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GBSX > SEC Filings for GBSX > Form 10-Q on 13-Jun-2013All Recent SEC Filings

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Form 10-Q for GBS ENTERPRISES INC


13-Jun-2013

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 latest Annual Report on Form 10-K and subsequent filings. 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. Headquartered in Eisenach, Germany, GROUP 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.

Products and Services

GBS has consolidated 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 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 may 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.

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 a 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 related customer projects. 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, which will assist client companies as they move to scale and adapt while remaining cost conscious.

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 to 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-pended software that underpins Modernizing/Migrating was developed by GBS with assistance and guidance from IBM'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.

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 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 a 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.

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 Stock Purchase Agreement, we sold 100% of the issued and outstanding capital stock of IDC to GTT for an aggregate purchase price of $4,600,000 (the "Purchase Price"), subject to certain holdback provisions amounting to $1.093 million as described more fully in the Stock Purchase 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.

We had acquired IDC on July 25, 2011 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. Due to the Company's perceived increase in the demand for Modernization, Mobility and Optimization offerings, the Company made a strategic decision in 2012 to focus on its core offerings in the IBM Notes and Domino market and to divest its non-core businesses, including IDC.

General Corporate History

The Company was originally incorporated in the state of Nevada on March 20, 2007 as SWAV Enterprises Ltd. ("SWAV"). SWAV was in a different industry and had a different management team and Board of Directors.

On April 26, 2010, SWAV purchased certain technology assets of Lotus Holdings Ltd. ("Lotus") in consideration for 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 SWAV common stock from certain selling shareholders of SWAV for an aggregate purchase price of $370,000. As a result of these two sets of transactions, Lotus acquired an aggregate of 14,250,010 shares of SWAV common stock which constituted approximately 95.0% of the 15,000,000 outstanding shares of SWAV common stock on April 26, 2010.

Upon the consummation of the April 26, 2010 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. Mr. Ott currently serves as the Chairman of the Board of Directors of GBSX and the Chief Executive Officer of GROUP.

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.

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, we acquired an additional 883,765 shares of GROUP common stock for $619,000 in order to maintain our 50.1% majority ownership of GROUP due to an increase in 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.

Results of Operations

Assets:

Total Assets decreased from $56,802,492 at December 31, 2012 to $ 48,969,459 at March 31, 2013. Total Assets consists of Total Current Assets and Total Non-Current Assets.

Total Current Assets

At March 31, 2013, Total Current Assets were $5,177,691 as compared to $6,444,192 at December 31, 2012. Total Current Assets consist of: Cash and Cash Equivalents, Accounts Receivable, Prepaid Expenses, Other Receivables-current and Assets Held for Sale.

n Cash and Cash Equivalents decreased from $1,154,602 at December 31, 2012 to $738,369 at March 31, 2013 as a result of our investments in strategic technology areas such as application migration and modernization, cloud technology, the associated costs necessary to build and implement the go- to- market strategy and losses in operations.

n Accounts Receivable decreased from $4,143,448 at December 31, 2012 to $3,205,807 at March 31, 2013 due to increased collections and less sales.

n Prepaid Expenses increased from $84,304 at December 31, 2012 to $214,435 at March 31, 2013 from prepaid rent, insurance and advances on technological events.

n Other Receivables-current increased from $676,976 at December 31, 2012 to $1,019,080 at March 31, 2013 and includes receivables from the sale of IDC Global, Ltd. of approximately $ 517,000, a receivable from a previous insolvency of approximately $439,000, tax assets of approximately $37,000 and prepaid costs of approximately $26,000.

n Assets Held for Sale decreased from $384,862 at December 31, 2012 to $Nil at March 31, 2013 as a result of the sale of IDC Global.

Total Non-Current Assets

At March 31, 2013, Total Non-Current Assets were $43,791,768 as compared to $50,358,300 at December 31, 2012. Total Non-Current Assets consist of: Property Plant and Equipment, Other Receivables-non current, Deferred Tax Assets, Goodwill, Software, Other Assets and Assets Held for Sale.

n Net Property (plant and equipment) decreased from $332,839 at December 31, 2012 to $317,771 at March 31, 2013.

n Other Receivables non-current decreased from $428,422 at December 31, 2012 to $1,154 at March 31, 2013 as a result of derivatives used for hedging which were divested in the sale of subsidiary SD Holdings.

n Deferred Tax Assets increased from $1,132,103 at December 31, 2012 to $1,104,222 at March 31, 2013 and consisted of Deferred Tax Assets derived from financial assets and losses carried forward.

n Goodwill decreased from $34,254,881 at December 31, 2012 to $31,260,500 at March 31, 2013. The decreased in goodwill of $ 2,994,381 resulted from the sale of the subsidiary IDC Global during the quarter.

n Software decreased from $12,207,031 at December 31, 2012 to $10,947,781 at March 31, 2013, as a result of the quarterly re-calculation of capitalized development costs, product rights and license for our expert business software, legacy business software and strategic business software all in the developmental or improvement stage.

n Other Assets increased from $156,379 at December 31, 2012 to $160,340 at March 31, 2013. This category includes rent and other security deposits.

n Assets Held for Sale decreased from $1,846,645 at December 31, 2012 to $Nil at March 31, 2013 as a result of the sale of IDC Global.

Liabilities

Total Liabilities decreased from $22,269,059 at December 31, 2012 to $16,586,123 at March 31, 2013. Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

Total Current Liabilities

At March 31, 2013, Total Current Liabilities were $13,861,989, compared to $18,227,184 at December 31, 2012. Total Current Liabilities consist of Notes Payable, Liabilities to Banks, Accounts Payable and Accrued Liabilities, Deferred Income, Other Liabilities, Amounts Due to Related Parties and Liabilities Held for Sale.

n Notes Payable decreased from $2,313,572 at December 31, 2012 to $260,421 at March 31, 2013 based on repayments of short terms loans during the quarter.

n Liabilities to Banks increased from $6,774 at December 31, 2012 to $9,293 at March 31, 2013 and included a line of credit and cash in transit.

n Accounts Payable and Accrued Liabilities decreased from $6,241,733 at December 31, 2012 to $3,662,133 at March 31, 2013. The decrease was due to the reduction of trade payables by approximately $1,367,000 and a decrease in accrued liabilities of approximately $1,213,000 by repayment and as a result of the sale of subsidiary IDC Global.

n Deferred Income increased from $6,099,570 at December 31, 2012 to $8,852,860 at March 31, 2013, generally as a result of maintenance income collected in advance.

n Other Liabilities of $860,032 at December 31, 2012 decreased to $800,740 at March 31, 2013 and includes $320,000 due for purchased software, $538,000 for purchased companies (Permessa) and tax credits of ($57,000).

n Amounts Due to Related Parties decreased from $2,115,869 at December 31, 2012 to $276,542 at March 31, 2013 as a result of payments to related parties during the quarter.

n Liabilities Held for Sale decreased from $589,634 at December 31, 2012 to $Nil at March 31, 2013 as a result of the sale of IDC Global.

Total Non-Current Liabilities

At March 31, 2013, our Total Non-Current Liabilities were $2,724,134, compared to $4,041,875 at December 31, 2012. Total Non-Current Liabilities consist of Liabilities to Banks, Deferred Tax Liabilities, Retirement Benefit Obligation, and Liabilities Held for Sale.

n Liabilities to Banks decreased from $3,716,102 at December 31, 2012 to $2,563,260 at March 31, 2013 as a result of partial payments, and included a long-term business loan/line of credit due to the Baden-Württembergische Bank, Stuttgart, Germany.

n Retirement Benefit Obligation decreased from $165,876 at December 31, 2012 to $160,874 at March 31, 2013.

n Deferred Tax Liabilities remained unchanged from $Nil at December 31, 2012 to $Nil at March 31, 2013.

n Liabilities Held for Sale decreased from $159,898 at December 31, 2012 to $Nil at March 31, 2013 as a result of the sale of IDC Global in February, 2013.

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Revenues

For the three months ended March 31, 2013, our total revenue decreased to $5,224,379 from $6,952,049 for the three months ended March 31, 2012.

The Company generates revenue from two divisions. The Product division of Revenues includes revenue generated from the sale of Licenses, Maintenance, Third-Party Products, and Other revenues. The Service division includes revenue generated from services rendered.

The Product division decreased to $4,373,010 for the three months ended March 31, 2013 from $5,593,365 for the three months ended March 31, 2012, a decline of $1,220,354 or 21.82%. The primary factors contributing to the decline were decreases in License revenues of $317,876, Third Party Product revenues of $914,196 and Other revenues of $22,154Company saw an increase in Maintenance revenue of $33,872 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease in License sales was equally split between the European (-$158,097) and the North American operations (-$159,779) of the Company. This is mainly as a result of economic conditions causing an increase in the sales cycles, whereby strategic customers are giving greater consideration towards the modernization/migration of their current application platform. While such an investment decision might affect the core business of the Company and a decrease in License sales, it also ideally creates potential service engagements for our migration/modernization offerings.

Service revenue decreased from $1,358,684 for the three months ended March 31, 2012 to $851,369 for the three months ended March 31, 2013 mainly as a result of the strategic reorganization allowing for an intensified focus around servicing the modernization, mobilizing and migration market.

Cost of Goods Sold

For the three months ended March 31, 2013, total Cost of Goods Sold decreased to $3,101,698 from $4,173,174 for the three months ended March 31, 2012.

The Company's Cost of Goods Sold are segmented into two divisions. The first are costs related to the Product division of revenue which includes the total cost of materials. The second are the costs related to the Service division of revenue which includes; other operating expenses, depreciation & amortization expense, and personnel expenses.

Within the Costs of Goods Sold related to the Product division the Company was able to achieve a reduction in total cost of materials from $1,916,624 to $ 857,275 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The primary factors contributing to the Company's . . .

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