Notes
to the Consolidated Financial Statements
September
30, 2007
NOTE
1
- BASIS OF FINANCIAL STATEMENT PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted in accordance with such rules and regulations. The
information furnished in the interim condensed consolidated financial statements
includes normal recurring adjustments and reflects all adjustments, which,
in
the opinion of management, are necessary for a fair presentation of such
financial statements. Management believes the disclosures and information
presented are adequate to make the information not misleading, it is suggested
that these interim condensed consolidated financial statements be read in
conjunction with the Company’s most recent 8-K filings and audited financial
statements and notes thereto included in its December 31, 2006 Annual Report
on
Form 10-KSB. Operating results for the nine months ended September 30, 2007
are not necessarily indicative of the results that may be expected for the
year
ending December 31, 2007.
NOTE
2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting
Method
The
consolidated financial statements are prepared using the accrual method of
accounting. The Company has elected a calendar year end.
b. Estimates
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.
c. 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.
NOTE
2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Revenue
Recognition
Revenue
Recognition
We
derive
our revenue from the sale of products and services that we classify into the
following sources: (1) licenses, (2) post-contract customer support, (3)
professional services.
Background
We
sell
our services and license our products thru master licensee arrangements with
state operated Small Business Development Centers (“SBDC”) or their profit
making equivalents, Fortune 1000 Corporations, Business Associations, Banking
Institutions and International Economic Development Projects. These
organizations represent our current domestic customer base, and 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 the same types of
entities with additional expansion through other federal government agencies
in
the area of procurement. Satellite license are sold through the
master license customers for a term of five (5) years domestically, four (4)
years internationally. The first year is structured like the master license
fee
in that it is larger then the subsequent years license maintenance
fees. These licenses fall under the master license but, the company
generally receives 90 to 95% of the year. Our 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. License arrangements currently produce the majority of
our
revenue. We utilize written contracts in the form of master satellite license
arrangements as the means to establish the terms and conditions upon which
our
products and services are sold.
Master/Satellite
License Customer Characteristics
As
discussed above, Licensee’s represent our current customer base and generate the
majority of our current revenue. Licenses arrangements are
characterized by the following;
|
|
|
|
o
|
Master
License arrangements typically represent larger value “multiple element”
arrangements where a multi-year term license is delivered bundled
with the
first year of post contract support and certain professional services.
Satellite licenses typically are less then a Master
license. Professional services are accounted for separately and
are not considered essential to the functionality of the software.
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 are required. Revenue
is
recognized on master license or similar arrangements in accordance
with
the policies discussed below;
|
|
o
|
the
license element is recognized when the license becomes
accessible,
|
|
o
|
the
post-contract customer support element is recognized ratably over
the
support period,
|
|
o
|
professional
services are recognized as services are
delivered.
|
General
We
recognize 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 adopted Emerging Issues Task Force (“EITF”)
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables.
As
described below, significant management judgments and estimates are made and
used to determine the revenue recognized in any accounting period. Material
differences may result in the amount and timing of our revenue for any period
if
our management made different judgments or utilized different
estimates.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes
to
the Consolidated Financial Statements
September
30, 2007
NOTE
2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We
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. We have standard payment terms,
typically
net 60 days, included in our
contracts.
|
|
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. If they did, delivery occurs after the customer has
accepted the
software.
|
|
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.
|
For
“multiple-element” arrangements we recognize revenue using the residual method
in accordance with SOP 98-9. Under the residual method, a portion of the
arrangement fee is allocated to the undelivered elements based on vendor
specific objective evidence (“VSOE”) of the fair value of such undelivered
elements, deferred and recognized over the initial service period, typically
one
year. The remaining portion of the arrangement fee is allocated to the delivered
elements and recognized as revenue, provided all other revenue recognition
criteria have been met. The undelivered elements in these arrangements typically
consist of Post-contract Customer Support services and Professional Services.
The VSOE for Post-contract Customer Support is based on the stated renewal
rate
in the license arrangements. The VSOE for Professional Services is based on
the
published rates for time and materials associated with such
projects.
License
Revenue
License
revenues are primarily generated from the sale of master license agreements
to
SBDC’s (or their profit making equivalents) and other potential master
licensees. License arrangements are typically sold with the first year of
Post-contract Customer Support included. As such, the combination of these
products and services represent a “multiple-element” arrangement for revenue
recognition purposes.
Our
revenue recognition policy for multiple-element arrangements, as described
above, generally results in 65% of the first year arrangement fee being
allocated to license revenue, the delivered element. Recognition of license
revenue occurs in the first month, once all the recognition criteria discussed
above are met. Subsequent years are treated in a similar
manner. License revenue is intended to cover the initial development
cost and testing of the software and the System.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes
to
the Consolidated Financial Statements
September
30, 2007
NOTE
2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d.
Revenue Recognition (Continued)
Post-contract
Customer Support (“PCS”) Revenue
Post-contract
customer support includes technical support, maintenance, enhancements, upgrades
and in some cases system access. License arrangements are typically sold with
the first year of PCS included. The customers can also purchase annual PCS
renewals over their arrangement term, which is typically 5 years domestically,
4
years internationally. Enhancements and upgrades are made available on a “when
and if” basis and are rarely if ever based on specifically identified
enhancements.
Our
revenue recognition policy for multiple-element arrangements, as described
above, generally results in 35% of the initial arrangement fee being allocated
to PCS, the undelivered element at the time the license arrangement is entered
into. The customers can also acquire additional annual PCS renewal contracts.
The PCS renewal rate utilized in subsequent years is consistent with the 35%
allocation to PCS in the initial year. Recognition of PCS revenue occurs ratably
over the PCS service period, once all the recognition criteria discussed above
are met.
Professional
Services Revenue
Professional
services include training and installation services. Training and installation
are separately described and priced in the license arrangement and can be
delivered at any time after the license has been conveyed.
Because
of the Web nature of product delivery, little installation support is required.
The System also includes extensive on-line training capabilities (Virtual
Trainer) at the time the license is conveyed and is available for every page
in
the System. No additional formal training on System use is required or provided.
Supplemental training, if required, is generally restricted to System
administration training. Training revenues are recognized as the services are
performed.
Professional
services are not considered essential to the functionality of the other elements
of the arrangement and are accounted for as a separate element. Professional
services are recognized as the services are performed for time and materials
contracts or upon achievement of milestones on fixed price contracts. A
provision for estimated losses on fixed-price professional services contracts
is
recognized in the period in which the loss becomes known. No losses have been
recorded to date.
Factors
for Government or Quasi-Government Agency Customers
Most
of
our current customers are government or quasi-government agencies and are
considered a low collection risk. However, due to the “slow pay” nature of these
entities, payments could take as long as 12 months to be brought current,
although management expects to reduce that time to no more than 9 months. As
more fully discussed in SOP 97-2, the fees are determined to be fixed and
determinable because;
|
·
|
our
software is not subject to obsolescence, any more than is typical
for
comparable software and we have not made concessions to effect
collections,
|
|
·
|
our
software is integral to the fundamental mission of our master license
customers,
|
|
·
|
our
contracts are long term, generally greater then 12 months and collections
on invoices are expected to be less than 12 months,
|
|
·
|
our
contracts provide for normal collection terms which are substantially
less
than the term of our agreements and further permit the assessment
of late
fees and interest on delinquent
balances,
|
|
·
|
our
contracts are with government entities, and by law, these entities
are
precluded from not disbursing funds that have been approved and allocated
for the license agreement,
|
|
·
|
our
contracts do not include any Fiscal Funding
Clauses,
|
|
·
|
our
contracts do not include any Rights of Return or Cancellation Clauses,
and
|
|
·
|
payment
is not dependant on the number of SME’s
engaged.
|
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes
to
the Consolidated Financial Statements
September
30, 2007
d.
Revenue Recognition (Continued)
Deferred
Revenue
Deferred
revenue results from fees billed to customers for which revenue has not yet
been
recognized. Deferred revenue generally represents PCS and training services
not
yet rendered and deferred until all requirements under SOP 97-2 are met.
Deferred revenue is recognized upon delivery of our products, as services are
rendered, or as other requirements requiring deferral under SOP 97-2 are
satisfied.
Allowance
for Doubtful Accounts and Sales Returns
A
considerable amount of judgment is required when we assessed 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 might be required.
A provision for doubtful accounts would initially be recorded based on our
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, 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 a national
government, as well as general economic conditions, among other factors.
National governments accounts are characterized as fully collectible but slow
payers. The bulk of our historic client base is primarily composed of national
governments; our periodic valuations do not indicate that an allowance for
doubtful accounts was necessary at this time.
In
the
first quarter of 2007, the Company has expanded its customer base outside of
national governmental account. Due to this expansion, management has currently
reevaluated its policies for establishing an allowance for doubtful accounts
and
sales return allowance specific to this new customer. This new customer base
includes state sponsored economic development councils and other
quasi-governmental agencies along with corporate based SBDC’s and SME’s. The
addition of these new customer types generally represents a higher level of
business risk than do national government customers. Management is changing
its
estimates specific to this new customer base to use a percentage of sales
revenue as the basis for its allowance. Management believes that this change
better addresses the diverse nature of its future customer base. This allowance
is not established for any particular customer but will be applied to the new
customer types. The percentage will be applied consistently among all contracts
generated from new customer types. Management has determined that 5% of sales
should provide an adequate allowance. For the nine months ending September
30,
2007 the amount was $286,000.
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.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes
to
the Consolidated Financial Statements
September
30, 2007
NOTE
2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Our
accounts receivable are as follows at September 30, 2007:
|
Current
– Account Receivable
|
|
|
|
|
|
Department
of Trade and Industry
|
|
$
|
11,291,993
|
|
|
Kenya
|
|
|
7,800,000
|
|
|
|
|
|
|
|
|
|
|
$
|
19,091,993
|
|
|
Other
Receivables
|
|
|
4,208,838
|
|
|
Less
Allowance for Bad Debts
|
|
|
(286,000)
|
|
|
Total
Current Account Receivable
|
|
$
|
23,014,831
|
|
|
|
|
|
|
|
|
Accounts
Receivable - Long term
|
|
Long
term account receivable (net of discount)
|
|
$
|
|
|
|
Total
Long term receivable
|
|
$
|
|
|
We
recognized revenue of the following amounts for the three months ended September
30, 2007:
|
Revenue
|
|
|
|
|
|
Department
of Trade and Industry
|
|
$
|
1,058,748
|
|
|
Kenya
|
|
|
2,772,732
|
|
|
Other
Revenue
|
|
|
157,655
|
|
|
Total
Recognized Revenue
|
|
$
|
3,989,135
|
|
Deferred
revenue consisted of the following at September 30, 2007:
|
Department
of Trade and Industry
|
|
$
|
3,373,236
|
|
|
Kenya
|
|
|
1,312,502
|
|
|
Other
Deferred Revenue
|
|
|
3,040,823
|
|
|
Total
Deferred Revenue
|
|
$
|
7,726,561
|
|
Listed
below is an example of the future values of some of the master
agreements.
Sample
Contracts Table
|
Contract
|
Number
of Satellites
|
Total
Value (4 or 5 years)**
|
Number
of SMEs in Database
|
|
Department
of Trade and Industry
|
3
|
US
$13.65 million
|
2.1
million
|
|
Kenya
|
5
|
US
$8.75 million
|
1.1
million
|
**
Total
estimated value for licenses and license maintenance for four years
internationally, five years domestically. No subscription revenue
included in figures.
IBSG
INTERNATIONAL, INC. AND SUBSIDIARIES
Notes
to
the Consolidated Financial Statements
September
30, 2007
NOTE
2
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
e.
Equity Transactions
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.
f. 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. The software
acquired is being amortized on a straight line over a five-year
period.
NOTE
3
- EQUITY ISSUANCES
In
February 2007, the Company retired 17,864 shares of common stock valued at
$0.18.
In
May
2007 the Company issued 20,000 shares of common stock for cash valued at
$1.50.
In
May
2007 the Company issued 12,500 shares of common stock for service valued at
$2.18.
In
May
2007 the Company issued 2,000 shares of common stock for service valued at
$2.18.
In
May
2007 the Company issued 1,562,500 shares of common stock for cash investment
valued at $1.40.
In
June
2007 the Company issued 12,000 shares of common stock valued at
$1.40.
In
June
2007 the Company issued 50,284 shares of common stock valued at
$1.75.
In
June
2007 the Company issued 20,000 shares of common stock for service valued at
$1.79.
In
June
2007 the Company issued 357,143 shares of common stock for cash investment
valued at $1.40.
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.
NOTE
4
–
RESTATEMENT
As
discussed below, certain restatements for filing with the SEC are in process
for
the quarters ended March 31, 2007, June 30, 2007 and for the year ended
December
31, 2006 and December 31, 2005. The net effect of the restatements is being
recorded as of September 30, 2007 other assets, deferred revenue, accrued
tax
provision, tax expense and revenue.
These
amendments will reflect certain adjustments to revenue and deferred revenue.
Previously recognized revenues associated with certain older contracts
are
required to be restated and deferred until such time as all SOP 97-2
requirements have been satisfied.
The
effect at September 30, 2007 is to change beginning balances at January
1, 2007
of the following accounts:
|
|
|
For
the 9 months ended
September
30, 2006
|
|
|
For
the 3 months ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
As
Originally Reported
|
|
|
As
Restated
|
|
|
Difference
|
|
|
As
Originally Reported
|
|
|
As
Restated
|
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,516,378
|
|
|
$
|
4,819,086
|
|
|
$
|
(2,697,292
|
)
|
|
$
|
2,798,686
|
|
|
$
|
2,776,811
|
|
|
$
|
(21,875
|
)
|
|
Net
Income
|
|
$
|
1,749,180
|
|
|
|
73,238
|
|
|
$
|
(1,675,942
|
)
|
|
|
484,918
|
|
|
|
885,884
|
|
|
$
|
400,966
|
|
|
Income
Per Share
|
|
$
|
0.26
|
|
|
$
|
0.01
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.07
|
|
|
$
|
0.13
|
|
|
$
|
0.06
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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-QSB, 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. The Company adopted at management’s
discretion, the most conservative recognition of revenue based on the most
astringent guidelines of the SEC in terms of recognition of software licenses
and recurring revenue. Management will elect additional changes to revenue
recognition to comply with the most conservative SEC recognition on a forward
going accrual basis as the model is replicated with other similar markets (i.e.
SBDC). 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 quarterly
report on Form 10-QSB should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in its 2006 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. 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, Inc., a Sarbanes-Oxley 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 IT), a consultant company focused on development of IT
projects for multi-national corporations.
IBSGI
UK,
LTD. (IBSGI UK), a United Kingdom based subsidiary, provides business
development and support to IBSG International’s (IBSGI) 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 participation
in e-commerce platform (BizWorld Pro, copyrighted and trade mark protected)
projects for Small-Midsized Enterprises [SMEs] internationally in countries
beyond South Africa. IBSGI’s relationship with IBSGI UK has already
brought the South African project and opportunities with similar projects in
Africa and Europe (EU and UK) and India.
IBS Group
offers BizWorld Pro 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, which 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, Inc. provides, in management’s opinion, an economical Sarbanes-Oxley (SOX)
compliance and security software suite, Secure Blue Pro. This product is
targeted to small and mid cap public companies as well as private companies
that
work with public companies and must be in compliance with SOX as a result of
working with a public company.
IBSD,
Inc. provides ongoing support of our other subsidiaries, IBS Group, Secure
Blue, and IBSGI UK. The company provides development, system support and secure
data storage, and maintains offices in the US and India, where its current
offshore development and support team is located.
As
software providers, system integrators and Application Service Providers, IBSG,
Inc. and Secure Blue, Inc. 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, but, being updated on an annual basis, has historically been
renewed upon expiration (to date the company has had only one licensee not
renew, due to the expiration of the licensee's contract with their
client).
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;
•
Estimating sales returns and the allowance for doubtful accounts;
•
Value of long lived assets including purchased software;
•
Valuation of services paid for with common stock.
We
derive
our revenue from the sale of products and services that we classify into the
following sources: (1) licenses, (2) post-contract customer support, (3)
professional services.
Background
We
sell
our services and license our products thru master licensee arrangements with
state operated Small Business Development Centers (“SBDC”) or their profit
making equivalents, Fortune 1000 Corporations, Business Associations, Banking
Institutions and International Economic Development Projects. These
organizations represent our current domestic customer base, and 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 the same types of
entities with additional expansion through other federal government agencies
in
the area of procurement. Satellite license are sold through the
master license customers for a term of five (5) years domestically, four (4)
years internationally. The first year is structured like the master license
fee
in that it is larger then the subsequent years license maintenance
fees. These licenses fall under the master license but, the company
generally receives 90 to 95% of the fees in the first year. Our
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. License arrangements currently produce
the majority of our revenue. We utilize written contracts in the form of
master/satellite license arrangements as the means to establish the terms and
conditions upon which our products and services are sold.
Master/Satellite
License Customer Characteristics
As
discussed above, Licensee’s represent our current customer base and generate the
majority of our current revenue. Licenses arrangements are
characterized by the following;
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Master
License arrangements typically represent larger value “multiple element”
arrangements where a multi-year term license is delivered bundled
with the
first year of post contract support and certain professional services.
Satellite licenses typically cost less then a Master
license. Professional services are accounted for separately and
are not considered essential to the functionality of the software.
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 are required. Revenue
is
recognized on master license or similar arrangements in accordance
with
the policies discussed below;
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the
license element is recognized when the license becomes
accessible,
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the
post-contract customer support element is recognized ratably over
the
support period,
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professional
services are recognized as services are
delivered.
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General
We
recognize 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 adopted Emerging Issues Task Force (“EITF”)
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables.
As
described below, significant management judgments and estimates are made and
used to determine the revenue recognized in any accounting period. Material
differences may result in the amount and timing of our revenue for any period
if
our management made different judgments or utilized different
estimates.
We
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:
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1.
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Persuasive
evidence of an arrangement exists, which consists of a written,
non-cancelable contract signed by both the customer and
us.
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2.
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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. We have standard payment terms,
typically
net 60 days, included in our
contracts.
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a.
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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. If they did, delivery occurs after the customer has
accepted the
software.
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b.
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For
post-contract customer support - ratably over the annual service
period.
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c.
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For
professional services - as the services are performed for time and
materials contracts or upon achievement of milestones on fixed price
contracts.
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4.
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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.
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For
“multiple-element” arrangements we recognize revenue using the residual method
in accordance with SOP 98-9. Under the residual method, a portion of the
arrangement fee is allocated to the undelivered elements based on vendor
specific objective evidence (“VSOE”) of the fair value of such undelivered
elements, deferred and recognized over the initial service period, typically
one
year. The remaining portion of the arrangement fee is allocated to the delivered
elements and recognized as revenue, provided all other revenue recognition
criteria have been met. The undelivered elements in these arrangements typically
consist of Post-contract Customer Support services and Professional Services.
The VSOE for Post-contract Customer Support is based on the stated renewal
rate
in the license arrangements. The VSOE for Professional Services is based on
the
published rates for time and materials associated with such
projects.
License
Revenue
License
revenues are primarily generated from the sale of master license agreements
to
SBDC’s (or their profit making equivalents) and other potential master
licensees. License arrangements are typically sold with the first year of
Post-contract Customer Support included. As such, the combination of these
products and services represent a “multiple-element” arrangement for revenue
recognition purposes.
Our
revenue recognition policy for multiple-element arrangement, as described above,
generally results in 65% of the first year arrangement fee being allocated
to
license revenue, the delivered element. Subsequent years are treated in a
similar manner. Recognition of license revenue occurs in the first
month, once all the recognition criteria discussed above are met.
Post-contract
Customer Support (“PCS”) Revenue
Post-contract
customer support includes technical support, maintenance, enhancements, upgrades
and in some cases system access. License arrangements are typically sold with
the first year of PCS included. The customers can also purchase annual PCS
renewals over their arrangement term, which is typically 5 years domestically,
4
years internationally. Enhancements and upgrades are made available on a “when
and if” basis and are rarely if ever based on specifically identified
enhancements.
Our
revenue recognition policy for multiple-element arrangements, as described
above, generally results in 35% of the initial arrangement fee being allocated
to PCS, the undelivered element at the time the license arrangement is entered
into. The customers can also acquire additional annual PCS renewal contracts.
The PCS renewal rate utilized in subsequent years is consistent with the 35%
allocation to PCS in the initial year. Recognition of PCS revenue occurs ratably
over the PCS service period, once all the recognition criteria discussed above
are met.
Professional
Services Revenue
Professional
services include training and installation services. Training and installation
are separately described and priced in the license arrangement and can be
delivered at any time after the license has been conveyed.
Because
of the Web nature of product delivery, little installation support is required.
The System also includes extensive on-line training capabilities (Virtual
Trainer) at the time the license is conveyed and is available for every page
in
the System. No additional formal training on System use is required or provided.
Supplemental training, if required, is generally restricted to System
administration training. Training revenues are recognized as the services are
performed.
Professional
services are not considered essential to the functionality of the other elements
of the arrangement and are accounted for as a separate element. Professional
services are recognized as the services are performed for time and materials
contracts or upon achievement of milestones on fixed price contracts. A
provision for estimated losses on fixed-price professional services contracts
is
recognized in the period in which the loss becomes known. No losses have been
recorded to date.
Factors
for Government or Quasi-Government Agency Customers
Most
of
our current customers are government or quasi-government agencies and are
considered a low collection risk and irrevocable due to the budgetary nature
of
governments. However, due to the “slow pay” nature of these entities, payments
could take as long as 12 months to be brought current, although management
expects to reduce that time to no more than 9 months. As more fully discussed
in
SOP 97-2, the fees are determined to be fixed and determinable
because;
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our
software is not subject to obsolescence, any more than is typical
for
comparable software and we have not made concessions to effect
collections,
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our
software is integral to the fundamental mission of our master and
their
satellite license customers,
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our
contracts are long term, greater then 12 months, and collections
on
invoices are expected to be less than 12 months,
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our
contracts provide for normal collection terms which are substantially
less
than the term of our agreements and further permit the assessment
of late
fees and interest on delinquent
balances,
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our
contracts are with government entities, and by law, these entities
are
precluded from not disbursing funds that have been approved and allocated
for the license agreement,
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our
contracts do not include any Fiscal Funding
Clauses,
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our
contracts do not include any Rights of Return or Cancellation Clauses,
and
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payment
is not dependant on the number of SME’s
engaged.
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Deferred
Revenue
Deferred
revenue result from fees billed to customers for which revenue has not yet
been
recognized. Deferred revenue generally represents PCS and training services
not
yet rendered and deferred until all requirements under SOP 97-2 are met.
Deferred revenue is recognized upon delivery of our products, as services are
rendered, or as other requirements requiring deferral under SOP 97-2 are
satisfied.
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. The potential markets for Secure Blue are public companies 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 “host” license to a state Small Business
Development Center or business associations (i.e. chambers of commerce), that
entity can sell “sub-licenses' to the other vertical markets in their respective
states or markets, from which Intelligent Business Systems Group, Inc. may
receive incremental revenue. This market represents a projected $2.5-$3.5
billion NOT including 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
US
Small Business Administration and state resources. The purpose of these centers
is to provide a range of assistance and training to the small and mid-size
business sector. Many of the SBDCs have a profit making equivalent or are
partners in a profit making entity. We currently have a license
agreement with 11 such entities.
Fortune
1000 Corporations:
The
Company’s subsidiaries suggests that Master license holders seek to sell
Corporate Sponsor satellite licenses to Fortune 1000 corporations for
procurement purposes (i.e. RFPs or Tenders thru award of a bid). The
license price is dependent on the size of the corporation and the number of
RFPs/Tenders issued. 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:
Other
business associations such as local chambers of commerce have membership or
offer services to small and medium size businesses. We seek to license the
BizWorld Data System to these organizations 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 BizWorld
access to their customers to encourage their use of the internet to grow their
businesses, add another revenue stream to their own business services offerings,
and create an excellent new communication tool whereby the bank can pursue
enhanced revenue relationships for their existing service
offerings.
Economic
Development Projects
These
markets reflect a combination of the above market needs. The BizWorld Data
System can provide them with similar benefits and the ability to create multiple
associations with the other markets in a similar fashion as previously
described.
Foreign
Markets
In
2004
we signed a license agreement with an agency of the country of Nigeria. We
have
since positioned the product as a national solution for the support and
development of the small to mid size business community (SMEs), as a centralized
procurement center not only for government but large corporations and provide
access to the same by larger corporations and government entities. By providing
the ability to manage developing businesses on the internet while creating
a
robust internet presence, small to mid size businesses will be enabled for
domestic and international business. Additional business development
efforts through IBSGI UK are underway with various foreign governments although
no assurances can be given that any new business will materialize from these
efforts.
Secure
Blue Markets
Secure
Blue will be targeting 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 rapid growth and a huge global market for SOX solutions
well in excess of the US projection. Additionally, foreign companies doing
business with US public companies will be 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. is focused on the US markets and it’s current
marketing efforts primarily consists of “word of mouth” referrals from existing
or potential customers, targeted prospect awareness campaigns, various
conventions and trade shows and cold calling entities with resources and
marketing research. The most effective and powerful marketing tool is the
demonstration of the system and its comprehensive features. Demonstrations
and
contract negotiations are handled on a personal basis.
To
achieve our growth plans Intelligent Business Systems Group, Inc. needs to
employ more business developers, present a more visible presence at conventions
and accelerate contract implementation. We also anticipate the need to provide
enhanced training and marketing services to its customers, which can best be
achieved by acquiring existing service companies with expertise in that field.
The addition of more 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 and in May 2005 we began a series of
online, live demos 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 through professional advisors to publicly traded
companies. These include investor relations firms, law firms, accountancy firms,
banks, compliance consultancies, corporate finance advisors, venture capital
companies and other strategically important organizations. We are approaching
these potential channel partners individually and demonstrating SOX Pro live
online to create a dialogue leading to long-term business partnerships. We
will
continue to focus our sales activity on third-party channels until we are
satisfied we can achieve significant traction in the market place. 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. In the longer term we will build a specialist
direct sales team focused on specific target sectors within the small/mid cap
market selling direct or providing qualified leads to our channel partners.
There can be no assurance that Secure Blue will be able to establish
satisfactory channels of distribution for its product or that the product will
generate success in the marketplace.
Marketing,
Sales and Support
We
market
our products primarily through direct contact of potential customers, referrals
from existing customers or potential customers and conferences that are market
specific. The key to the marketing of the various products is the ability under
the BizWorld product to enable customers to act as channel partners through
the
ability to sell sub-licenses of the system and provide revenue generating
digital service center to their customers. This makes us dependent on the
efforts of our customers since we have no direct way to communicate with those
parties which may be potential ultimate users of the BizWorld
product.
Secure
Blue has 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
IBSD
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 maintenance of customer satisfaction, which in
turn will enhance our reputation and generate repeat orders. In addition, we
believe that customer interaction and feedback involved in our ongoing support
functions provide us with information on market trends and customer requirements
that is critical to future product development efforts. Intelligent Business
Systems Group, Inc. 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 being capable of providing
instructions to navigate a user error or auto report a potential system “bug”
which 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, how to complete
the
page by animating the page as a window in a window and makes suggestions on
where to go to next in the system. This should provide for minimum
end user confusion which statistically makes up the majority of on-line help
calls (Microsoft 2005; Oracle 2006).
Secure
Blue believes that effective and speedy customer support is crucial to the
long-term success of SOX Pro. As a mission-critical application, SOX Pro must
be
totally reliable and the support available must be of the highest order. 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 constantly requests and receives 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 provided over the internet.
However our products compete against a variety of individual software programs
designed to provide similar functions for small and medium sized business
users. Additionally, many digital commerce solutions are available to
small businesses through established internet portals such as
Yahoo. Many internet hosting providers’ help their customers set up
e-commerce sites and provide software for such sites. A wide variety
of consultants market e-commerce solutions to small businesses and offer a
more
personalized service than are available through small business development
centers.
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 attempting take a significant share of the
small-mid cap company market.
Results
of Operations for the Three and Nine Months ended September 30, 2007 and
2006
The
Company reflected an increase in sales revenues for the three months ended
September 30, 2007 to $3,989,135 compared to sales revenues for the three months
ended September 30, 2006 of $2,776,811, an increase of $1,212,324. The company
also recorded higher sales revenues for the nine months ended September 30,
2007
of $10,144,286 compared to September 30, 2006 sales revenues of $4,819,086.
The
contract values were higher in 2007. The Company had deferred revenues for
the nine months ended September 30, 2007 of $7,726,561(deferred pending
recognition based on revenue recognition policies previously stated;
See Note 2 of the Financial Statements).
Operating
Expenses for the Three and Nine Months ended September 30, 2007 and
2006
The
Company had operating expenses of $2,390,465 for the three months ended
September 30, 2007 compared to operating expenses of $1,777,268 for the three
months ended September 30, 2006, an increase of $613,197. This
increase is a reflection of stock based compensation for the three months ended
September 30,2007. The Company had an operating profit for the three months
ended September 30, 2007 of $1,509,577 as compared to $931,501 for the three
months ending September 30, 2006. Operating profits for the
nine months ended September 30, 2007 was $5,421,593 as compared to operating
profits of $760,851 for the nine months ended September 30,
2006. This increase of $4,660,742 was due primary from the additional
sales for 2007.
Other
Expense for the Three and Nine Months ended September 30, 2007 and
2006
The
company had other expenses for the three months ended September 30, 2007 of
$689,248 compared to other expenses of 45,617 for the three
months ended September 30, 2006. The increase in other expenses for 2007 was
the
accrual of additional taxes. The Net Income reported for the three
months ending September 30, 2007 was $820,329 as compared to net income of
$885,884 for the three months ending September 30, 2006. The company
Net Income for the nine months ended September 30, 2007 was $3,353,846 as
compared to $73,238 for September 30, 2006.
Liquidity
and Capital Resources
We
believe the proceeds from the receivables and the reserves will generate
sufficient cash in assisting with the operating needs of the company. The
company is continuing to inquire into new investments to provide for further
research and development capital and assisting further acquisitions over the
next twelve months.
Our
current accounts receivable are as follows at September 30, 2007:
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Department
of Trade and Industry
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$
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11,291,993
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Kenya
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7,800,000
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Other
Receivables
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4,208,838
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$
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23,300,831
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Allowance
for bad debt
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(286,000)
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Current
Accounts Receivable, net of bad debt
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$
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23,014,831
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Management
expects to close an offering of $2,500,000 securities in which the Company
shall
use the proceeds to fund its business plan. All funds raised will go into
operation.
FACTORS
THAT COULD AFFECT FUTURE RESULTS
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. 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:
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Uncertain
commercial acceptance of our products;
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Technological
obsolescence; and
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Competition
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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.
A
considerable amount of judgment is required when we assessed 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 might be required.
A provision for doubtful accounts would initially be recorded based on our
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, 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 a national
government, as well as general economic conditions, among other factors.
National governments accounts are characterized as fully collectible but slow
payers. The bulk of our historic client base is primarily composed of national
governments; our periodic valuations do not indicate that an allowance for
doubtful accounts was necessary at this time.
Licenses
held by satellite license holders that are non-government entities are mandated
to adhere to a wide range of government compliance regulations. As
such, payments may, without previous knowledge or forewarning be interrupted,
should a satellite license holder of a government master license holder, fall
into a non compliance state. The myriad of possible domestic or
international compliance regulations makes it impossible to determine if a
satellite license holder is compliant or sufficiently compliant. As
such, if a satellite license holder falls into a non compliance status with
their respective governments, it could affect payments due to the
Company.
In
the
first quarter of 2007, the Company has expanded its customer base outside of
national governmental accounts. Due to this expansion, management has currently
reevaluated its policies for establishing an allowance for doubtful accounts
and
sales return allowance specific to this new customer. This new customer base
includes state sponsored economic development councils and other
quasi-governmental agencies along with corporate based SBDC’s and SME’s. The
addition of these new customer types generally represents a higher level of
business risk than do national government customers. Management is changing
its
estimates specific to this new customer base to use a percentage of sales
revenue as the basis for its allowance. Management believes that this change
better addresses the diverse nature of its future customer base. This allowance
is not established for any particular customer but will be applied to the new
customer types. The percentage will be applied consistently among all contracts
generated from new customer types. Management has determined that 5% of sales
should provide an adequate allowance. As of September 30, 2007 that amount
was
$286,000.
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.
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.
ITEM
3. CONTROLS AND PROCEDURES
|
a)
|
Evaluation
of Disclosure Controls and
Procedures.
|
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness
of
the design and operation of our disclosure controls and procedures (as such
term
is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”). Disclosure controls and procedures are the controls and other
procedures that we designed to ensure that we record, process, summarize and
report in a timely manner the information we must disclose in reports that
we
file with or submit to the Securities and Exchange Commission under the Exchange
Act. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
Disclosure
controls and procedures are controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our principal executive
officer and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
|
b)
|
Changes
in Internal Control over Financial
Reporting
|
During
the Quarter ended September 30, 2007, there was no change in our internal
control over financial reporting (as such term is defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings
There
are
no material currently pending legal proceedings to which the Company is a
party
and, to the Company's knowledge, no proceedings are contemplated against
the
Company.
Item
2. Unregistered
Sales of Securities and Use of Proceeds
There
were no changes in securities or purchase or sales of
securities
during the period ended September 30,
2007.
Item
3. Defaults
upon Senior Securities
There
were no defaults upon senior securities during the period ended September
30,
2007.
Item
4. Submission
of Matters to a Vote of Security Holders
There
were no matters submitted to the vote of securities holders during the period
ended September 30, 2007.
Item
5. Other
Information:
There
is
no information with respect to which information is not otherwise called
for by
this form.
Item
6.
Exhibits
SIGNATURES
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
November 16, 2007.
|
|
|
|
|
|
IBSG
INTERNATIONAL, INC.
|
|
|
|
|
|
Date: November
16, 2007
|
By:
|
/s/ Michael
Rivers
|
|
|
Michael
Rivers
|
|
|
President,
Chief Executive Officer
|
|
|
|
|
|
|
IBSG
INTERNATIONAL, INC.
|
|
|
|
|
|
Date: November
16, 2007
|
By:
|
/s/ Geoffrey
Birch
|
|
|
Geoffrey
Birch
|
|
|
Principal
Accounting Officer
|
|
|
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