U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
x
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended
December
31, 2007
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ___________________ to
______________________
Commission
file number
000-29587
IBSG
INTERNATIONAL, INC.
Florida
|
65-0705328
|
(State
or other jurisdiction of incorporation)
|
(I.R.S.Employer
identification No.)
|
1132
Celebration Blvd., Celebration, FL 34747
(Address
and Zip Code of Principal Executive Offices)
Registrant's
Telephone Number:
(321)
939-6321
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 par value per share
(Title of
Class)
Check
whether the issuer: (i) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90
days. Yes
x
No
o
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
x
The
issuer's revenues for the fiscal year ended December 31, 2006 were $14,571,283.
The
number of shares outstanding of the issuer's common stock as of March 24, 2008
was 10,279,301 shares. The aggregate market value of the common stock of
8,842,690 shares held by non-affiliates, based on the closing price of the
common stock on the over the counter market as of March 24, 2008 was
$13,529,316.
Transitional
Small Business Disclosure Format (Check one): Yes
o
No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
FORM
10-KSB - INDEX
TABLE
OF CONTENTS
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PAGE
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PART
I
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3
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9
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9
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9
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PART
II
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10
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10
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20
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20
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20
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21
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PART
III
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22
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23
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25
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26
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26
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27
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28
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Certifications
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PART
I
Item
1. De
scripti
on of Business
Business
Development
The
Company was originally incorporated on June 18, 1996, under the laws of the
State of Florida under the name Celebrity Steakhouses, Inc. The Company changed
its corporate name to Deerfield Financial Services, Inc. (“Deerfiled”) effective
October 28, 1996. On January 31, 1998, Deerfield acquired all of the outstanding
stock of Optical Concepts of America, Inc., a Delaware corporation formed on
April 30, 1996, through a Stock Purchase Agreement in exchange for 750,000
shares of common stock of Deerfield. Prior to the acquisition, the Company had
not commenced any active business operations. The Company adopted the corporate
name of Optical Concepts of America, Inc. on July 6, 1998 and thereafter was
engaged in the development, design and marketing of a collection of fashionable
prescription eyeglass frames as well as a line of upscale, ready-to-wear,
non-prescription reading eyewear until the end of 2000 when it divested this
business. Since that time, until February 2004, the Company redirected its
efforts and limited resources towards seeking potential new business
opportunities or business transactions with other companies.
The
Company signed a share exchange agreement to acquire Intelligent Business
Systems Group, Inc. (“Group”) in November 2003 and changed its name to IBSG
International, Inc. (“IBSGI”) at that time. The share exchange agreement closed
on February 13, 2004. In the share exchange, we acquired 100% of the outstanding
capital stock of Group in exchange for 1,500,000 shares of our common stock.
These shares were issued to the stockholders of Group in exchange for their
wholly owned interest in Group. At the time of acquisition, the stockholders of
Group acquired control of IBSGI and accordingly, for accounting purposes, Group
was treated as the acquiring entity. BSGI is the continuing entity for legal
purposes. There was no adjustment to the carrying value of the assets or
liabilities of Group. The Company began planned principle operations as of the
date of the reverse merger.
In June
2004 we acquired certain assets of RedHand International, a UK based company,
which included sophisticated security software and a channel partner agreement.
We created a new company called Secure Blue, Inc. (Secure Blue) to own such
assets. In February of 2006 the Company acquired A-Division IT Systems, Ltd.
(A-Division), a UK based consultant company, in effort to expand the Company’s
international business.
Our
Business
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 (IBSD), a software development,
maintenance and data storage company and; IBSGI UK, LTD (formally A-Division), a
consultant company focused on development of 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,
Inc. provides ongoing support for our other subsidiaries; IBS Group, Secure
Blue, and IBSGI UK. The Company 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, LTD. (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 and Secure Blue generate 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/Secure Blue license agreement has a
five-year term, however, the agreements are updated annually and have
historically been renewed upon expiration.
Market
for our products
The
potential market for the BizWorld Data System 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
on going 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 Data System 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 Intelligent Business
Systems Group, Inc. 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, Ltd. 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 operate small business development centers funded by a combination of the
US Small Business Administration and state resources. The purpose of these
centers are 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 license
agreements with 11 such entities.
Fortune
1000 Corporations:
The
Company’s subsidiaries suggests that Master license holders seek to sell
corporate sponsored 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. This license would provide the Corporation with
unlimited access to the constituent pool of the 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 are routinely approached to 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:
We seek
to license the BizWorld Data System to other business associations such as local
chambers of commerce, which have membership or offer services to small and
medium size businesses as a way of providing additional services and
generate 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 the BizWorld
Data System 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 for both government entities and large corporations. By
providing the ability to manage developing businesses on the internet while
simultaneously 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 will target 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:
Intelligent
Business Systems Group, Inc.’s marketing efforts primarily consist of “word of
mouth” referrals from existing or potential customers are currently targeted
prospect awareness campaigns, various conventions and trade shows and cold
calling entities with resources and marketing research and are focused on the US
markets. 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, Inc. and IBSGI-UK, Ltd., need 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 is 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 direct our sales activity on
third-party channels until we are satisfied that we can achieve significant
traction in the market place. Our third-party channels will attack the end-user
market through their existing client base.
In
addition we will continue to promote and demonstrate SOX Pro to potential
end-users where appropriate. Our long term goal is to build a specialized 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
Euros/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 is currently seeking to establish channel partner
arrangements with investor relation firms that primarily target the small cap
market. Secure Blue will also seek 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 will also
seek 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 aims are
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 will be derived from sub
contracting opportunities in the areas of maintenance, hosting, and support for
IBIN's other subsidiaries.
Customer
Support
Our
management believes that strong customer support is crucial to both the initial
marketing of its products and essential for maintaining customer satisfaction,
which in turn will enhance our reputation and generate additional business. In
addition, we believe that the 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.
Intelligent Business Systems Group, Inc. (IBSG) and Intelligent Business Systems
Group International UK, Ltd. (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 make 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. We will
be including 24/7 support as an integral part of the SOX Pro package with an
ongoing annual fee of 35% 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 as a test bed for emerging
technologies such as Microsoft. 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 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
subsidiary, IBS Group, and their network. Once our third-party channel network
is established, we will focus on taking a significant share of the small-mid cap
company market.
Manufacturing
Our
products are principally composed of digital materials. Coding and
revisions are done at the central offices of the Company and its India
facilities for all subsidiaries' products. All servers related to initial back
up and developments are at the international location. The Company offers
“hosting” which is done at a secure off site location with redundant back ups in
India and its central offices. The Company follows the standard course for
treatment of development software and storage with back up power supplies,
redundant server farms, and off site back up services.
Patents,
Trademarks and Licenses
The
Company currently relies upon a combination of trademark, copyright, and trade
secret laws and contractual provisions to protect proprietary rights in its
products. Both the intellectual property being sold by the Company's
subsidiaries, IBS Group, IBSGI-UK and Secure Blue, are copyright and Trade mark
protected and wholly owned by the Company. The source code for the Company's
products is protected both as a trade secret and as an unpublished copyrighted
work. Despite these precautions, it may be possible for a third party to copy or
otherwise obtain, and use, the Company's products or technology without
authorization. In addition, the laws of various countries in which the Company's
products may be sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States. Because the
software industry is characterized by rapid technological change, the Company
believes that factors such as the technological and creative skills of its
personnel, new product developments, frequent product enhancements, name
recognition and reliable product maintenance are more important to establishing
and maintaining a technology leadership position than the various legal
protections of its technology. There can be no assurance that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. There can also be no
assurance that the measures taken by the Company to protect its proprietary
rights will be adequate to prevent misappropriation of the technology or
independent development by others of similar technology.
Although
the Company believes that its products and other proprietary rights do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert intellectual property infringement claims
against the Company in the future or that any such claims will not require the
Company to enter into royalty or cross-license arrangements or result in costly
litigation.
Personnel
As of
March 15, 2008 the Company, including all subsidiaries had a total of 48
employees and 3 full time consultants, 12 of which were engaged in marketing,
sales and related customer support services, 26 were in research and
development, and 10 were in general and administrative functions. Our success
depends in significant part upon the performance of our senior management and
certain key employees. Competition for highly skilled employees, including
sales, technical and management personnel is intense in the software industry.
There can be no assurance that the Company will retain its key managerial and
technical employees. The Company's failure to attract, assimilate, or retain
highly qualified sales, technical and managerial personnel could materially
adversely affect the Company's business. None of the Company's employees are
represented by a labor union. The Company has never experienced any work
stoppages. None of our employees have written employment
agreements.
Item
2. Descr
iption
of Property
The
Company leases offices in Celebration, Florida from an independent realtor. The
leased space is approximately 4,000 square feet. The term of the lease is 60
months and terminates May 18, 2012. The monthly rent is $6,110 per month. The
Company maintains a corporate office in London, United Kingdom on a month by
month basis for approximately $500 per month. The Company leases 1,900 square
feet corporate office in Ahmedabad, India. The terms are of the lease is 60
months and terminates on February 2011. The monthly rent is $1,283. The Company
also leases office space in Johannesburg, South Africa on a month to
month basis. The monthly rent is $2,545.
Item
3.
Legal Proceedings
None.
Item
4. Submission
Of Matters
To A Vote Of Security
Holders
There
were no submissions of matters to security holders in the fourth quarter 2007.
P
ART
II
Item
5. Market For Common Equity And Related Stockholder Matters
Common
Stock
Our
common stock is quoted on the NASD OTC Bulletin Board under the symbol “IBIN”.
The following is the range of high and low closing prices for our common stock
for the periods indicated:
PERIOD
|
|
HIGH
|
|
|
LOW
|
|
January
1, 2006 - March 31, 2006
|
|
$
|
1.90
|
*
|
|
$
|
1.30
|
*
|
April
1, 2006 - June 30, 2006
|
|
$
|
2.70
|
*
|
|
$
|
1.50
|
*
|
July
1, 2006 - September 30, 2006
|
|
$
|
2.10
|
*
|
|
$
|
1.50
|
*
|
October
1, 2006 - December 31, 2006
|
|
$
|
1.75
|
*
|
|
$
|
1.23
|
*
|
January
1, 2007 - March 31, 2007
|
|
$
|
1.75
|
*
|
|
$
|
1.27
|
*
|
April
1, 2007 - June 30, 2007
|
|
$
|
2.87
|
*
|
|
$
|
1.32
|
*
|
July
1, 2007 - September 30, 2007
|
|
$
|
1.92
|
*
|
|
$
|
1.37
|
*
|
October
1, 2007 - December 31, 2007
|
|
$
|
2.23
|
*
|
|
$
|
1.56
|
*
|
*Post
reverse split
In
September 2006, the Company processed a ten for one stock split. All
references to Common Stock have been retroactively restated.
As of
March 24, 2008 there were approximately 236 holders of record of our common
stock.
Holders
of our common stock are entitled to cash dividends as may be declared by the
board of directors. We do not intend to pay any dividends in the foreseeable
future and investors should not rely on an investment in us if they require
dividend income. We intend to retain earnings, if any, to finance the
development and expansion of our business. Future dividend policy will be
subject to the discretion of our board of directors and will be based upon
future earnings, if any, our financial condition, capital requirements, general
business conditions and other factors. There can be no assurance that cash
dividends of any kind will ever be paid.
Item
6. Management's Discu
ssio
n And Analysis Or Plan Of
Operation
Management's
Discussion and Analysis contains various “forward looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
regarding future events or the future financial performance of the Company that
involve risks and uncertainties. Certain statements included in this Form
10-KSB, including, without limitation, statements related to anticipated cash
flow sources and uses, and words including but not limited to “anticipates”,
“believes”, “plans”, “expects”, “future” and similar statements or expressions,
identify forward looking statements. Any forward-looking statements herein are
subject to certain risks and uncertainties in the Company's business, including
but not limited to, reliance on key customers and competition in its markets,
market demand, product performance, technological developments, maintenance of
relationships with key suppliers, difficulties of hiring or retaining key
personnel and any changes in current accounting rules, all of which may be
beyond the control of the Company. Management will elect additional changes to
revenue recognition to comply with any future changes in GAAP regarding
recognition on a forward going accrual basis as the model is replicated with
other similar markets (i.e. SBDC for profit entities). The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth therein.
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 annual report
on Form 10-KSB 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 (IBSD),
a software development, maintenance and data storage company and IBSGI UK, LTD
(formally A-Division), a consultant company focused on development of 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,
Inc. provides ongoing support for our other subsidiaries; IBS Group, Secure
Blue, and IBSGI UK. The Company 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, LTD. (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
and Secure Blue generate 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/Secure Blue license agreement has a five-year term,
however, the agreements are updated annually and have historically been renewed
upon expiration.
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
recievable, allowance for doubtful accounts and sales returns
Revenue
Recognition
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”) Issue No. 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables.
The
Company recognize revenue on software related transactions on single element
arrangements and on each element of a multiple element arrangement, when 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 a multi-year term license is delivered 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. In the
first year, PCS is packaged with the license and accordingly the Company
allocates the arrangement fees to the elements using the residual method which
generally results in 65% of the first year’ arrangement fee being allocated to
license revenue. 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. The PCS revenue subsequent to
year 1 is realized annually, upon customer acceptance, as deferred revenue and
recognized as revenue over the service period of one
year. Professional services include training and installation
services are accounted for separately as they are not considered essential to
the functionality of the software.
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.
The Company has amended its
annual report to reflect certain adjustments to revenue and deferred
revenue in the consolidated financial statements for fiscal years
ended December 31, 2006 and
2005
along with
clarification
s
to the Company’s revenue
recognition policies.
A certain
portion of deferred revenue represents license fees for which the
conditions of the arrangements have been modified, and which represent
p
reviously 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. The effects of this restatement are presented in Note
11
.
Deferred revenue as of
December 31, 2007 consists of the following:
|
|
South
Africa
|
|
|
Kenya
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance as of December 31, 2006
|
|
$
|
4,275,000
|
|
|
$
|
994,768
|
|
|
$
|
2,924,693
|
|
|
$
|
8,194,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases:
current year deferred revenue
|
|
|
3,625,087
|
|
|
|
1,312,500
|
|
|
|
331,565
|
|
|
|
5,269,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decreases: realization
of revenue from deferred revenue
|
|
|
(3,029,611
|
)
|
|
|
(1,435,462
|
)
|
|
|
(292,193
|
)
|
|
|
(4,757,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue as of December 31, 2007
|
|
|
4,870,476
|
|
|
|
871,806
|
|
|
|
2,964,065
|
|
|
|
8,706,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of deferred revenue
|
|
|
(2,507,976
|
)
|
|
|
(871,806
|
)
|
|
|
(331,565
|
)
|
|
|
(3,711,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue, net of current portion
|
|
$
|
2,362,500
|
|
|
$
|
-
|
|
|
$
|
2,632,500
|
|
|
$
|
4,995,000
|
|
Accounts
Receivable, Allowance for Doubtful Accounts and Sales
Returns
A
considerable amount of judgment is required to assess the realization of
accounts receivables, including assessing the probability of collection
and the current credit-worthiness of each customer. If the financial
condition of a customer were to deteriorate, resulting in an impairment of
their ability to make payments, an additional provision for doubtful
accounts might be required. A provision for doubtful accounts would
initially be recorded based on historical experience, and then adjusted at
the end of each reporting period based on a detailed assessment of our
accounts receivable and allowance for doubtful accounts. In estimating the
provision for doubtful accounts, management considers (i) the type of
entity (government, commercial, retail) and the aging of the accounts
receivable; (ii) trends within and ratios involving the age of the
accounts receivable; (iii) the customer mix in each of the aging
categories and the nature of the receivable, such as whether it derives
from license, professional services or maintenance revenue; (iv) our
historical provision for doubtful accounts; (v) the credit worthiness of
the customer; and (vi) the economic conditions of the customers industry,
whether the entity is a national government, as well as general economic
conditions, among other factors. The bulk of the
Company’s historic client base is primarily composed of
national government accounts which are classified as fully collectible but
slow payers.
In
the first quarter of 2007, the Company expanded its customer base outside
of national governmental accounts. Due to this expansion, management has
reevaluated its allowance for doubtful accounts and sales return allowance
specific to this new customer base which includes state sponsored economic
development councils and other quasi-governmental agencies along with
corporate based SBDC’s and SME’s. The addition of these types of customers
generally represents a higher level of business risk than do national
government customers. Accordingly, management evaluates the realization of
accounts receivable specific to this new customer base by using a
percentage of sales revenue as the basis for its allowance for doubtful
accounts applied consistently among all contracts generated from the new
customer base. For the year ended December 31, 2007 the allowance for
doubtful accounts was $286,000. For the years ended December
31, 2006 there was no allowance for doubtful accounts.
In
summary, estimates for establishing an allowance for doubtful accounts and
sales returns applicable to national government account will be based on
our existing method referred to above. Estimates for allowance for
doubtful accounts and sales returns applicable to the new customer types
will be based on the percentage of sales method.
The Company has a note recievable to Galaxy5
for $3,000,000 recorded from the sale of the CAC contract in March 2006.
An interest discount of $428,296 was recorded at the time of the contract
sale. This receivable has a term of three years at the time of issue. The
balance of the note receivable as of December 31, 2007 was
$1,802,324.
|
Our accounts
receivables from the customers are as follows at December 31,
2007:
|
|
South
Africa
|
|
|
Kenya
|
|
|
Other
|
|
|
Allowance
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
$
|
8,046,430
|
|
|
$
|
3,800,000
|
|
|
$
|
3,493,120
|
|
|
$
|
-
|
|
|
$
|
15,339,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
to accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of revenue in the current year
|
|
|
9,342,024
|
|
|
|
4,372,962
|
|
|
|
856,297
|
|
|
|
-
|
|
|
|
14,571,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization
of revenue (from deferred revenue) in the current year
|
|
|
(3,029,611
|
)
|
|
|
(1,435,462
|
)
|
|
|
(292,193
|
)
|
|
|
-
|
|
|
|
(4,757,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of deferred revenue in the current year
|
|
|
3,625,087
|
|
|
|
1,312,500
|
|
|
|
331,565
|
|
|
|
-
|
|
|
|
5,269,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increases to accounts receivable
|
|
|
9,937,500
|
|
|
|
4,250,000
|
|
|
|
895,669
|
|
|
|
-
|
|
|
|
15,083,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
reductions to accounts receivable
|
|
|
(1,744,437
|
)
|
|
|
(1,400,000
|
)
|
|
|
(123,451
|
)
|
|
|
(286,000
|
)
|
|
|
(3,553,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
recievable as of December 31, 2007
|
|
|
16,239,493
|
|
|
|
6,650,000
|
|
|
|
4,265,338
|
|
|
|
(286,000
|
)
|
|
|
26,868,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of accounts
recievable,
net
|
|
|
12,696,993
|
|
|
|
6,650,000
|
|
|
|
1,632,828
|
|
|
|
(286,000
|
)
|
|
|
20,673,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
recieveable, net of current
portion
|
|
$
|
3,562,500
|
|
|
$
|
-
|
|
|
$
|
2,632,500
|
|
|
$
|
-
|
|
|
$
|
6,195,000
|
|
85% of
the Company’s accounts receivable outstanding is related to two customers in
South Africa and Kenya. The aggregate value of these two contracts is
approximately $33.4 million, including the multi-year license renewal component
of the contracts. From inception of these contracts through December 31, 2007,
the Company has realized revenue of approximately $21
million.
The
Company has amended its annual report to reflect certain adjustments to revenue
and deferred revenue in the consolidated financial statements for fiscal years
ended December 31, 2006 and 2005 along with clarifications to the Company’s
revenue recognition policies. A certain portion of accounts receivable
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 that have been restated to deferred
revenue and will be deferred until such time as all SOP 97-2 requirements have
been satisfied. These amounts, along with the multi-year license renewal
component of the contract for South Africa are classified as accounts
receivable, net of current portion.
Revenue
Revenue
increased $6,966,605, or 92%, from $7,604,678 in 2006 to $14,571,283 in
2007. Revenues increased
significantly this year and is a
reflection of signing master contracts with larger values as well as increases
in satellite contracts.
Cost
of Sales
Cost of
Sales was $356,372 in 2007, approximately 2.44% of revenues. Cost of Sales was
$272,171 in 2006, approximately 3.6% of revenues. Cost of sales includes
the amortization and depreciation of the software assets. The Company has
determined that the amount of salaries responsible for the installation and
maintenance which would be allocable into cost of sales would be approximately
$1,500 for the year ended December 31, 2007. The Company has determined that
this amount is immaterial.
Services
paid for with common stock
Stock-based
compensation was $1,813,505 in 2007 arising out of the issuance of common stock
as compensation for services received and to be received. The Company at
December 31, 2007 had $2,350,375 in deferred consulting services in other assets
related to stock-based compensation.
Amortization
and depreciation
Amortization
and depreciation expense was $381,402 for 2007. We recognized amortization and
depreciation expense on our furniture, fixtures and equipment.
Bad
debt expense
The Company has recorded
$286,000 of bad debt expense related to the allowance for doubtful accounts for
2007.
Sales,
General and Administrative Expense
Sales,
general and administrative expenses increased $1,063,586 or 18.5% to $6,805,278
in 2007 from $5,741,692 in 2006. General and administrative expenses
consist primarily of related personnel costs, and other general corporate costs
and show an increase in 2007 primarily due to the additional consulting services
for the international market in order to increase market share as well as
additional stock based compensation.
Interest
Expense and Liquidated Damages
Interest
expense was $0 for 2007 and $58,877 in 2006. This reduction in expense, year
over year, was due to the settlement of the $1,000,000 convertible promissory
note, interest incurred since March 2005 and the related amortization of debt
discounts.
Change
in Fair Value of Embedded Conversion Option and Warrant Liabilities
As
discussed under “critical accounting policies” the embedded conversion option
and warrants issued with the convertible debt were determined to be derivative
liabilities. We recorded the derivative liabilities at the funding date of March
17, 2005 and changes in the fair value were recorded at each reporting date
during 2005 as other expenses or income. The net effect was other income of
$212,692 in the three months ending in December 31, 2005. The change in fair
value of embedded conversion option and warrants created other expenses of
$79,864 for the year ending December 31, 2006.
Net
Income
The
Company reported a net income of $4,859,093 in 2007 and a net income of $697,114
in 2006. The primary reason for the increase in net income is due to
more revenue recorded in 2007 than in 2006. The increase also has an
additional $2,233,534 in provisions for income taxes.
Liquidity
and Capital Resources
The
Company paid off the $1,000,000 of Senior Secured Convertible Notes in the first
quarter of 2006. In the second quarter of 2006, the Company purchased 461,400 of
common stock from shareholders. The Company expanded its operations to two
international offices in 2006. One of the offices is in South Africa and the
other operation is located in India. We believe the proceeds from the
receivables and the reserves will generate sufficient cash in assisting with the
operating needs of the Company. The Company is continuing to acquire new
investments to provide for further research and development capital and
assisting further acquisitions over the next twelve months.
Obligations
and Commitments
The
following table reflects our contractual obligations with regards to
real estate commitments as of December 31, 2007. This table does not
include trade payables, derivative liabilities and other operating expenses not
subject to written commitments such as salaries.
Year
|
|
Total
Scheduled Rental
Payments
|
|
2008
|
|
$
|
75,324
|
|
2009
|
|
$
|
78,444
|
|
2010
|
|
$
|
81,696
|
|
2011
|
|
$
|
59,340
|
|
2012
|
|
$
|
61,140
|
|
Off
Balance Sheet Arrangements
The
Company does not have significant off-balance sheet arrangements.
Factors
That May Affect Our Business, Future Operating Results and Financial
Condition
Because
of the following factors, as well as other variables affecting our operating
results, past financial performance may not be a reliable indicator of future
performance, and historical trends should not be used to anticipate results or
trends in future periods. We have no arrangements or sources of additional
capital and may have to curtail our operations if additional capital is needed
but is not available
Our
customers who are generally state government agencies or quasi government
business associations can be exceedingly tardy in paying their obligations to
us. Due to the tardiness, the Company would end up financing the account
receivables. We may have to curtail our operations if we do not have sufficient
funds to pay for the expenses of operating our business. The Company will use
additional commercial market opportunities to offset the slow pay nature of the
lucrative government contract market. The Company's current and projected
acquisitions will expand the Company's retail and private sector markets which
should create a blend of payment cycles between the secured government markets
and the commercial markets.
We
acquired our enterprise software and began servicing licensees of such software
in 2004. Prior financial information reflects a profitable
operation. Our prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in relatively new and rapidly
evolving markets. These risks may include:
|
·
|
uncertain
commercial acceptance of our products;
|
|
·
|
technological
obsolescence; and
|
|
·
|
Competition
|
We cannot
assure you that we will succeed in addressing these risks. If we fail to do so,
our revenue and operating results could be materially harmed.
Our
software products are subject to rapid technological change and to compete, we
must offer products that achieve market acceptance.
The
software industry is characterized by rapid technological change. To
remain competitive, we must continue to improve our existing products to meet
the needs of our customers. We cannot assure you that new products offered
by our competitors may not prove attractive to our clients and potential clients
and adversely affect our future revenues. Our failure to adequately
protect our proprietary rights could adversely affect our ability to compete
effectively. We rely on a combination of contracts, copyrights, continued
evolution of our core product (s) and other security measures in order to
establish and protect our proprietary rights. We can offer no assurance that the
measures we have taken or may take in the future will prevent misappropriation
of our technology or that others will not independently develop similar
products, design around our proprietary technology or duplicate our
products.
Allowance for Doubtful Accounts and
Sales Returns
We
maintain an allowance for doubtful accounts and a sales return allowance to
reduce amounts to their estimated realizable value. A considerable amount of
judgment is required when we assess the realization of accounts receivables,
including assessing the probability of collection and the current
credit-worthiness of each customer. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, an additional provision for doubtful accounts may be required. We
initially record a provision for doubtful accounts based on our historical
experience, and then adjust this provision at the end of each reporting period
based on a detailed assessment of our accounts receivable and allowance for
doubtful accounts. In estimating the provision for doubtful accounts, we
consider (i) the type of entity (government, commercial, retail) and the aging
of the accounts receivable; (ii) trends within and ratios involving the age of
the accounts receivable; (iii) the customer mix in each of the aging categories
and the nature of the receivable, such as whether it derives from license,
professional services or maintenance revenue; (iv) our historical provision for
doubtful accounts; (v) the credit worthiness of the customer; and (vi) the
economic conditions of the customers industry, whether the entity is government,
as well as general economic conditions, among other factors.
Should
any of these factors change, the estimates that we make may also change, which
could impact our future provision for doubtful accounts. For example, if the
financial condition of our customers were to deteriorate, affecting their
ability to make payments, an additional provision for doubtful accounts could be
required.
FORWARD
LOOKING STATEMENTS - CAUTIONARY FACTORS
This
annual report on Form 10-KSB contains forward-looking statements within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and in Section 21F of the Securities Exchange Act of 1934 as amended. The
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "intend," "anticipate," "believe,"
"estimate," "predict," "potential" or "continue," the negative of these terms or
other similar terminology. These forward-looking statements involve risks and
uncertainties and other factors that may cause the actual results, performance
or achievements to differ from any future results, performance or achievements
expressed or implied by such forward-looking statements. Except for the
historical information and statements contained in this Report, the matters and
items set forth in this Report are forward looking statements that involve
uncertainties and risks some of which are discussed at appropriate points in the
Report and are also summarized as follows:
BUSINESS
RISKS
WE HAVE ACHIEVED PROFITABLE
OPERATIONS BUT MAY NOT BE PROFITABLE IN THE FUTURE.
We
incurred a net income of $4,859,093 in 2007 and a provision income of
$697,114 in 2006. Our revenues are currently greater than our expenses. The
Company recorded tax expense of $2,616,434 for the year ending December 31,
2007. Our ability to operate profitably depends on generating sales and
achieving sufficient gross profit margins. We cannot assure you that we will
achieve or maintain profitable operations in the future.
WE
HAVE NO ARRANGEMENTS OR SOURCES OF ADDITIONAL CAPITAL AND MAY HAVE TO CURTAIL
OUR OPERATIONS IF ADDITIONAL CAPITAL IS NEEDED BUT IS NOT
AVAILABLE.
Our
customers who are generally state government agencies or non-profit chambers of
commerce can be exceedingly tardy in paying their obligations to us. We may have
to curtail our operations if we do not have sufficient funds to pay for the
expenses of operating our business.
WE HAVE A LIMITED OPERATING HISTORY
WHICH MAKES YOUR EVALUATION OF OUR BUSINESS DIFFICULT.
We
acquired our BizWorld Data System software and began servicing licensees of such
software in 2003. Our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in relatively new
and rapidly evolving markets. These risks include:
|
·
uncertain commercial acceptance of our
products;
|
·
technological obsolescence; and
|
·
competition, including competition from other software products which may
enable users to achieve the same results as our
software.
|
We cannot
assure you that we will succeed in addressing these risks. If we fail to do so,
our revenue and operating results could be materially harmed.
LOSS OF A MAJOR CUSTOMER WOULD
SUBSTANTIALLY HARM OUR OPERATING RESULTS.
Substantially
all of our revenue comes from three customers, all of whom are governmental
entities. Loss of either of such customers would substantially harm our
operating results.
OUR
SOFTWARE PRODUCTS MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE.
We cannot
assure you that our current or new products will prove sufficiently attractive
to our clients and potential clients to enable us to reach a sufficient level of
sales to generate net income and positive cash flows.
REDUCED
FUNDING FOR SMALL BUSINESS DEVELOPMENT AND AN EMPHASIS OF GOVERNMENT PROCUREMENT
MAY ADVERSELY AFFECT OUR REVENUES
Our
BizWorld Data System product is designed to enhance the operating efficiency of
SMEs. Any agency or entity that budgets in part or whole serve this
market sector may see budget reductions which could affect Company financial
performance. Additionally, if governments stop emphasizing the need
for broad procurement opportunities may also result in a material affect on
Company performance.
OUR FAILURE TO ADEQUATELY PROTECT OUR
PROPRIETARY RIGHTS COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE
EFFECTIVELY.
We rely
on a combination of contracts, copyrights and other security measures in order
to establish and protect our proprietary rights. We can offer no assurance that
the measures we have taken or may take in the future will prevent
misappropriation of our technology or that others will not independently develop
similar products, design around our proprietary technology or duplicate our
products.
OUR
BUSINESS IS DEPENDENT IN PART ON THIRD PARTY LICENSEES WHOM WE DO NOT
CONTROL.
We
provide our BizWorld Data System to certain licensees on a revenue sharing basis
whereby we receive a percentage of the revenue generated by our licensees from
satellite licenses and end user subscriptions of the product. If these licensees
are not successful in developing end users who pay for use of the product, then
we will not receive the revenues we expect from these arrangements.
OUR
BUSINESS AND OPERATING RESULTS WILL SUFFER IF OUR SYSTEMS OR THE INTERNET FAIL,
BECOME UNAVAILABLE OR PERFORM POORLY SO THAT CURRENT OR POTENTIAL USERS DO NOT
HAVE ADEQUATE ACCESS TO OUR PRODUCTS OVER THE INTERNET.
Our
BizWorld Data System software is generally accessed by end users over the
internet. Our ability to provide products and services to our customers and
operate our business depends on the continued operation of our information
systems and the internet. A significant or repeated reduction in the
performance, reliability or availability of our information systems or the
internet could harm our ability to conduct our business, and harm our reputation
and ability to attract and retain customers.
OUR INTERNATIONAL OPERATIONS EXPOSE
OUR BUSINESS TO ADDITIONAL RISKS.
A
significant portion of our 2007 revenue was derived from international
customers. This may involve risks inherent in doing business on an international
level, including difficulties in managing operations due to distance, language
and cultural differences, different or conflicting laws and regulations,
political instability and difficulty in collection of receivables.
WE MAY HAVE DIFFICULTY IN MEETING THE
DEMANDS WHICH MAY ARISE IN THE EVENT OF SIGNIFICANT GROWTH IN OUR
OPERATIONS.
In the
event we are successful in developing significant additional demand for our
products, we may experience significant pressure on the Company's managerial,
operational, and financial resources. We may be required to rapidly add to our
staff and facilities which may require additional financing. We cannot assure
you that we will be successful in meeting the challenges of managing the growth
of our business.
WE
MAY HAVE SOME CASH FLOW PROBLEMS IF THE ACCOUNT RECEIVABLES ARE NOT PAID IN A
TIMELY MANNER.
The
majority of our clients are governmental entities. The funds for these projects
have been allocated for all invoices. However, governmental entities can be slow
in making their payments. Although the Company maintains the position that these
revenues are fixed and determinable due to the legal requirements of government
entities, this may involve risks of providing for additional capital to operate
the Company until the payments are received. The Company reserved the option to
finance the receivable until payment is received.
SECURITIES
RISKS
“PENNY
STOCK” RULES MAY MAKE BUYING OR SELLING OUR SECURITIES DIFFICULT.
Trading
in our securities will be subject to the “penny stock” rules for the foreseeable
future. The Securities and Exchange Commission has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. These rules require
that any broker-dealer who recommends our securities to persons other than prior
customers and accredited investors must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transactions involving a
penny stock, of a disclosure schedule explaining the penny stock market and the
risks associated with trading in the penny stock market. In addition,
broker-dealers must disclose commissions payable to both the broker-dealer and
the registered representative and current quotations for the securities they
offer. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our securities and consequently
adversely affect the market price for our securities.
Item
7. Fina
ncia
l Statements
See the
Company's consolidated financial statements beginning on page F-1.
Item
8. Changes In And
Disagreements With
Accountants On Accounting
And Financial Disclosure
We have
had no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures with any of our
accountants for the year ended December 31, 2007 or any interim
period.
We
have not had any other changes in nor have we had any disagreements, whether or
not resolved, with our accountants on accounting and financial disclosures
during our two recent fiscal years or any later interim period. On January 15,
2008, the Board of Directors, appointed Jewett, Schwartz, Wolfe & Associates
(“JSWA”) as its new principal independent-registered public accounting firm.
This decision to engage JSWA was ratified by the majority approval of the Board
of Directors.
ITEM
8A. C
ONT
ROLS AND PROCEDURES
(a)
|
Evaluation
of disclosure controls and
procedures
|
Based
upon an evaluation of the effectiveness of the Company’s disclosure controls and
procedures performed by the Company’s management, with participation of the
Company’s Chief Executive Officer, Chief Operating Officer, and its Chief
Accounting Officer as of the end of the period covered by this report, the
Company’s Chief Executive Officer, Chief Operating Officer, and its Chief
Accounting Officer concluded that the Company’s disclosure controls and
procedures have been effective in ensuring that material information relating to
the Company, including its consolidated subsidiary, is made known to the
certifying officers by others within the Company and the Bank during the period
covered by this report.
As used
herein, “disclosure controls and procedures” mean controls and other procedures
of the Company that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
(b)
|
Management’s
Report on Internal Control Over Financial
Reporting
|
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and
with the participation of the Chief Executive Officer, the Chief Operating
Officer and the Chief Accounting Officer, we conducted an evaluation of the
effectiveness of our control over financial reporting based on the framework in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on our evaluation under the
framework, management has concluded that our internal control over financial
reporting was effective as of December 31, 2007.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
(c)
|
Changes
in Internal Control over Financial
Reporting
|
There
have not been any changes in the Company’s internal controls or in other factors
that occurred during the Company’s last fiscal quarter ended December 31, 2007
that have materially affected or are reasonably likely to materially affect the
Company’s internal control over financial reporting.
ITEM
8B.
OTHER INFORMATION
None
ITEM 9. DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The
following table sets forth the directors and officers of the
Company.
NAME
|
POSITION
|
Michael
Rivers, PhD
|
President,
CEO and Director
|
Geoffrey
Birch
|
Director
Treasurer
|
Jeffrey
Willmott
|
Director
|
Alexander
Preker, PhD
|
Director
|
Dr.
Michael Rivers is the founder of IBSG and has over twenty-four years experience
in the field of business development, support and human services. His areas of
expertise include supporting the development of small to mid size businesses,
establishing digital business services with a diverse group of business
community entities and remote vocational relationships within One-Stop Career
Center processes through technology. Dr. Rivers has served as an expert and
guest speaker for several organizations. Of note, the U.S. Dept. of Commerce,
the Social Security Administration, the Dept. of Labor, the Association for
Community Colleges and a number of state and national organizations. Dr. Rivers
has also been the guest speaker for several countries as an expert in internet
strategies and expansion of commerce activity. Dr. Rivers holds a
doctorate through the Washington D.C. consortium of universities, and an
undergraduate degree in the diversified studies of Chemistry, Biology and
Psychology.
Mr.
Jeffrey Willmott is a senior level executive with over 35 years experience in
diverse industries, both domestic and international in scope. He started his
career in 1977 at Avon Products, spending 5 years in the South American
marketing group, and then 3 years as Division Manager for a $25million dollar
New England sales group. Recruited to Westinghouse in 1983 into their nascent
cable television unit, Group W, Mr. Willmott spent 8 years in all phases of
sales and marketing, and running the effort in the southeast region of the U.S.
After the sale of Group W, Mr. Willmott joined the venerable investment banking
firm of Dillon Read & Company (now UBS) in 1991, spending the next 8 years
in financial services, business development, and marketing. In 2002, he joined
the board of RCG Companies, a public travel/technology holding company. He was
immediately made Chairman of the Board, and through various travel related
mergers/acquisitions, the business grew to over $300 million in bookings. Mr.
Willmott retired the Chair in 2005, and remained a director until the Company
was acquired by private equity. Mr. Willmott joined the board of IBSGI in June
2005. He is currently also advising several private early stage companies with
their development. Also, he serves on the Adjunct faculty of both New York
University Graduate Management Program and Fordham University Graduate School of
Business. He holds a Bachelors and an MBA in marketing.
Mr.
Geoffrey Birch was in the manufacturing and distribution plastics and
pharmaceuticals for over 30 years. Mr. Birch developed a specialized European
facility for medicated over-the-counter hair treatments which was eventually
purchased by SSL International, a UK publicly quoted company in the late 1990s.
Mr. Birch was a board member of several UK Venture capital firms investing in
young UK companies with identifiable growth potential in the areas of
technology. He is currently chairman of Sylvrey Ltd, an investment company. Mr.
Birch brings in-depth knowledge into the development of businesses in bear and
bull markets.
Dr.
Alexander S. Preker has served as director of the Company since October, 2007.
From 2006 through 2007, Dr. Preker was the Lead Economist, Africa Region
(AFTH2), World Bank and Member of Global Task Force on Scaling up Health
Education, WHO, Geneva. From 2004 through 2006, Dr. Preker was the Sector Leader
& Member of Corporate Management Group (AFTH2), World Bank. From 2000
through 2003, Dr. Preker was the Chief Economist for Health and Head of Health
Systems Development, World Bank. Dr. Preker has completed the Executive
Development Program, Harvard University, US; earned a PhD, Economics, London
School of Economics and Political Science, London, UK; Diploma, Medical Law and
Ethics, King's College, London, UK; Fellowship, Medicine, University College
London, London, UK; Postgraduate Medical Training, McGill, Montreal, Quebec,
Canada; Masters of Business Administration (audit), McGill, Montreal, Quebec,
Canada; MD, University of British Columbia, Vancouver, Canada; and BSc,
Honors, University of British Columbia, Vancouver, Canada. Dr. Preker is
currently an Adjoint Associate Professor, Wager School, New York University, New
York, NY.
Our
directors are elected for a one-year term at our annual shareholders' meeting.
Vacancies may be filled by the Board of Directors until the next annual
meeting.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who own more than 10% of a registered class
of the Company's equity securities, to file with the Securities and Exchange
Commission (the “Commission”) initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater-than 10% shareholders are required by the
Commission's regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of Forms 3, 4 and 5 received by the
Company, transactions involving the Company and review of stockholder records,
the Company believes, during the fiscal year ended December 31, 2004, all filing
requirements under Section 16(a) of the Securities Exchange Act of 1934
applicable to officers, directors and 10% shareholders were
satisfied.
Audit
Committee Financial Expert
The Board
has determined that Director Geoffrey Birch has the expertise to be financial
expert as defined by Item 401(e)(2) of Regulation S-B of the Securities exchange
Act of 1934. Mr. Birch is not independent within the meaning of Item 7(d)(iv) of
Schedule 14A under the Exchange Act. The board anticipates when an audit
committee is impaneled; Mr. Birch will serve on that committee in that
capacity.
CODE OF
ETHICS
The
Company has adopted a code of business conduct and ethics for its directors,
officers and management employees. Such code was filed as Exhibit 14 to Form
10-KSB filed March 21, 2004 and is available to shareholders at no charge from
the Company at, 1132 Celebration Blvd., Celebration, FL
34747.
The
Board of Directors accepted the resignation of HJ & Associates, LLC for the
2007 audit and elected to obtain a new accounting firm. On January
15
th
, 2008
the board appointed Jewett, Schwartz, Wolfe, and Associates, LLC as its new set
of auditors.
ITEM
10. EXECU
TIV
E COMPENSATION
SUMMARY
COMPENSATION TABLE (1)
The
following table summarizes compensation paid to the Company's president/chief
executive officer in 2005 (the “named executive officers”) as well as his
compensation in 2004. No other officer received compensation of $100,000 in any
such year.
Annual
Compensation
|
Long
Term Compensation Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
Payouts
|
|
|
|
|
|
|
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Other
Annual
Compen-
sation
($)
|
|
|
Restricted
Stock
Award(s)
($)
|
|
|
Securities
Underlying
Options/
SARs
(#)
|
|
|
LTIP
Payouts
($)
|
|
|
All
Other
Compen-
sation
($)
|
|
|
Michael
Rivers,
|
|
|
2007
|
|
$
|
198,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
President,
CEO
|
|
|
2006
|
|
$
|
198,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Rivers was appointed CEO of IBSGI as of November 17, 2003. All of Dr. Rivers’
salary is currently deferred and $120,000 of his 2005 salary was waived and
contributed to the capital of the Company.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
TABLE
None.
OPTION EXERCISES AND STOCK VESTED TABLE
None.
PENSION
BENEFITS TABLE
None.
NONQUALIFIED DEFERRED COMPENSATION TABLE
None.
ALL OTHER COMPENSATION TABLE
None.
PERQUISITES TABLE
None.
AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUE TABLE
None.
EXECUTIVE
EMPLOYMENT CONTRACTS
The named
executive officer set forth in the Summary Compensation Table is an “at will”
employee and does not have a written employment agreement. The Board of
Directors established the 2006 base annual salary of the named executive officer
as $198,000. Salary for 2007 and 2006 is currently being deferred.
The
Company has no stock option, SAR or other compensation plans.
DIRECTOR
COMPENSATION
Directors
are not paid for meetings attended at our corporate headquarters or for
telephonic meetings. All travel and lodging expenses associated with directors'
meeting(s) are reimbursed by the Company.
On July
2, 2007, the Company issued 370,611 shares of common stock to the directors. A
consulting company controlled or represented by Geoffrey Birch's wife, the
Company's Chief Financial Officer and a director was issued 70,000 shares.
Jeffrey Willmott was issued 67,500 shares. A trust account was issued 233,111
shares for Dr. Michael Rivers.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 24, 2008 by (i) each stockholder who is
known by the Company to own beneficially more than five percent of the Company's
outstanding Common Stock, (ii) each director of the Company, (iii) the Company's
executive officer named in the Summary Compensation Table, and (iv) by all
executive officers and directors of the Company as a group.
Name
of Shareholder
|
|
Shares
Beneficially Owned
|
|
Percent
of
Class
|
|
M&K
Trust (1)
|
|
|
1,134,111
|
|
|
11.97
|
|
Geoffrey
Birch (2)
|
|
|
220,000
|
|
|
2.32
|
|
Jeffrey
Willmott
|
|
|
82,500
|
|
|
*
|
|
Alexander Preker,
PhD
|
|
|
0
|
|
|
0
|
|
All
directors and executive
|
|
|
1,436,611
|
|
|
14.29
|
|
officers
as a group (3 persons)
|
|
|
|
|
|
|
|
* Less
than 2%
(1)
Represents shares owned in the name of M&K Trust, a trust established in
April of 2001 for the benefit of Michael Rivers' children and wife, Kim Rivers.
Kim Rivers is the trustee of the trust and exercises sole voting and investment
power with respect to such shares. Dr. Rivers disclaims any beneficial interest
in such shares.
(2) Represents shares owned in
the name of Mr. Birch's shares are owned by Sylvrey, LTD and Tamarinda Ventures
LTD of in Guernsey, UK.
The
following issuances of common stock in 2007 were approved by the Company's Board
of Directors. Except as indicated, these issuances were not to directors,
officers or 10% holders. Reference is made to Note 5 to the Financial Statements
included in this report for further information concerning these
issuances.
Shares
issued for cash
|
294,617
|
Shares
issued for services
|
16,662
|
Shares
issued for board member services and officers
|
384,111
|
Shares
issued in private offering
|
1,919,643
|
Item 12. Certain
Relationships and
Related Transactions
The
President of the Company waived the right to receive $120,000 of his 2005 salary
which has been accounted for as a contribution to the Company's capital. The
President of the Company also contributed $26,500 to the Company in
2005.
Item
13. Exhibits
The
Company shall furnish copies of exhibits for a reasonable fee (covering the
expense of furnishing copies) upon request to Michael Rivers, IBSG
International, Inc., 1132 Celebration Blvd., Celebration, FL 34747
Exhibit
Number
Description
|
3.1
|
Articles
of Incorporation, as amended. Incorporated by reference to exhibit 3(i) to
the Company's Form 10-SB/12g filed on March 27,
2002.
|
|
3.2
|
By-laws,
as amended. Incorporated by reference to exhibit 3(ii) to the Company's
Form 10-SB/12g filed on March 27,
2002.
|
|
10.1
|
Stock
Purchase Agreement. Incorporated by reference to Exhibit 1.1 to Form 8-K
filed on November 21, 2003.
|
|
10.2
|
Promissory
Note dated November 10, 2003. Incorporated by reference to Exhibit 10.2 to
Registration Statement on Form SB-2 (file no.
333-119903).
|
|
10.3
|
Note
Modification Agreement dated June 2004. Incorporated by reference to
Exhibit 10.3 to Registration Statement on Form SB-2 (file no.
333-119903).
|
|
10.4
|
Subscription
Agreement dated March 17, 2005 for purchase of senior secured convertible
notes and common stock purchase warrants. Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on March 31,
2005
|
|
10.5
|
Form
of Senior Secured Convertible Promissory Note. Incorporated by reference
to Exhibit 10.2 to Form 8-K filed on March 31,
2005
|
|
10.6
|
Form
of Class A Common Stock Purchase Warrant. Incorporated by reference to
Exhibit 10.3 to Form 8-K filed on March 31,
2005
|
|
10.7
|
Form
of Class B Common Stock Purchase Warrant. Incorporated by reference to
Exhibit 10.4 to Form 8-K filed on March 31,
2005
|
|
10.8
|
Form
of Security Agreement. Incorporated by reference to Exhibit 10.5 to Form
8-K filed on March 31, 2005
|
|
14
|
Code
of Ethics (Incorporated by reference to Exhibit 14 to the Registrant's
Form 10-KSB, filed March 21, 2004.)
|
|
16.1
|
Letter
from Robert C. Seiwell, CPA. Incorporated by reference to Exhibit 16. to
the Company's Form 8-K/A, filed on March 31,
2004.
|
Item
14. PRINCIP
AL
ACCOUNTANT FEES AND SERVICES
Jewett,
Schwartz, Wolfe, and Associates, LLC (“JWSA”) was hired to audit the Company’s
annual financial statements on January 18, 2008. Fees related to
services performed by JSWA in 2007 were as follow:
|
|
2007
|
|
Audit
Fees (1)
|
|
$
|
0
|
|
Audit-Related
Fees
|
|
|
0
|
|
Tax
Fees (2)
|
|
|
0
|
|
|
|
|
|
|
All
Other Fees (3)
|
|
$
|
34,000
|
|
|
|
|
|
|
Total
|
|
$
|
34,000
|
|
HJ &
Associates, LLC (“HJ&A”) has audited the Company's financial statements
annually since 2003. Fees related to services performed by HJ&A in
2007 and 2006 were as follows:
|
|
2007
|
|
|
2006
|
|
Audit
Fees (1)
|
|
$
|
27,562
|
|
|
$
|
34,318
|
|
Audit-Related
Fees
|
|
|
|
|
|
|
|
|
Tax
Fees (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other Fees (3)
|
|
$
|
25,827
|
|
|
$
|
8,741
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,389
|
|
|
$
|
43,059
|
|
|
(1)
|
Audit
fees represent fees for professional services provided in connection with
the audit of our financial statements and review of our quarterly
financial statements.
|
|
(2)
|
Tax
fees principally included tax advice, tax planning and tax return
preparation.
|
|
(3)
|
Other
fees related to Registration Statement Reviews and
Comments.
|
The Board
of Directors has reviewed and discussed with the Company's management and
auditors the audited consolidated financial statements of the Company contained
in the Company's Annual Report on Form 10-KSB for the Company's 2006 fiscal
year. The Board has also discussed with the auditors the matters required to be
discussed pursuant to SAS No. 61 (Codification of Statements on Auditing
Standards, AU Section 380), which includes, among other items, matters related
to the conduct of the audit of the Company's consolidated financial
statements.
The Board
has received and reviewed the written disclosures and the letter from JSWA
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and has discussed with its auditors its
independence from the Company. The Board has considered whether the provision of
services other than audit services is compatible with maintaining auditor
independence.
Based on
the review and discussions referred to above, the Board approved the inclusion
of the audited consolidated financial statements be included in the Company's
Annual Report on Form 10-KSB for its 2007 fiscal year for filing with the
SEC.
AUDIT
COMMITTEE'S PRE-APPROVAL PROCESS
The
Board's policy is now to pre-approve all audit services and all permitted
non-audit services (including the fees and terms thereof) to be provided by the
Company's independent auditor; provided, however, pre-approval requirements for
non-audit services are not required if all such services (1) do not aggregate to
more than five percent of total revenues paid by the Company to its accountant
in the fiscal year when services are provided; (2) were not recognized as
non-audit services at the time of the engagement; and (3) are promptly brought
to the attention of the Board and approved prior to the completion of the
audit.
The Board
pre-approved all fees described above.
SIGN
ATU
RES
Pursuant
to the requirements of Section 13 or 15(b) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Celebration, Florida, on
March 27, 2008.
|
|
|
|
IBSG
INTERNATIONAL, INC
|
|
|
|
Date: March
31, 2008
|
By:
|
/s/
Michael Rivers
|
|
Michael
Rivers
|
|
President
|
In
accordance with the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature
|
Title
|
Date
|
|
|
|
/s/
Michael Rivers
|
President
and Director ( Principal
|
March
31, 2008
|
Michael
Rivers
|
Executive
Officer)
|
|
|
|
|
|
|
|
/s/
Geoffrey Birch
|
Director,
Treasurer (Principal
|
March
31, 2008
|
Geoffrey
Birch
|
Accounting
Officer)
|
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
December
31, 2007
C
O N T E N T S
|
|
Reports
of Independent Registered Public Accounting Firm
|
31
|
Consolidated
Balance Sheet
|
33
|
Consolidated
Statements of Operations
|
34
|
Consolidated
Statements of Changes in Stockholders' Equity
|
35
|
Consolidated
Statements of Cash Flows
|
36
|
Notes
to the Consolidated Financial Statements
|
37
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
IBSG
International, Inc. and Subsidiaries
Celebration,
Florida
We have
audited the accompanying consolidated balance sheet of IBSG International, Inc.
and Subsidiaries at December 31, 2007, and the related statements of operations,
stockholders’ equity and cash flows for the year ended December 31, 2007. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of IBSG International, Inc. and
Subsidiaries at December 31, 2007, and the results of their operations and their
cash flows for the year ended December 31, 2007 in conformity with United States
generally accepted accounting principles.
As
discussed in Note 11 to the consolidated financial statements, the Company has
restated its financial statements for the year ended December 31,
2006. This action was taken to correct errors relating to revenue
recognition. Adjustments have been made to correct revenue, deferred revenue and
the tax provision.
Jewett,
Schwartz, Wolfe & Associates
Hollywood,
Florida
March 27,
2008
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
IBSG
International, Inc. and Subsidiaries
Celebration,
Florida
We have
audited the statements of operations, stockholders’ equity and cash flows of
IBSG International, Inc. and Subsidiaries for the year ended December 31, 2006.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of the operations and cash flows of IBSG
International, Inc. and Subsidiaries for the year ended December 31, 2006 in
conformity with United States generally accepted accounting
principles.
As
discussed in Note 11 to the consolidated financial statements, the Company has
restated its financial statements for the year ended December 31,
2006. This action was taken to correct errors relating to revenue
recognition. Adjustments have been made to correct revenue, deferred revenue,
accounts receivable, and the tax provision.
HJ &
Associates, LLC
Salt Lake
City, Utah
March 27,
2007, except for note 11 for which the date is December 31, 2007
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated
Balance Sheet
ASSETS
|
|
December
31,
2007
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
|
|
$
|
2,138,496
|
|
Accounts
receivable, net
|
|
|
20,673,831
|
|
Prepaid expenses
|
|
|
1,402,274
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
24,214,601
|
|
|
|
|
|
|
FURNITURE,
FIXTURES AND SOFTWARE, NET (Note 3)
|
|
|
703,024
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
Accounts receivable, net of current portion
|
|
|
6,195,000
|
|
Deferred consulting services
|
|
|
2,350,375
|
|
Deferred tax assets, net
|
|
|
350,000
|
|
Note
receivable
|
|
|
1,802,324
|
|
Other
assets
|
|
|
141,665
|
|
Total
Other Assets
|
|
|
10,839,364
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
35,756,989
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
IBSG INTERNATIONAL, INC. AND
SUBSIDIARIES
Consolidated
Balance Sheet (Continued)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
December
31,
2007
|
|
|
|
TOTAL
LIABILITIES
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
878,770
|
|
Income
tax payable
|
|
|
1,026,350
|
|
Deferred
revenue (Note 2)
|
|
|
3,711,347
|
|
Deferred
tax liabilities, net
|
|
|
914,137
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
6,530,604
|
|
|
|
|
|
|
DEFERRED
REVENUE, NET OF CURRENT PORTION
|
|
|
4,995,000
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
11,525,604
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 9)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
Common
stock authorized 100,000,000 shares at
|
|
|
|
|
$0.001
par value; 9,685,052 shares issued and outstanding
|
|
|
9,686
|
|
Additional
paid-in capital
|
|
|
20,160,045
|
|
Retained
earnings
|
|
|
4,061,654
|
|
|
|
Total
Stockholders' Equity
|
|
|
24,231,385
|
|
|
|
TOTAL
LIABILTIES AND STOCKHOLDERS' EQUITY
|
|
$
|
35,756,989
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
For
the years ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Restated)
|
|
REVENUES
|
|
$
|
14,571,283
|
|
|
$
|
7,604,678
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
356,372
|
|
|
|
272,171
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
14,214,911
|
|
|
|
7,332,507
|
|
|
|
|
|
|
|
|
|
|
SALES,
GENERAL, AND ADMINISTRATIVE EXPENSES
|
|
|
6,805,278
|
|
|
|
5,741,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
7,409,633
|
|
|
|
1,590,815
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (Expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
65,894
|
|
|
|
98,837
|
|
Interest
expense
|
|
|
--
|
|
|
|
(58,877
|
)
|
Loss
on debt settlement and warrants
|
|
|
--
|
|
|
|
(470,897
|
)
|
Change
in fair value of warrants
|
|
|
--
|
|
|
|
(61,181
|
)
|
Change
in fair value of embedded convertible options
|
|
|
--
|
|
|
|
(18,683
|
)
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense), Net
|
|
|
65,894
|
|
|
|
(510,801
|
)
|
|
|
|
|
|
|
|
|
|
Net
income before provision for income taxes
|
|
|
7,475,527
|
|
|
|
1,080,014
|
|
Provision
for income taxes
|
|
|
2,616,434
|
|
|
|
382,900
|
|
Net
Income
|
|
$
|
4,859,093
|
|
|
$
|
697,114
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE – Basic and Diluted
|
|
$
|
0.57
|
|
|
$
|
0.10
|
|
WEIGHTED
AVERAGE NUMBER OF
|
|
|
|
|
|
|
|
|
SHARES
OUTSTANDING – Basic and Diluted
|
|
|
8,487,700
|
|
|
|
7,023,831
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income(Deficit)
|
|
|
Total
|
|
Balance,
December 31, 2005
|
|
|
6,039,886
|
|
|
$
|
6,041
|
|
|
$
|
14,868,140
|
|
|
$
|
(1,494,553
|
)
|
|
$ 13,379,628
|
|
Common
stock issued board member for services
|
|
|
165,000
|
|
|
|
165
|
|
|
|
263,835
|
|
|
|
--
|
|
|
|
264,000
|
|
Common
stock issued for acquisition
|
|
|
20,000
|
|
|
|
20
|
|
|
|
37,980
|
|
|
|
--
|
|
|
|
38,000
|
|
Common
stock issued for cash
|
|
|
369,300
|
|
|
|
369
|
|
|
|
333,901
|
|
|
|
--
|
|
|
|
334,270
|
|
Common
stock issued for settlement debt
|
|
|
834,733
|
|
|
|
835
|
|
|
|
1,429,643
|
|
|
|
--
|
|
|
|
1,430,478
|
|
Purchase
of treasury stock
|
|
|
(461,400
|
)
|
|
|
(461
|
)
|
|
|
(830,059
|
)
|
|
|
--
|
|
|
|
(830,520
|
)
|
Common
stock issued for services
|
|
|
20,000
|
|
|
|
20
|
|
|
|
19,980
|
|
|
|
--
|
|
|
|
20,000
|
|
Common
stock issued for private offering
|
|
|
82,500
|
|
|
|
82
|
|
|
|
82,418
|
|
|
|
--
|
|
|
|
82,500
|
|
Net
income, December 31, 2006 (Restated)
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
697,114
|
|
|
|
697,114
|
|
Balance,
December 31, 2006
|
|
|
7,070,019
|
|
|
$
|
7,071
|
|
|
$
|
16,205,838
|
|
|
$
|
(797,439
|
)
|
|
$
|
15,415,470
|
|
Common
stock issued board member for services
|
|
|
384,111
|
|
|
|
384
|
|
|
|
691,015
|
|
|
|
--
|
|
|
|
691,399
|
|
Common
stock issued for cash
|
|
|
294,617
|
|
|
|
294
|
|
|
|
485,237
|
|
|
|
--
|
|
|
|
485,531
|
|
Common
stock issued for services
|
|
|
16,662
|
|
|
|
17
|
|
|
|
67,375
|
|
|
|
--
|
|
|
|
67,392
|
|
Common
stock issued for private offering
|
|
|
1,919,643
|
|
|
|
1,920
|
|
|
|
2,685,580
|
|
|
|
--
|
|
|
|
2,687,500
|
|
Contributed
capital
|
|
|
--
|
|
|
|
--
|
|
|
|
25,000
|
|
|
|
--
|
|
|
|
25,000
|
|
Net
income, December 31, 2007
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
4,859,093
|
|
|
|
4,859,093
|
|
Balance,
December 31, 2007
|
|
|
9,685,052
|
|
|
$
|
9,686
|
|
|
$
|
20,160,045
|
|
|
$
|
4,061,654
|
|
|
$
|
24,231,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
For
the Years Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
CASH
FLOW FROM OPERATING ACTIVITIES:
|
|
|
|
|
(Restated)
|
|
Net
income
|
|
$
|
4,859,093
|
|
|
$
|
697,114
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash
used by operating activities:
|
|
|
|
|
|
|
|
|
Amortization
and depreciation expense
|
|
|
381,402
|
|
|
|
307,098
|
|
Bad
debt expense
|
|
|
286,000
|
|
|
|
--
|
|
Recognition
of deferred stock based consulting fee
|
|
|
1,190,661
|
|
|
|
1,190,661
|
|
Loss
on settlement of debt
|
|
|
--
|
|
|
|
470,897
|
|
Stock
issued for services
|
|
|
758,791
|
|
|
|
284,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(10,615,281
|
)
|
|
|
(4,701,171
|
)
|
Contributed
services by officers, directors, or shareholders
|
|
|
--
|
|
|
|
161,688
|
|
Prepaid
expenses
|
|
|
(947,521
|
)
|
|
|
--
|
|
Accounts recieveable, net of current portion
|
|
|
(1,200,000
|
)
|
|
|
--
|
|
Other
assets
|
|
|
3,704
|
|
|
|
(105,968
|
)
|
Deferred
tax assets, net
|
|
|
1,903,300
|
|
|
|
768,900
|
|
Accounts
payable and accrued expenses
|
|
|
940,657
|
|
|
|
358,200
|
|
Accrued
liquidated damages
|
|
|
--
|
|
|
|
11,613
|
|
Accrued
Interest payable
|
|
|
--
|
|
|
|
(55,426
|
)
|
Deferred
revenue
|
|
|
(4,483,114
|
)
|
|
|
4,215,331
|
|
Deferred
tax liabilities, net
|
|
|
(417,963
|
)
|
|
|
(386,000
|
)
|
Deferred
revenue, net of current portion
|
|
|
4,995,000
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities
|
|
|
(2,345,271
|
)
|
|
|
3,216,937
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(443,259
|
)
|
|
|
(25,892
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(443,259
|
)
|
|
|
(25,892
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments
for note receivable
|
|
|
769,380
|
|
|
|
(2,571,704
|
)
|
Repurchase
of stock
|
|
|
--
|
|
|
|
(983,559
|
)
|
Payments
on capital leases
|
|
|
(4,031
|
)
|
|
|
(10,055
|
)
|
Payments
on notes payable
|
|
|
--
|
|
|
|
(250,000
|
)
|
Proceed
from investors
|
|
|
2,712,500
|
|
|
|
--
|
|
Proceeds
from issuance of common stock, net of offering costs
|
|
|
485,531
|
|
|
|
290,471
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
3,963,380
|
|
|
|
(3,524,847
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
1,174, 850
|
|
|
|
(333,802
|
)
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
963,646
|
|
|
|
1,297,448
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
2,138,496
|
|
|
$
|
963,646
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
IBSG INTERNATIONAL, INC. AND
SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Continued)
|
|
For
the Years Ended
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
(Restated)
|
|
Interest
paid
|
|
$
|
--
|
|
|
$
|
58,877
|
|
Income
taxes paid
|
|
$
|
--
|
|
|
$
|
(104,500
|
)
|
SCHEDULE
OF NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Equity
instruments
|
|
$
|
--
|
|
|
$
|
284,000
|
|
Common
stock issued for extinguishment of debt
|
|
$
|
--
|
|
|
$
|
834,733
|
|
Repurchase
of common stock
|
|
$
|
--
|
|
|
$
|
(830,520
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 1 –
BASIS OF PRESENTATION
|
The
consolidated financial statements presented include those of IBSG
International, Inc. (IBSGI) and its wholly owned subsidiaries Intelligent
Business Systems Group, Inc, IBSGI-UK, Ltd. Intelligent Business
Systems Development , Inc., and Secure Blue, Inc. (“Secure Blue”).
Collectively they are referred to as “the Company”.
The
Company’s principal business is the sale of software products and
services. The Company sells licenses and services for their
products thru master licensee arrangements with state operated small
business development centers (“SBDC”), Fortune 1000 corporations, business
associations, banking institutions and international economic development
projects. These organizations focus on servicing or supporting small and
medium sized enterprises (SME). Internationally, the Company
focuses its marketing efforts in offering the solution on a federal level
and expands projects through other federal government agencies in the same
areas of procurement. Satellite licenses are also sold
through master license customers. The Company’s target market
is comprised of emerging enterprises in need of a suite of
business-to-business products or web enabled capabilities, but lack the
resources required for internal development or are focusing their
resources on growth by outsourcing these
capabilities.
|
|
IBSG
was incorporated under the laws of the State of Florida in June 1996 and
until November 2003 went through several name changes. Prior to
November 2003 and the name change to IBSG International, Inc., no
meaningful business activities were
conducted.
|
|
Intelligent
Business Systems Group, Inc. (“Group”) was incorporated in the State of
Delaware on January 9, 2003 for the purpose of providing software
solutions to small business development, banking and business association
markets.
|
|
Pursuant
to a Share Exchange Agreement dated November 10, 2003, which was effective
on February 13, 2004, International acquired 100% of the outstanding
capital stock of Group, in exchange for 15,000,000 shares of its common
stock. These shares were issued to the stockholders of Group in exchange
for their wholly owned interest in Group. At the time of acquisition, the
stockholders of Group acquired control of International. For accounting
purposes, Group was treated as the acquiring entity and International as
the continuing entity for legal purposes. There was no adjustment to the
carrying value of the assets or liabilities of Group. The Company began
planned principle operations as of the date of the reverse merger. Since
commencing operations the Company has acquired exclusive licenses of
software and source codes for the Company's proprietary software as well
as various license/maintenance agreements with the users of such software
from a related party. Group assumed the obligations as licensor
under the agreements with the
users.
|
|
Secure
Blue was established as a new subsidiary in June 2004 through the
acquisition of certain assets to utilize acquired security technology in
addressing the digital monitoring of records for purposes of satisfaction
of certain accounting control requirements of public
companies. The Company exchanged 650,000 shares of common stock
valued at $0.56 per share totaling $364,000 plus $46,088 in cash for the
software assets. The entire purchase price of $410,088 was allocated to
the software purchased.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of
Consolidation
The
consolidated financial statements of the Company include International and
its wholly owned subsidiaries Group and Secure Blue. All
material intercompany accounts have been eliminated in
consolidation.
Accounting
Method
|
|
The
consolidated financial statements are prepared using the accrual method of
accounting. The Company has elected a calendar year
end.
|
|
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period.
|
|
Reclassification
Certain
prior period amounts have been reclassified to conform to current year
presentations.
|
|
Cash and Cash
Equivalents
|
|
The
Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Revenue
Recognition
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”) Issue No. 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables.
The
Company recognize revenue on software related transactions on single
element arrangements and on each element of a multiple element
arrangement, when 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 a multi-year term license is delivered 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. In the
first year, PCS is packaged with the license and accordingly the Company
allocates the arrangement fees to the elements using the residual method
which generally results in 65% of the first year’ arrangement fee being
allocated to license revenue. 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. The PCS revenue subsequent to year 1 is realized
annually, upon customer acceptance, as deferred revenue and recognized as
revenue over the service period of one year. Professional
services include training and installation services are accounted for
separately as they are not considered essential to the functionality of
the software.
Concentration of
Credit Risk
Financial
instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts
receivable. At December 31, 2007 the Company had cash deposits
which exceeded federally insured limits. The Company maintains
its cash balances at high quality financial institutions, which the
Company believes limits these risks. The Company performs ongoing credit
evaluations of its customers’ financial condition and maintains an
appropriate allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable.
Fair Value of
Financial Instruments
The
Company’s financial instruments include cash and trade receivables. The
carrying amount of these financial instruments has been estimated by
management to approximate fair
value.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
|
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.
The Company has amended
its annual report to reflect certain adjustments to revenue and
deferred revenue in the consolidated financial statements for fiscal years
ended
December 31, 2006 and 2005
along with
clarification
s
to the Company’s
revenue recognition policies.
A certain
portion of deferred revenue represents license fees for which the
conditions of the arrangements have been modified, and which
represent
p
reviously
recognized revenues specifically associated with certain older
contracts that
have been restated
and will be deferred until such time as all SOP 97-2 requirements have
been satisfied. The effects of this restatement are presented
in Note
11
. Deferred revenue as
of December 31, 2007 consists of the
following:
|
|
|
South
Africa
|
|
|
Kenya
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance as of December 31, 2006
|
|
$
|
4,275,000
|
|
|
$
|
994,768
|
|
|
$
|
2,924,693
|
|
|
$
|
8,194,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases:
current year deferred revenue
|
|
|
3,625,087
|
|
|
|
1,312,500
|
|
|
|
331,565
|
|
|
|
5,269,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decreases: realization
of revenue from deferred revenue
|
|
|
(3,029,611
|
)
|
|
|
(1,435,462
|
)
|
|
|
(292,193
|
)
|
|
|
(4,757,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue as of December 31, 2007
|
|
|
4,870,476
|
|
|
|
871,806
|
|
|
|
2,964,065
|
|
|
|
8,706,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of deferred revenue
|
|
|
(2,507,976
|
)
|
|
|
(871,806
|
)
|
|
|
(331,565
|
)
|
|
|
(3,711,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
revenue, net of current portion
|
|
$
|
2,362,500
|
|
|
$
|
-
|
|
|
$
|
2,632,500
|
|
|
$
|
4,995,000
|
|
|
Accounts Receivable,
Allowance for Doubtful Accounts and Sales
Returns
|
|
A
considerable amount of judgment is required to assess the realization of
accounts receivables, including assessing the probability of collection
and the current credit-worthiness of each customer. If the financial
condition of a customer were to deteriorate, resulting in an impairment of
their ability to make payments, an additional provision for doubtful
accounts might be required. A provision for doubtful accounts would
initially be recorded based on historical experience, and then adjusted at
the end of each reporting period based on a detailed assessment of our
accounts receivable and allowance for doubtful accounts. In estimating the
provision for doubtful accounts, management considers (i) the type of
entity (government, commercial, retail) and the aging of the accounts
receivable; (ii) trends within and ratios involving the age of the
accounts receivable; (iii) the customer mix in each of the aging
categories and the nature of the receivable, such as whether it derives
from license, professional services or maintenance revenue; (iv) our
historical provision for doubtful accounts; (v) the credit worthiness of
the customer; and (vi) the economic conditions of the customers industry,
whether the entity is a national government, as well as general economic
conditions, among other factors. The bulk of the
Company’s historic client base is primarily composed of
national government accounts which are classified as fully collectible but
slow payers.
In
the first quarter of 2007, the Company expanded its customer base outside
of national governmental accounts. Due to this expansion, management has
reevaluated its allowance for doubtful accounts and sales return allowance
specific to this new customer base which includes state sponsored economic
development councils and other quasi-governmental agencies along with
corporate based SBDC’s and SME’s. The addition of these types of customers
generally represents a higher level of business risk than do national
government customers. Accordingly, management evaluates the realization of
accounts receivable specific to this new customer base by using a
percentage of sales revenue as the basis for its allowance for doubtful
accounts applied consistently among all contracts generated from the new
customer base. For the year ended December 31, 2007 the allowance for
doubtful accounts was $286,000. For the years ended December
31, 2006 there was no allowance for doubtful accounts.
In
summary, estimates for establishing an allowance for doubtful accounts and
sales returns applicable to national government account will be based on
our existing method referred to above. Estimates for allowance for
doubtful accounts and sales returns applicable to the new customer types
will be based on the percentage of sales method.
The Company has a note recievable to Galaxy5
for $3,000,000 recorded from the sale of the CAC contract in March 2006.
An interest discount of $428,296 was recorded at the time of the contract
sale. This receivable has a term of three years at the time of issue. The
balance of the note receivable as of December 31, 2007 was
$1,802,324.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
Our accounts
receivables from customers are as follows at December 31,
2007:
|
|
South
Africa
|
|
|
Kenya
|
|
|
Other
|
|
|
Allowance
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2006
|
|
$
|
8,046,430
|
|
|
$
|
3,800,000
|
|
|
$
|
3,493,120
|
|
|
$
|
-
|
|
|
$
|
15,339,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
to accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of revenue in the current
year
|
|
|
9,342,024
|
|
|
|
4,372,962
|
|
|
|
856,297
|
|
|
|
-
|
|
|
|
14,571,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization
of revenue (from deferred revenue) in the current year
|
|
|
(3,029,611
|
)
|
|
|
(1,435,462
|
)
|
|
|
(292,193
|
)
|
|
|
-
|
|
|
|
(4,757,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition
of deferred revenue in the current year
|
|
|
3,625,087
|
|
|
|
1,312,500
|
|
|
|
331,565
|
|
|
|
-
|
|
|
|
5,269,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increases to accounts receivable
|
|
|
9,937,500
|
|
|
|
4,250,000
|
|
|
|
895,669
|
|
|
|
-
|
|
|
|
15,083,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
reductions to accounts receivable
|
|
|
(1,744,437
|
)
|
|
|
(1,400,000
|
)
|
|
|
(123,451
|
)
|
|
|
(286,000
|
)
|
|
|
(3,553,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable as of December 31, 2007
|
|
|
16,239,493
|
|
|
|
6,650,000
|
|
|
|
4,265,338
|
|
|
|
(286,000
|
)
|
|
|
26,868,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
current portion of accounts
receivable,
net
|
|
|
12,676,993
|
|
|
|
6,650,000
|
|
|
|
1,632,828
|
|
|
|
(286,000
|
)
|
|
|
20,673,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receiveable, net of current
portion
|
|
$
|
3,562,500
|
|
|
$
|
-
|
|
|
$
|
2,632,500
|
|
|
$
|
-
|
|
|
$
|
6,195,000
|
|
85% of
the Company’s accounts receivable outstanding is related to two customers in
South Africa and Kenya. The aggregate value of these two contracts is
approximately $33.4 million, including the multi-year license renewal component
of the contracts. From inception of these contracts through December 31, 2007,
the Company has realized revenue of approximately $21
million.
The
Company has amended its annual report to reflect certain adjustments to revenue
and deferred revenue in the consolidated financial statements for fiscal years
ended December 31, 2006 and 2005 along with clarifications to the Company’s
revenue recognition policies. A certain portion of accounts receivable
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 that have been restated to deferred
revenue and will be deferred until such time as all SOP 97-2 requirements have
been satisfied. These amounts, along with the multi-year license renewal
component of the contract for South Africa are classified as accounts
receivable, net of current portion.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Depreciation and
Amortization
|
|
The
Company is depreciating its furniture on a straight-line basis over 5
years and equipment on a straight-line basis over a three year period.
Software acquired is amortized on a straight line over a five year
period.
|
|
The
Company follows the provisions of SFAS No. 142 and reviews long-lived
assets and identifiable tangibles whenever events or circumstances
indicate that the carrying amounts of such assets may not be
fully recoverable. The Company evaluates the recoverability of long-lived
assets by measuring the carrying amounts of the assets against the
estimated undiscounted cash flows associated with these assets. At the
time such evaluation indicates that the future undiscounted cash flows of
certain long-lived assets are not sufficient to recover the assets'
carrying value, the assets are adjusted to their fair values (based upon
discounted cash flows).
|
|
Accounting for
Derivatives
|
|
The
Company evaluates its convertible debt, options, warrants or other
contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" and related interpretations
including EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own
Stock".
The
fair value of the embedded derivative is marked-to-market at each balance
sheet date and recorded as a liability. In the event that the fair value
is recorded as a liability, the change in fair value is recorded in the
consolidated statement of operations as other income or expense. Upon
conversion or exercise of a derivative instrument, the instrument is
marked to fair value at the conversion date and then that fair value is
reclassified to equity. Equity instruments that are initially
classified as equity that become subject to reclassification under SFAS
No. 133 are reclassified as a liability at the fair value of the
instrument on the reclassification
date.
|
|
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amount of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely then not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment. A deferred tax asset valuation allowance is
recorded when it is more likely than not that deferred tax assets will not
be realized.
The
Company’s policy for interest and penalties on material uncertain income
tax positions recognized in our consolidated financial statements is to
classify these as interest expense and operating expense, respectively.
The Company did not incur material income tax interest or penalties during
the year ended December 31,
2007.
|
|
Equity transactions for
consideration other than cash are valued at the closing trading price of
the Company’s common stock on the date of
authorization.
|
|
Cost
of sales is comprised of the amortization of the capitalized software
costs.
|
|
Research and
Development Expenses
|
|
The
Company expenses research and development costs as incurred. During the
years ended December 31, 2007 and 2006 the Company had no research and
development expenses.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Recent Accounting
Pronouncements
In
December, 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51”
(hereinafter “SFAS No. 160”). This statement establishes accounting and
reporting standards that require a) the ownership interests in
subsidiaries held by parties other than the parent be clearly identified,
labeled and presented in the consolidated statement of financial position
with equity, but separate from the parent’s equity, b) the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face of
the consolidated statement of income, c) changes in a parent’s ownership
interest while the parent retains its controlling financial interest in
its subsidiary be accounted for consistently, d) when a subsidiary is
deconsolidated, any retained noncontrolling equity investment
in the former subsidiary be initially measured at fair value and e)
entities provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. The effective date of this standard is for fiscal
years and interim periods beginning on or after December 15, 2008. The
adoption of this statement had no immediate material effect on the
Company’s financial condition or results of operations.
In
February, 2007, the FASB issued SFAS 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of
FASB Statement No. 115” (hereinafter “SFAS No. 159”). This Statement
permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of this Statement is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. The effective date of this standard is for fiscal
years that begin after November 15, 2007. The adoption of this statement
had no immediate material effect on the Company’s financial condition or
results of operations.
In
September, 2006, the FASB issued SFAS 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of
FASB Statements No. 87, 88, 106, and 132(R)” (hereinafter “SFAS No. 158”).
This statement requires an employer to recognize the overfunded or
underfunded statues of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity
or changes in unrestricted net assets of a not for profit organization.
This statement also requires an employer to measure the funded status of a
plan as of the date of its year end statement of financial position, with
limited exceptions. The adoption of this statement had no immediate
material effect on the Company’s financial condition or results of
operations.
In
September, 2006, the FASB issued SFAS 157, “Fair Value Measurements”
(hereinafter “SFAS No. 157”). This statement defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosure about fair value
measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements. This statement does not
require any new fair value measurements, but for some entities, the
application of this statement may change current practice. Management has
not determined the impact that the adoption of this statement will have on
the Company’s financial condition or results of
operations.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
|
In
March, 2006, the FASB issued SFAS 156, “Accounting for Services of
Financial Assets – an Amendment of FASB Statement No. 140” (hereinafter
“SFAS No. 156”). This statement amends FASB Statement No. 140 “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. This statement requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract that results from a transfer, acquisition or assumption
of financial assets or liabilities. This statement also requires all
separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. This statement permits
an entity to choose among two subsequent measurement methods for each
class of separately recognized servicing assets and servicing liabilities.
This statement also permits at its initial adoption a one time
reclassification of available for sale securities to trading securities by
entities with recognized servicing rights. Finally, this statement
requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities. The adoption of
this statement had no immediate material effect on the Company’s financial
condition or results of operations.
In
February, 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
Financial Instruments – an Amendment of FASB Statements No. 133 and 140”
(hereinafter “SFAS No. 155”). This statement amends FASB Statements No.
133, “Accounting for Derivative Instruments and Hedging Activities” and
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” This statement resolves issues addressed
in Statement No. 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets.”
This statement permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation. This statement clarifies which interest-only strips
and principal-only strips are not subject to the requirement of Statement
No. 133. This statement establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation. This statement clarifies that
concentration of credit risk in the form of subordination are not embedded
derivatives. Finally, this statement amends Statement No. 140 to eliminate
prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. The adoption of this
statement had no material effect on the Company’s financial condition or
results of operations.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 3 -
FURNITURE, FIXTURES AND SOFTWARE
|
Fixed
assets are recorded at cost, major additions and improvements are
capitalized and minor repairs are expensed when
incurred. Depreciation of furniture, fixtures, and software is
determined using the straight-line method over the expected useful lives
of the assets as follows:
|
Description
|
Useful
lives
|
Art
|
Not
depreciated
|
Furniture
& fixtures
|
5
years
|
Office
equipment
|
3
years
|
Software
|
5
years
|
|
Furniture,
fixtures and software consisted of the
following:
|
|
|
For
the year ended
December
31,
2007
|
|
|
|
$
|
5,472
|
|
Furniture
& fixtures
|
|
|
41,113
|
|
Office
equipment
|
|
|
80,229
|
|
Software
|
|
|
1,787,202
|
|
|
|
|
|
|
|
|
|
1,914,016
|
|
Accumulated
depreciation
|
|
|
1,210,992
|
|
|
|
|
|
|
Net
furniture, fixtures and software
|
|
$
|
703,024
|
|
|
|
|
|
|
|
Depreciation
and amortization expense for the years ended December 31, 2007 and 2006
was $381,402 and $307,098,
respectively.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 4
– OTHER ASSETS
|
Other assets are
comprised of deposits, goodwill, and interest
receivable. Deposits of $4,474 are initial cash outlay for
rental agreements. Goodwill, which the Company recorded at
$38,000 is for the acquisition of its UK operation. Interest
receivable of $99,191 is the interest earned from the long term receivable
from Galaxy.
|
NOTE 5 – INCOME
TAXES
|
The
information in this footnote has been restated for 2006 to reflect certain
adjustments related to revenue as well as to correct errors in the income
tax note as originally filed with the Security Exchange Commission (SEC)
on March 29, 2007. The most significant corrections to this
note are related to the reversal of a valuation allowance of approximately
$1.1 million for deferred taxes and the recognition of deferred tax
liabilities related to deferred consulting from 2005. The effects of
this restatement are presented in Note
11.
|
|
The
provision for income taxes for the years ended December 31, 2007 and 2006
consist of the following:
|
|
|
|
2007
|
|
|
|
2006
|
|
Federal:
|
|
|
|
|
|
|
(Restated)
|
|
Current
|
|
$
|
2,251,434
|
|
|
$
|
--
|
|
Deferred
|
|
|
--
|
|
|
|
326,614
|
|
|
|
|
2,251,434
|
|
|
|
326,614
|
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
|
365,000
|
|
|
|
--
|
|
Deferred
|
|
|
--
|
|
|
|
56,286
|
|
|
|
|
365,000
|
|
|
|
56,286
|
|
|
|
$
|
2,616,434
|
|
|
$
|
382,900
|
|
|
Net deferred tax assets (liabilities) consist of
the following components as of December 31, 2007 and
2006:
|
|
|
2007
|
|
|
2006
|
|
Deferred tax
assets:
|
|
|
|
|
(Restated)
|
|
NOL carryover
|
|
$
|
--
|
|
|
$
|
2,076,600
|
|
Accrued expenses
|
|
|
275,863
|
|
|
|
139,500
|
|
Depreciation
|
|
|
330,000
|
|
|
|
37,200
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Deferred consulting
|
|
|
(1,190,000
|
)
|
|
|
(1,332,100
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
(liabilities)
|
|
$
|
(584,137
|
)
|
|
$
|
921,200
|
|
|
|
|
|
|
|
|
|
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
|
Deferred
tax assets and liabilities are reflected on the Company’s consolidated
balance sheets at December 31, 2007 and 2006 as
follows:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Non-current
deferred tax assets, net
|
|
$
|
350,000
|
|
|
$
|
2,113,800
|
|
Current
deferred tax liability, net
|
|
|
(914,137
|
)
|
|
|
(1,192,600
|
)
|
Net deferred tax assets
(liabilities)
|
|
$
|
(584,137
|
)
|
|
$
|
921,200
|
|
|
The
income tax provision differs from the amount of income tax determined by
applying the
U.S.
federal
and state income tax rates of 37.62% to pretax income from continuing
operations for the years ended December 31, 2007 and 2006 due to the
following:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Book
income
|
|
$
|
2,812,471
|
|
|
$
|
406,300
|
|
Net
operating loss carry forward
|
|
|
(3,552,037
|
)
|
|
|
(1,161,500
|
)
|
Cash to
accrual basis for tax purpose
|
|
|
2,784,000
|
|
|
|
--
|
|
Meals and
entertainment
|
|
|
2,600
|
|
|
|
3,500
|
|
Loss
on extinguishment of debt
|
|
|
-
|
|
|
|
177,100
|
|
Deferred
consulting
|
|
|
448,000
|
|
|
|
448,000
|
|
Depreciation
|
|
|
124,000
|
|
|
|
19,100
|
|
Options/
warrants
|
|
|
--
|
|
|
|
30,000
|
|
Related
party accruals
|
|
|
--
|
|
|
|
77,
500
|
|
|
|
$
|
2,616,434
|
|
|
$
|
--
|
|
|
The
Company has a net operating loss carry forward of approximately $2 million
available to offset future taxable income through
2026.
|
|
The
amount of deferred income tax expense is impacted by the difference
between the estimated Federal and State statutory income tax rates used to
estimate deferred tax assets and liabilities and actual rates utilized
when determining incomes taxes due or the application of net operating
losses which are impacted by lower rates for taxable income less than
$100,000 along with differences in state tax rates. In addition, other
estimates utilized in determining deferred income tax expense resulting
from anticipated timing differences may differ from amounts initially
determined when the timing differences are
realized.
|
|
Due
to the change in ownership provision of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net
operating loss carryforwards may be limited to use in future
years.
|
NOTE 6
– INCOME PER SHARE
|
Basic
and diluted net income per share is calculated based on net income and the
weighted average number of common stock outstanding during the reporting
period. References to common stock and income per share for
2006 have been retroactively restated. The effects of this
restatement are presented in Note
11.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
|
|
For
the years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
(Restated)
|
|
Income
/ (numerator)
|
|
$
|
4,859,093
|
|
|
$
|
697,114
|
|
Shares
/ (denominator) - Basic
|
|
|
8,487,700
|
|
|
|
7,023,831
|
|
Shares
/ (denominator) - Diluted
|
|
|
8,487,700
|
|
|
|
7,023,831
|
|
Income
per share - Basic
|
|
$
|
0.57
|
|
|
$
|
0.10
|
|
Income
per share - Diluted
|
|
$
|
0.57
|
|
|
$
|
0.10
|
|
NOTE 7
– EQUITY ISSUANCES
|
In
July 2007 the Company issued 384,111 shares of stock for the members of
the board of directors and officers valued at $1.80 for
$691,399.
In
2007 the Company issued 1,919,643 shares of common stock for cash valued
between $1.40 and $1.50 for $2,712,500.
In
2007 the Company issued 16,662 shares of common stock for service valued
between $1.79 and $2.18 for $67,392.
In
2007 the Company issued 294,617 shares of common stock for private
offering valued between $1.40 and $1.75 for $485,331.
In
January 2006, the Company issued 834,733 shares of common stock as part of
a settlement of debt and outstanding warrants for $1,430,478 (see note
10).
In
April 2006, the Company re-purchased 461,400 shares of common stock at
$1.80 per share for $830,520.
In
July 2006, the Company issued 20,000 shares of common stock for
acquisition of a business valued at $1.90 per share for
$38,000.
In
September 2006, the Company processed a ten for one stock split. All
references to common stock have been retroactively restated.
In
2006, the Company issued 185,000 shares of common stock for services
valued between $1.00 and $1.60 per share for $284,000.
In
2006, the Company issued 451,800 shares of common stock for cash for
$416,700.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
NOTE 8 –
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
|
There
are three major items that are included within these
expenses. They
are:
|
|
|
2007
|
|
|
2006
|
|
Consulting
Service
|
|
$
|
4,003,933
|
|
|
$
|
2,719,432
|
|
Salary
|
|
|
1,009,174
|
|
|
|
914,064
|
|
Professional
Services
|
|
|
659,095
|
|
|
|
898,002
|
|
Other
expenses
|
|
|
1,133,076
|
|
|
|
1,280,194
|
|
|
|
$
|
6,805,278
|
|
|
$
|
5,741,692
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
|
During November of 2003 the
Company entered into a forty-two month agreement to lease commercial real
estate in Celebration, Florida. During May 2007, the Company
renegotiated a 60 month lease for this location
. In February
2006,
t
he Company entered into a sixty
month agreement to lease commercial real estate in Ahmedabad, India. The
Company has offices in London, United Kingdom and Johannesburg, South
Africa that are rented month to month. Annual minimum rental fees are as
follows
:
|
Year
|
|
Total
Scheduled Rental
Payments
|
|
2008
|
|
$
|
75,324
|
|
2009
|
|
$
|
78,444
|
|
2010
|
|
$
|
81,696
|
|
2011
|
|
$
|
59,340
|
|
2012
|
|
$
|
61,140
|
|
|
Rent expense for the years ended
December 31, 2007 and 2006 was $118,017 and $99,530,
respectively.
|
NOTE 10
– SETTLEMENT OF $1 MILLION SENIOR SECURED CONVERTIBLE NOTE AND RELATED
WARRANTS
|
On
January 18, 2006 (the “Settlement Date”) the Company paid $150,000 in cash
and issued 834,733 common shares valued at $1.00 per share to settle the
outstanding principal, accrued interest payable of $55,425 and
accrued liquidated damages of $171,613 relating to a $1 million senior
secured convertible note and approximately 4 million related Class A and B
outstanding warrants. A loss on settlement of $470,897 was
recorded.
|
NOTE 11 – RESTATEMENT OF
PREVIOUSLY ISSUED FINANCIAL STATEMENTS
|
The Company has amended its annual report for
fiscal years ended December 31, 2006 and 2005 on January 7, 2008 to
reflect certain adjustments to revenue and deferred revenue as well as the
tax provision in the consolidated financial statements along with
clarifications specific to the Company’s revenue recognition
policies. The Company’s annual report on Form 10-KSB for fiscal year
ended December 31, 2006, was initially filed with the Securities &
Exchange Commission on March 29, 2006.
The Company has amended its annual report to
reflect certain adjustments to revenue and deferred revenue in the
consolidated financial statements along with clarifications specific to
the Company's revenue recognition policies required to be in compliance
with generally accepted accounting standards. Previously recognized
revenues associated with certain older contracts were required to be
restated and will be deferred until such time as all SOP 97-2 requirements
have been satisfied.
The tax provision has been restated to reflect the
adjustments related to revenue, as mentioned above, as well as to correct
errors in the income taxes note specifically related to the reversal of a
valuation allowance as originally filed with the Securities and Exchange
Commission.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to
the Consolidated Financial Statements
December
31, 2007 and 2006
|
The
following table reflects the effects of the restatements for the year
ended December 31,
2006.
|
|
|
Year
|
|
|
|
Ended
|
|
|
|
December
31, 2006
|
|
Other
Assets
|
|
|
|
As
Previously Reported
|
|
$
|
--
|
|
As
Restated
|
|
|
103,205
|
|
Difference
|
|
$
|
103,205
|
|
|
|
|
|
|
Deferred
Tax Assets, Net
|
|
|
|
|
As
Previously Reported
|
|
$
|
170,805
|
|
As
Restated
|
|
|
2,113,800
|
|
Difference
|
|
$
|
1,942,995
|
|
|
|
|
|
|
Deferred
Revenue
|
|
|
|
|
As
Previously Reported
|
|
$
|
3,199,461
|
|
As
Restated
|
|
|
8,194,461
|
|
Difference
|
|
$
|
4,995,000
|
|
|
|
|
|
|
Deferred
Tax Liabilities, Net
|
|
|
|
|
As
Previously Reported
|
|
$
|
--
|
|
As
Restated
|
|
|
1,192,000
|
|
Difference
|
|
$
|
1,192,000
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Payable
|
|
|
|
|
As
Previously
|
|
$
|
2,121,640
|
|
Reported
|
|
|
|
|
As
Restated
|
|
--
|
|
Difference
|
|
$
|
(2,121,640
|
)
|
|
|
|
|
|
Retained
Earnings
|
|
|
|
|
(Accumulated
Deficit)
|
|
|
|
|
As
Previously Reported
|
|
$
|
1,222,321
|
|
As
Restated
|
|
|
(797,439
|
)
|
Difference
|
|
$
|
(2,019,760
|
)
|
|
|
|
|
|
Revenue
|
|
|
|
|
As
Previously Reported
|
|
$
|
10,301,970
|
|
As
Restated
|
|
|
7,604,678
|
|
Difference
|
|
$
|
(2,697,292
|
)
|
|
|
|
|
|
Net
Income (Loss) Before Provision
|
|
|
|
|
(Benefit)
for Income Taxes
|
|
|
|
|
As
Previously Reported
|
|
$
|
3,777,306
|
|
As
Restated
|
|
|
1,080,014
|
|
Difference
|
|
$
|
(2,697,292
|
)
|
|
|
|
|
|
Provision
(Benefit) for
|
|
|
|
|
Income
Taxes
|
|
|
|
|
As
Previously Reported
|
|
$
|
1,949,540
|
|
As
Restated
|
|
|
382,900
|
|
Difference
|
|
$
|
(1,566,640
|
)
|
|
|
|
|
|
Net
Income
|
|
|
|
|
As
Previously Reported
|
|
$
|
1,827,766
|
|
As
Restated
|
|
|
697,114
|
|
Difference
|
|
$
|
(1,130,652
|
)
|
|
|
|
|
|
Earning
per Share - Basic
|
|
|
|
|
As
Previously Reported
|
|
$
|
0.26
|
|
As
Restated
|
|
|
0.10
|
|
Difference
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
Earning
per Share - Diluted
|
|
|
|
|
As
Previously Reported
|
|
$
|
0.26
|
|
As
Restated
|
|
|
0.10
|
|
Difference
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
Weighted
Average Shares
|
|
|
|
|
Outstanding
– Basic
|
|
|
7,023,831
|
|
|
|
|
|
|
Weighted
Average Shares
|
|
|
|
|
Outstanding
– Diluted
|
|
|
7,023,831
|
|
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