBSD supports the business initiatives of all other subsidiaries and IBSGI and does not generate revenue.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. A critical accounting policy is one that is both very important to the portrayal of
Our financial condition and results, and requires management's most difficult, subjective or complex judgments. Typically, the circumstances that make these judgments difficult, subjective and/or complex have to do with the need to make estimates about the
effect of matters that are inherently uncertain. We believe the accounting policies below represent our critical accounting policies:
• Revenue recognition;
• Deferred revenue; and
• Accounts receivable, allowance for doubtful accounts and sales returns
General
The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as modified by SOP 98-9 "Modifications of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions", and interpreted by the Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 104 "Revenue Recognition". The Company has also adopted Emerging Issues Task Force ("EITF") No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables".
The Company does not recognize revenue on software related transactions on single element arrangements and on each element of a multiple element arrangement until all of the following criteria are met:
1. Persuasive evidence of an arrangement exists, which consists of a written, non-cancelable contract signed by both the customer and us;
2. The fee is fixed or determinable when we have a signed contract that states the agreed upon fee for our products and/or services, which specifies the related payment terms and conditions of the arrangement and it is not subject to refund or adjustment;
3. Delivery Occurs:
a. For licenses-due to the Web nature of our software, when access to the software is made available to our customer through the Internet or the software is delivered electronically. Our arrangements are typically not contingent upon the customer providing the hardware, staff for training or scheduling conflicts in general nor do our arrangements contain acceptance clauses.
b. For post-contract customer support-ratably over the annual service period.
c. For professional services-as the services are performed for time and materials contracts or upon achievement of milestones on fixed price contracts.
4. Collection is probable as determined by a credit evaluation, the customer's payment history (either with other vendors or with us in the case of follow-on sales and renewals) and financial position.
Master license arrangements typically represent large value "multiple element" arrangements where the multi-year term license is packaged only in the first year with post contract support (PCS) and certain professional services. PCS includes technical support, maintenance, enhancements, upgrades and, in some cases system access. Satellite license arrangements are typically structured similarly to the corresponding master license but the fees are less as it is technically a sub-contract of the master license. Master license holders can accept delivery either by electronic download to their system or by accessing their software residing on our system through the Internet. Only minimal installation and training is required. PCS subsequent to year one is optional and renewable at a customer's discretion on an annual basis. Professional services include training and installation services are accounted for separately as they are not considered essential to the functionality of the software.
License Revenue
License revenues are primarily generated from the sale of multi-year master license agreements to SBDCs (or their profit making equivalents) and other potential master licensees. License arrangements are typically sold with the PCS being delivered in the first year only. PCS subsequent to year one is optional and renewable at a customer's discretion on an annual basis. As such, the combination of these products and services represent a "multiple-element" arrangement for revenue recognition purposes in year one only.
Our revenue recognition policy for multiple-element arrangements, as described above, generally results in 65% of arrangement fee in year one being allocated to license revenue, the delivered element. Recognition of license revenue occurs in the first month, once all the recognition criteria discussed above are met. License revenue is intended to cover the initial development cost and testing of the software and the system.
Post-Contract Support ("PCS") Revenue
Post-contract support includes technical support, maintenance, enhancements, upgrades and in some cases system access. License arrangements are typically sold with only the first year of PCS included. Subsequent to year one, customers can purchase annual PCS renewals over their arrangement term, which is typically five years domestically, four years internationally. Enhancements and upgrades are made available on a "when and if" basis and are rarely if ever based on specifically identified enhancements.
Our revenue recognition policy for multiple-element arrangements, as described above, generally results in 35% of the initial arrangement fee being allocated to PCS in year one, the undelivered element at the time the license arrangement is entered into. Customers can elect, subsequent to year one, to acquire PCS on an annual basis. The combination of these products and services represent a "multi-element" arrangement for revenue recognition purposes in year one only. Recognition of PCS revenue occurs ratably over the PCS service period, once all the recognition criteria discussed above are met.
Professional Services Revenue
Professional services include training and installation services. Training and installation are separately described and priced in the license arrangement and can be delivered at any time after the license has been conveyed.
Because of the Web nature of product delivery, little installation support is required. The System also includes extensive on-line training capabilities (Virtual Trainer) at the time the license is conveyed and is available for every page in the System. No additional formal training on System use is required or provided. Supplemental training, if required, is generally restricted to System administration training. Training revenues are recognized as the services are performed.
Professional services are not considered essential to the functionality of the other elements of the arrangement and are accounted for as a separate element. Professional services are recognized as the services are performed for time and materials contracts or upon achievement of milestones on fixed price contracts. A provision for estimated losses on fixed-price professional services contracts is recognized in the period in which the loss becomes known. No losses have been recorded to date.
Deferred Revenue
Deferred revenue result from fees billed to customers for which revenue has not yet been recognized or for which the conditions of the arrangement have been modified. Current deferred revenue generally represents PCS and training services not yet rendered and deferred until all requirements under SOP 97-2 are satisfied. Deferred revenue, net of current portion represents license fees for which the conditions of the arrangements have been modified, and which represent previously recognized revenues specifically associated with certain older contracts which have been restated and will be deferred until such time as all SOP 97-2 requirements have been satisfied.
Market for our products
The potential market for the BizWorld Pro includes any entity that has a customer, vendor or membership base comprised of small to mid size business enterprises. Alternatively, the potential markets for Secure Blue are public companies which are required to establish internal control systems or companies that require tracking of sensitive files. All current and projected revenues for the Company are associated with the digital commerce platform, BizWorld Pro and the recurring revenues projected from both license revenues and ongoing monthly subscription fees from small to mid-sized enterprises. The projected market size for BizWorld Pro is greater than $15 billion annually. No assurances can be made that such market shall be realized or result in profitability.
The market for the BizWorld Pro includes state operated small business development centers (or their profit making equivalents), business organizations such as chambers of commerce, large corporations, and other entities which seek to help small and medium size businesses succeed. When IBSG sells a master license to a state small business development center or business association (i.e. chambers of commerce), that entity can sell "satellite-licenses" to the other vertical markets in their respective states or markets, from
which IBSG, Inc. or IBSGI UK may derive incremental revenue. This market represents a projected $2.5-$3.5 billion exclusive of international application. No assurances can be made that such market shall be realized or result in profitability.
Small Business Development Centers (SBDCs)
Many states, in the United States (US), operate Small Business Development Centers funded by a combination of US Small Business Administration and state resources. The purpose of these centers is to provide a range of assistance and training to the small and mid-size business sector. Many of the SBDCs have a profit making equivalent or are partners in a profit making entity. We currently have a license agreement with 11 such entities.
Fortune 1000 Corporations
Master license holders seek to sell Corporate Sponsor satellite licenses to Fortune 1000 corporations for procurement purposes (i.e. RFPs or Tenders thru award of a bid). The license price is dependent on the size of the corporation and the number of RFPs/Tenders issued. The license provides the Corporation with unlimited access to the constituent's pool of SMEs in order to facilitate the large corporation's recruitment of small businesses as vendors. The System platform permits end users to interact not only with these large corporations, but also among each other.
Government Agencies
Other government agencies routinely purchase a satellite license to use the system for procurement purposes. When these licenses are sold they are primarily for use of the Bid Management functions of the system. This is/has been viewed by many local government municipalities and ministries (internationally) as a means of centralizing all procurements activities. As such, any government vendor or vendor of a municipality would be compelled to join the platform as a subscriber in order to be positioned for future government RFPs/tenders.
Business Associations
The BizWorld Pro is licensed to other business associations such as local Chambers of Commerce, which has membership or offer services to small and medium size businesses as a way of providing additional services and generates additional revenues.
Banking Institutions
Many major banking institutions maintain divisions specializing in providing banking services to small-to-medium sized businesses. These banks can add BizWorld access to their customers to encourage their use of the internet to grow their businesses, add another revenue stream to their own business services offerings, and create an excellent new communication tool whereby the bank can pursue enhanced revenue relationships for their existing service offerings.
Economic Development Projects
These markets reflect a combination of the above market needs. The BizWorld Data System can provide them with similar benefits and the ability to create multiple associations with the other markets in a similar fashion as previously described.
Foreign Markets
In 2004 we signed a license agreement with an agency of the country of Nigeria. We have since positioned the product as a national solution for the support and development of the small to mid size business community (SMEs), as a centralized procurement center not only for government but large corporations and provide access to the same by larger corporations and government entities. By providing the ability to manage developing businesses on the internet while creating a robust internet presence, small to mid size businesses will be enabled for domestic and international business. Additional business development efforts through IBSGI UK are underway with various foreign governments although no assurances can be given that any new business will materialize from these efforts.
Secure Blue Markets
Secure Blue targets small to mid size cap public companies. Because of the broad encompassing nature of the SOX legislation, any private company doing business with a public company, both in the US and abroad, must be SOX compliant for those records dealing with that business. This market represents a projected value of $3-$4 billion. Currently in the US there are an estimated 10,000 small cap companies and over 10,000 private companies doing business with public companies. No assurances can be made that such market shall be realized or result in profitability.
International Markets
Many aspects of the Sarbanes-Oxley Act have been incorporated into new European legislation which led to a large global market for SOX solutions that far exceeded US projections. Additionally, foreign companies doing business with US public companies are also required to be SOX compliant as well. It is our objective to establish Secure Blue in the US before expanding into European and Asian markets.
Sales & Market Strategy
IBSG's marketing efforts primarily consists of "word of mouth" referrals from existing or potential customers, targeted prospect awareness campaigns, various conventions and trade shows and cold calling entities with resources and marketing research. The most effective and powerful marketing tool is the demonstration of the system and its comprehensive features. We have determined that demonstrations and contract negotiations are most effective when handled on a personal basis.
To achieve our growth plans, IBSG and IBSGI UK needs to employ more business developers, present a more visible presence at conventions, accelerate contract implementation, and acquire and import database information of SMEs/vendors from license holding entities. We also anticipate the need to provide enhanced training and marketing services to our customers, which can best be achieved by acquiring existing service companies with expertise in that field. Additional technical staff will accelerate contract implementation and add-on work (system modifications) as the customer base is extended. There can be no assurance that we will be able to meet our growth plans or have sufficient financial resources to provide the enhanced services.
Secure Blue was launched in mid-April of 2005. One month later in May 2005, we began a series of online, live demonstrations to potential channel partners (i.e. accounting and law firms, brokerage firms and potential end users). Our distribution strategy has been to develop third-party channels to publicly traded companies through professional advisors. These include investor relations firms, law firms, accountancy firms, banks, compliance consultancies, corporate finance advisors, venture capital companies and other strategically important organizations. We are approaching these potential channel partners individually and demonstrating SOX Pro live online to create a dialogue leading to long-term business partnerships. We will continue to focus our sales activity on third-party channels until we are satisfied we can achieve significant traction in the market place.
We continue to promote and demonstrate SOX Pro to potential end-users where appropriate. In the longer term we have plans to build a specialist direct sales team focused on specific target sectors within the small/mid cap market selling direct or providing qualified leads to our channel partners. There can be no assurance that Secure Blue will be able to establish satisfactory channels of distribution for its product or that the product will generate success in the marketplace.
Marketing, Sales and Support
We market our products primarily through direct contact of potential customers, referrals from existing customers or potential customers and conferences that are market specific. The key to the marketing of the various products is the ability under the BizWorld product to enable customers to act as channel partners through the ability to sell satellite-licenses of the system and provide revenue generating digital service centers to their customers or members. By utilizing the existing relationships between the various government agencies and/or corporate and business associations and the end user, individual small-mid size businesses (enterprises), referred to as SMEs, the Company market through the licensing entities existing marketing or public relations communication lines rather than directly to the SMEs. This is marketing practice is critical to the long term revenue stream established by the Company. End user pay a monthly subscription fee which are based on a minimum of $20/month/SME (€20 /month in the European countries) of which the Company average revenue share is 50%-55%.
Secure Blue uses a direct market application focusing primarily on the small cap public companies. Secure Blue seeks to establish channel partner arrangements with investor relation firms that primarily target the small cap market. Secure Blue also seeks to expand its marketing efforts to include telemarketing, and direct target contact through telemarketing firms that specializes in software sales. There can be no assurance that Secure Blue will be able to establish satisfactory channels of distribution for its product, or that the product will generate success in the marketplace. Secure Blue also seeks to expand its marketing efforts to include marketing support for both channel partners and direct sales using PR, advertising, and direct marketing techniques, once the basic distribution infrastructure is in place. Our aim is to make SOX Pro the preferred SOX solution within the small/mid cap market, to prepare the marketplace for our channel partners, and to generate good quality, qualified leads for the sales teams.
IBSG will employ several consultant services to secure independent programming contracts. The Company will also employ a small force of business developers to develop direct business for the Company. Most of IBSD's revenue is derived from sub contracting opportunities in the areas of maintenance, hosting, and support for IBSGI's other subsidiaries.
Customer Support
Our management believes that strong customer support is crucial to both the initial marketing of its products and maintenance of customer satisfaction, which in turn will enhance our reputation and generate repeat orders. In addition, we believe that customer interaction and feedback involved in our ongoing support functions provide us with information on market trends and customer
Requirements that is critical to future product development. IBSG and IBSGI UK provides toll free and web site support. However, the first line of support is built into the systems through a virtual trainer and self diagnostic feature which is enhanced by the system's ability to provide instructions to navigate a user error or auto report a potential system "bug". When a system "bug" is detected, it is directed to the technical center's program team which can correct the anomaly on-line and auto down load the correction to all systems. The virtual trainer describes the purpose of each page to the end user, uses animation to instruct the end user on how to complete the page, and provides suggestions on where to go to next in the system. This should provide for minimum end user confusion which statistically makes up the majority of on-line help calls (Microsoft 2005; Oracle 2006).
Secure Blue believes that effective and speedy customer support is crucial to the long-term success of SOX Pro. As a mission-critical application, SOX Pro must be totally reliable and the support available must be of the highest order, including 24/7 support as an integral part of the SOX Pro package with an ongoing annual fee based upon a percentage of the first years license cost. Our team, based in Florida, will provide technical support for end users and channel partners.
Research and Development
We believe that our success will depend in large part on our ability to maintain and enhance our current product lines, develop new products, maintain technological competitiveness and meet an expanding range of customer requirements. Our management and technical team under IBSD are constantly searching for frontier technology from numerous sources and maintain relationships with several larger technology firms, such as Microsoft, as a test bed for emerging technologies. Additionally, the business development and project implementation teams from both IBSG and IBSGI UK request and receive comments on desired functionality or system changes from not only the Company's customers but the customer's customer. Our management also intends to hold focus groups by taking a sample population of customers and discussing in an open forum the potential revisions of the various systems.
Competition
Our management believes that we are the leading provider of digital commerce and management systems for small and medium businesses (enterprises; SMEs) provided over the internet. However our products compete against a variety of "niche" individual software programs designed to provide a small percentage of similar functions for small and medium sized business users (i.e. web site builders). Additionally, various limited functions can be found through internet portals such as Yahoo. Many internet hosting providers' help their customers set up e-commerce sites and provide software for such sites.
The marketplace is full of so-called point products offering solutions to various elements of Sarbanes-Oxley compliance. Virtually all of these solutions are heavily biased in price and complexity toward the larger corporation. Secure Blue has a major cost advantage over the competition and is a more comprehensive SOX solution. We have built the solution on a comprehensive and proven security software solution and added sophisticated enhancements such as the PDA access for compliant and sub compliant officers to have access to data on activity of sensitive information. This provides our customer with the required base criteria of SOX which is a secure network with sophisticated functionality of SOX specific monitoring. The majority of the competition has established distribution infrastructures built on a range of existing and complementary products. We are confident that we can leverage the success of the other . . .
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