Item
6. Management's Discussion 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). 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 annually 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 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 technology and 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; Intelligent Business Systems
Development (IBSD), a software development, maintenance and data storage company
and; A-Division IT, a consultant company focused on development of IT projects
for multi-national corporations.
A-Division
IT Systems Ltd. (A-Division), a United Kingdom based subsidiary and provides
business development support in IBSG International’s (IBSGI) South African
project. A-Division is a subcontractor to BAE Systems and provides IT projects
for BAE’s offset programs by establishing IT Hubs. A-Division is engaged in
international business development and consultancy in the Technology sector
and
is a subcontractor for BAE System’s offset credit projects around the world. The
purchase gives IBSGI participation in e-commerce platform (BizWorld Pro,
copyrighted and trade mark protected) projects for Small-Midsize Enterprises
[SMEs] internationally in countries beyond South Africa. IBSGI’s relationship
with A-Division and BAE has already brought the South African project and
opportunities with similar projects in Saudi Arabia, Malaysia, members of the
EU
and India.
The
IBS
Group offers BizWorld Pro as a solutions to enhance the operating efficiency
and
create revenue for State Small Business Development Centers, 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.
The
Company’s other subsidiary, Secure Blue, Inc. provides, in management’s opinion,
an economical Sarbanes-Oxley (SOX) compliant and security software 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 and must be in compliance
with SOX as a result of working with a public company.
IBSD,
Inc. will provide ongoing support of International’s other subsidiaries, IBS
Group and Secure Blue. The company provides development, system support and
secure data storage, and will maintain offices in the US and India, where its
current offshore development and support team is located.
As
software providers, system integrators and Application Service Provider, IBSG,
Inc. and Secure Blue, Inc. generate their revenue from license sales, system
modifications, and system support and a percentage of monthly customer fees.
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; and
·
Accounting for derivatives
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”), Fortune 1000
Corporations, Business Associations, Banking Institutions and International
Economic Development Projects. These organizations represent our current
customer base, and focus on servicing or supporting small and medium sized
enterprises (SME). 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. Master license
arrangements currently produce all of our revenue. We utilize written contracts
in the form of master license arrangements as the means to establish the terms
and conditions upon which our products and services are sold.
Master
License Customer
Characteristics
As
discussed above, Master Licensee’s represent our current customer base and
generate the bulk of our current revenue. Master license arrangements are
characterized by the following:
|
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; and
|
|
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.
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.
|
|
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 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, as the delivered element. Recognition of license
revenue occurs in the first month, once all the recognition criteria discussed
above are met. License revenue is intended to cover the initial development
cost
and testing of the software and the System.
Post-contract
Customer
Support (“PCS”) Revenue
Post-contract
customer support includes technical support, maintenance, enhancements, upgrades
and in some cases system access and is specified in the license arrangement.
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 are typically for each of years 2 through 5. 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.
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.
Deferred
Revenue
Deferred
revenue result from fees billed to customers for which revenue has not yet
been
recognized. Deferred revenue generally represents deferred maintenance,
consulting and training services not yet rendered and license revenue 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.
Deferred
revenue at December 31, 2006 was $8,194,461 as compared to $3,979,130 of
deferred revenue at December 31, 2005. The Company deferred revenues are as
followed at December 31, 2006:
California
|
|
$
|
2,924,693
|
|
Kenya
Drako
Oil
|
|
|
994,768
1,225,000
|
|
Industrial
Development Corporation -South Africa Initiative
|
|
|
3,050,000
|
|
|
|
$
|
8,194,461
|
|
Cost
of Sales
Cost
of
Sales was $272,171 in 2006, approximately 3.6% of revenues. Cost of Sales was
$410,726 in 2005, approximately 8.3% of revenues. Cost of sales is 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, 2005. The Company has determined that this amount
is
immaterial.
Services
paid for with common
stock
Stock-based
compensation was $1,474,661 in 2006 arising out of the issuance of common stock
as compensation for services received and to be received. The Company at
December 31, 2006 had $3,541,036 of prepaid expenses on its books relating
to
the stock-based compensation.
Amortization
and
depreciation
Amortization
and depreciation expense was $35,153 for 2006. We recognized amortization and
depreciation expense on our furniture, fixtures and equipment.
Bad
debt expense
The
Company did not incur any bad debt expense for 2006.
General
and Administrative
Expense
General
and administrative expenses were $2,489,885 in 2006 and $1,120,575 in 2005.
General and administrative expenses consist primarily of related personnel
costs, and other general corporate costs. General and administrative expenses
show an increase in 2006 primarily due to the additional of the ISBD India,
the
South Africa office and the A-1 Division office as well as an increase in travel
expenses.
Loss
on extinguishment of related
party debt
The
company had no loss relating to extinguishment of related party debt in 2006.
Interest
Expense and Liquidated
Damages
Interest
expense was $58,877 for 2006 and $456,251 was recorded in 2005. This reduction
in cost 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.
We
incurred liquidated damages of $160,000 in 2005 since we did not file the
required registration statement relating to the shares underlying the
convertible promissory note and warrants. This debt was paid off in the first
quarter of 2006 and $11,613 liquidating damages were expensed.
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 $697,114 in 2006 and a net income of $1,243,780
in 2005. The primary reason for the decrease in net income is due to
an income tax benefit of $1,304,100 for 2005 compared to a tax payable of
$382,900 for 2006.
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 office 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.
We
currently have four (4) major customers, Industrial Development Corporation
- South Africa Initiative, Drako Oil,
California,
and Kenya. Our accounts receivables from the customers are as follows at
December 31, 2006:
Other
Receivables
|
|
$
|
520,000
|
California
|
|
|
2,973,120
|
Drako
Oil
|
|
|
3,500,000
|
Kenya
|
|
|
3,800,000
|
Industrial
Development Corporation - South Africa Initiative
|
|
|
4,546,430
|
|
|
$
|
15,339,550
|
Obligations
and
Commitments
The
following table reflects our contractual obligations and other commercial
commitments as of December 31, 2006. This table does not include trade payables,
derivative liabilities and other operating expenses not subject to written
commitments such as salaries.
Payments
Due By Period as of December 31, 2006
Total
|
|
Less
Than
1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Debt
|
|
$
|
0.0
|
|
$
|
0.0
|
|
$
|
0.0
|
|
Capital
Leases
|
|
$
|
4,030
|
|
$
|
0.0
|
|
$
|
0.0
|
|
Total
Contractual Obligations
|
|
$
|
4,030
|
|
$
|
0.0
|
|
$
|
0.0
|
|
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 $697,114 in 2006 and a net income of $1,243,780 in
2005. Our revenues are currently greater than our expenses. The Company recorded
tax benefit of $1,304,100 for the year ending December 31, 2005. 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, including our Secure Blue
product which we expect to introduce into the commercial marketplace in
2005;
·
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 OF SMALL BUSINESS
DEVELOPMENT CENTERS MAY ADVERSELY AFFECT OUR REVENUES
Our
BizWorld Data System product is designed to enhance the operating efficiency
and
create revenue for State Small Business Development Centers (SBDCs). The SBDCs
represent a core potential customer market for the System. These organizations
are dependent upon funding from state and Federal governmental sources. Reduced
funding to these organizations may force them to cease being our customers
or
reduce the possibility of our acquiring additional small business development
centers in the future.
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
end users 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 our 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 2006 revenue was derived from a customer in Kenya
and
in South Africa. 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 ACCOUNTS RECEIVABLE 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.