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GBSX > SEC Filings for GBSX > Form 10-Q on 21-Nov-2012All Recent SEC Filings

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Form 10-Q for GBS ENTERPRISES INC


21-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Note Regarding Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in the Quarterly Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the "Risk Factors," "Cautionary Notice Regarding Forward-Looking Statements" and "Description of Business" sections in the Company's 10-K for the fiscal year ended March 31, 2012. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "predict," and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these statements. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

OVERVIEW

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

The Company's Common Stock is quoted on the OTC Bulletin Board under the ticker symbol, "GBSX."

Products and Services

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

Historically, GROUP has achieved growth through acquisition by targeting underperforming companies with complimentary operations and leveraging GROUP's expertise to successfully turnaround and integrate these targets. Key success factors for this strategy are: enhanced portfolio, positioning GROUP as the 'one-stop-shop' for Lotus applications and services, expanded customer support, fast code migration, and cloud enablement/XPages conversion of acquired applications. Going forward, the Company will focus on potential acquisition targets in the following areas of software and services: Applications, Professional Services, Hosting/Outsourcing Services, Administration and IT services, and XPages expertise.

Messaging and Business Applications Software & Solutions

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

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

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

Consulting Services

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

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

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

As a Premier IBM Business Partner GBS is one of the few partners that can sell and support licenses for all five IBM software brands: Lotus, WebSphere, Rational, Tivoli, and DB2.

Cloud Computing

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

1) GROUP Live - Cloud Automation Platform / Cloud Platform-as-a-Service (PaaS) software and services. and

2) Modernizing/Migrating - Lotus Notes modernization/migration services and technology accelerators

GBS Cloud Computing activities are focused on cloud automation solutions and therefore the Company has made acquisitions and R&D investments to create an award winning Cloud Platform-as-a-Service offering. Under the GROUP Live banner, the GBS PaaS offering has been sold to a variety of enterprise customers, which use the PaaS software to host internal corporate clouds (Private cloud) and applications as-a-service to their various internal user groups. GROUP Live has also been sold and implemented by a number of Independent Software Vendors (ISVs), which are leveraging the platform to deliver their own Software-as-a-Service (SaaS) applications to their respective customer bases.

Both of these customer groups enjoy the comprehensive nature of this platform agnostic PaaS solution and its exceptional change management capabilities, enabling resource flexibility, business agility, scalability and ease-of-use beyond that which is generally available in the market today.

GBS Lotus Application Modernization and Migration

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

Revenue Model

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

Strategy and Focus Areas

We see a high potential to achieve growth by successfully integrating our strategic portfolio with our core competences. Based on current market demands for modern, Cloud-based and mobile-device capable business applications, we have acquired and developed a set of unique technologies that help organizations reduce the time, cost, resources and risks associated with modernizing or migrating their existing applications.

We generate revenue with our cloud automation platform from subscription and usage fees and related services, including support and strategic consulting services. The subscription period is typically based on a yearly or multi-year contract with our customers. Additionally, we generate revenue from consulting around utilizing our cloud platform services.

Another sector of our strategic portfolio is a suite of tools and methodologies we have developed to rapidly convert Lotus Notes applications into web and mobile applications through automated conversion processes. This portfolio includes a set of powerful analysis tools known as Insights that identify all of the Lotus Notes applications within an organization and provide metrics about the uses and users of those applications. Because of the nature of Lotus Notes and Domino, the applications within a customer environment tend to be highly distributed and number in the thousands. For many organizations, this fact alone makes it extremely difficult to plan for projects that involve modernizing these applications for use in a browser and on mobile devices or migrating them to another platform. Our technologies help them to dramatically reduce the cost, risk, time and resources associated with these highly complex projects.

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

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

General Corporate History

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

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

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

About Lotus Holdings, Ltd.

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

SPPEFs

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

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

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

Transactions following the April 26, 2010 Acquisition

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

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

Reverse Merger

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

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

Additional Acquisitions

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

Subsidiary Companies

Pavone AG

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

GroupWare, Inc.

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

IDC Global, Inc.

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

SD Holdings, Ltd.

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

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

GBS India Private Limited

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

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

Pavone AG/Groupware AG

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

Pavone, Ltd.

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

Overview of Cloud Computing Technology and Industry Trends

Cloud computing is a general term for anything that involves delivering hosted services over the Internet. These services are broadly divided into three categories: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS).

IaaS providers have massive data centers that can handle the data run over the cloud, the largest of which is Amazon.com. IBM also participates in this business and hosts GROUP Live. PaaS providers offer the actual cloud platform that runs on the IaaS data centers and can deploy the applications (SaaS products). Some of the leading PaaS providers include Amazon Web Services, Microsoft Azure Services Platform, Google App Engine, and Rackspace Cloud, along with GBS's GROUP Live products. SaaS delivers applications on the cloud, which simplify product licensing and maintenance. The SaaS market was first filled by a number of CRM (Customer Relationship Management), ERP (Enterprise Risk Management) and email applications but has spread into nearly all other types of software. Leading providers in this space include Salesforce.com, Google and Zoho as well as IBM's Lotus Live suite.

Over the past five years, there has been a migration from on-premise hardware and software to cloud computing which allows companies to increase efficiency and reduce cost by paying for software and hardware use on a subscription basis. In this model, IT managers are able to rent server capacity on an as-needed basis from a third party, instead of managing a data center on-premise, and purchasing up-to-date licenses for software based on real-time, instead of purchasing bundles of licenses or software and upgrading when updates are released.

Competition

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

The Company is focused on developing a portfolio of Cloud Computing software technologies and Application Services to address the needs of Independent Software Vendors (ISV), Data Center providers, as well as commercial and government organizations.

Results of Operations

Assets:

. . .

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