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GBSX > SEC Filings for GBSX > Form 10-Q on 1-Jul-2013All Recent SEC Filings

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Form 10-Q for GBS ENTERPRISES INC


1-Jul-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 38 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 also 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.

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. The Company's common stock is currently quoted on the OTC Markets' OTCQB under the symbol 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 increased from $60,502,276 at December 31, 2010 to $76,979,410 at March 31, 2011. Total Assets consists of Total Current Assets and Total Non-Current Assets.

Total Current Assets

At March 31, 2011, Total Current Assets were $16,412,559 as compared to $10,988,106 at December 31, 2010. 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 increased from $1,872,068 at December 31, 2010 to $9,031,340 at March 31, 2011 as a result of our investments in strategic technology areas such as application migration and modernization, and cloud technology.

n Accounts Receivable decreased from $5,712,157 at December 31, 2010 to $4,896,092 at March 31, 2011 due to increased collections and less sales.

n Prepaid Expenses increased from $1,420,662 at December 31, 2010 to $1,648,093 at March 31, 2011 from prepaid rent, insurance and advances on technological events.

n Other Receivables-current decreased from $1,983,219 at December 31, 2010 to $837,034 at March 31, 2011.

n Assets Held for Sale remained unchanged, from $Nil at December 31, 2010 to $Nil at March 31, 2011.

Total Non-Current Assets

At March 31, 2011, Total Non-Current Assets were $60,566,850 as compared to $49,514,170 at December 31, 2010. 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) increased from $297,011 at December 31, 2010 to $320,117 at March 31, 2011.

n Other Receivables non-current remained unchanged, from $Nil at December 31, 2010 to $Nil at March 31, 2011.

n Deferred Tax Assets increased from $257,859 at December 31, 2010 to $2,027,609 at March 31, 2011 and consisted of Deferred Tax Assets derived from financial assets and losses carried forward.

n Goodwill increased from $31,004,262 at December 31, 2010 to $39,688,967 at March 31, 2011.

n Software increased from $16,360,884 at December 31, 2010 to $16,900,047 at March 31, 2011, 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 $223,780 at December 31, 2010 to $228,544 at March 31, 2011. This category includes rent and other security deposits.

n Assets Held for Sale remained unchanged, from $Nil at December 31, 2010 to $Nil at March 31, 2011.

Liabilities

Total Liabilities increased from $22,369,941 at December 31, 2010 to $25,271,947 at March 31, 2011. Total Liabilities consists of Total Current Liabilities and Total Non-Current Liabilities.

Total Current Liabilities

At March 31, 2011, Total Current Liabilities were $18,533,337, compared to $15,330,583 at December 31, 2010. 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 increased from $1,441,263 at December 31, 2010 to $1,516,381 at March 31, 2011 based on additional short terms loans during the quarter.

n Liabilities to Banks decreased from $50,358 at December 31, 2010 to $42,236 at March 31, 2011 and included a line of credit and cash in transit.

n Accounts Payable and Accrued Liabilities decreased from $4,804,434 at December 31, 2010 to $3,564,922 at March 31, 2011.

n Deferred Income increased from $6,212,630 at December 31, 2010 to $10,503,660 at March 31, 2011, generally as a result of maintenance income collected in advance.

n Other Liabilities increased from $2,821,898 at December 31, 2010 to $2,906,138 at March 31, 2011.

n Amounts Due to Related Parties remained unchanged, from $Nil at December 31, 2010 to $Nil at March 31, 2011.

n Liabilities Held for Sale remained unchanged, from $Nil at December 31, 2010 to $Nil at March 31, 2011.

Total Non-Current Liabilities

At March 31, 2011, our Total Non-Current Liabilities were $6,738,610, compared to $7,066,358 at December 31, 2010. 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 $780,801 at December 31, 2010 to $Nil at March 31, 2011 as a result of repayments on a long-term business loan/line of credit due to the Baden-Württembergische Bank, Stuttgart, Germany.

n Retirement Benefit Obligation decreased from $154,065 at December 31, 2010 to $162,095 at March 31, 2011.

n Deferred Tax Liabilities increased from $Nil at December 31, 2010 to $798,010 at March 31, 2011.

n Other Liabilities decreased from $6,131,492 at December 31, 2010 to $5,778,505 at March 31, 2011

n Liabilities Held for Sale remained unchanged, from $Nil at December 31, 2010 to $Nil at March 31, 2011.

Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010

Revenues

For the three months ended March 31, 2011, our total revenue decreased to $5,676,430 from $7,053,238 for the three months ended March 31, 2010.

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 $4,451,106 for the three months ended March 31, 2011 from $5,448,002 for the three months ended March 31, 2010, a decline of $996,896 or 18.30%. The primary factors contributing to the decline were decreases in License revenues of $173,971 or 13.75%, Third Party Product revenues of $362,413 or 34.71%, Other revenues of $418,504 or 94.78%, and a decrease in Maintenance revenue of $42,008 or 1.56% for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. 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.

The Service division decreased $379,912 or 23.67%, from $1,605,236 for the three months ended March 31, 2010 to $1,225,324 for the three months ended March 31, 2011. 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, 2011, total Cost of Goods Sold decreased to $3,101,698 from $4,173,174 for the three months ended March 31, 2010.

The Company's Cost of Goods Sold is 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 $1,444,248 to $721,901 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The primary factors contributing to the Company's reduction in Costs of Goods Sold related to the Product division of revenues were a $722,346 or 50.02% reduction in product material and third party product material costs, for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Within the Costs of Goods Sold related to the Service division, the Company saw a $263,451 or 16.42% increase in the total costs of services, from $1,603,996 to $1,867,447 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The primary factor contributing to the Company's additional costs of services was an increase in personnel costs, depreciation and amortization costs.

Operating Expenses

The Company's total operating expense consist of three segments; selling, administrative and general expenses. For the three months ended March 31, 2011 total operating expenses increased to $5,315,195 from $4,638,480 for the three months ended March 31, 2010.

For the three months ended March 31, 2011, Selling Expenses increased to $3,663,474 from $3,367,119 for the three months ended March 31, 2010. The $296,356 or 8.80% increase was primarily due to increases in cost of materials, personnel expense and in other selling expense within the Selling expense segment.

For the three months ended March 31, 2011, administrative expense increased by $439,171 or 43.73%, to $1,443,505 from $1,004,334 for the three months ended March 31, 2010. This was primarily due to increases in personnel costs and other administrative expense related to the Company's acquisition of subsidiary companies as well as an increases in compliance costs.

For the three months ended March 31, 2011, General Expenses slightly decreased $58,812 or 22.02% to $208,215 from $267,027 for the three months ended March 31, 2010.

Other Income (Expense)

For the three months ended March 31, 2011, Other Expense of $756,724 decreased from Other income of $1,167,056 for the three months ended March 31, 2010. This change is primarily due to decreased of Other Income of $1,912,322 and a net decrease in Interest Expense of $11,458 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Liquidity & Capital Resources

As March 31, 2011, the Company had $9,031,340 in cash and cash equivalents, compared to $1,872,068 at December 31, 2010.

In March 2011 we consummated a private placement of Units for $1.25 per Unit for . . .

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