SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB/A
Quarterly Report of Small Business Issuers under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended June 30, 2005
Commission File No. 333-45210
SYSTEMS MANAGEMENT SOLUTIONS, INC.
(Name of Small Business Issuer in Its Charter)
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Nevada 88-046047
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
7550 IH-10 West, 14th Floor 78229
San Antonio, Texas
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (210) 541-7133
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The issuer has (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) been subject to
such filing requirements for the past 90 days.
Number of shares outstanding of each of the issuer's classes of common equity:
Class Outstanding as of August 15,2005
----- ---------------------------------
Common stock, $0.0001 par value 20,640,386
The issuer is not using the Transitional Small Business Disclosure format.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION............................................1
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)....................1
ITEM 2. MANAGEMENT'S PLAN OF OPERATIONS..................................8
ITEM 3. CONTROLS AND PROCEDURES..........................................9
PART II - OTHER INFORMATION................................................9
ITEM 1. LEGAL PROCEEDINGS................................................9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................10
SIGNATURES................................................................11
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SYSTEMS MANAGEMGENT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
June 30, 2005
ASSETS
Current Assets
Cash $ --
Accounts receivable 80,275
Inventory 112,866
Prepaid expenses 14,081
------------
Total Current Assets 207,222
Property and equipment, net of accumulated depreciation
of $441,677 396,033
Deposits 4,000
------------
Total Assets $ 607,255
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 624,452
Accounts payable - related parties 87,000
Accrued interest and expenses 454,383
Shareholder loans 2,605,517
------------
Total Current Liabilities 3,771,352
------------
STOCKHOLDERS' DEFICIT
Preferred stock, $.0001 par value, 5,000,000 shares
authorized, no shares issued and outstanding --
Series A Cumulative Convertible Preferred Stock,
$.0001 par value, 60,000 shares authorized,
no shares issued and outstanding --
Series B Cumulative Convertible Preferred Stock,
$.0001 par value, 50,000 shares authorized,
no shares issued and outstanding --
Common stock, $.0001 par value, 100,000,000 shares
authorized, 20,640,386 shares issued and outstanding 2,064
Additional paid in capital 19,373,244
Accumulated deficit (22,539,405)
------------
Total Stockholders' Deficit (3,164,097)
------------
Total Liabilities and Stockholders' Deficit $ 607,255
============
2
SYSTEMS MANAGEMENT SOLUTIONS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2005 and 2004
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ 513,538 $ 3,748 $ 607,789 $ 11,290
Cost of sales 682,296 24,790 778,374 54,102
------------ ------------ ------------ ------------
Gross margin (168,758) (21,042) (170,585) (42,812)
General and administrative 756,352 756,955 1,518,604 1,303,164
Research and development -- 127,069 -- 286,616
------------ ------------ ------------ ------------
Total operating
expenses 756,352 884,024 1,518,604 1,589,780
------------ ------------ ------------ ------------
Net Operating Loss (925,110) (905,066) (1,689,189) (1,632,592)
Interest expense (74,056) (70,979) (162,389) (229,863)
------------ ------------ ------------ ------------
Income(Loss) from
continuing operations (999,166) (976,045) (1,851,578) (1,862,455)
Income(Loss) from
discontinued operations -- 2,667,097 -- 2,621,157
------------ ------------ ------------ ------------
NET LOSS $ (999,166) $ 1,691,052 $ (1,851,578) $ 758,702
============ ============ ============ ============
Basic and diluted income
(loss) per share for
continuing operations $ (0.05) $ (0.16) $ (0.14) $ (0.31)
Basic and diluted income
(loss) per share for
discontinued operations $ (0.00) $ 0.44 $ (0.00) $ 0.43
------------ ------------ ------------ ------------
Total basic and diluted income
(loss) per share for
operations $ (0.05) $ 0.28 $ (0.14) $ 0.12
Weighted average
shares outstanding 19,897,762 6,094,542 13,106,156 6,081,209
3
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004
(unaudited)
2005 2004
----------- -----------
Cash Flows From Operating Activities
Net income (loss) $(1,851,578) $ 758,702
Net income (loss) from discontinued Operations -- 2,621,197
----------- -----------
Net loss before discontinued operations (1,851,578) (1,862,495)
Adjustments to reconcile net loss to net cash
used in operating activities:
Imputed Interest 55,193 107,022
Depreciation 43,546 23,275
Changes in:
Accounts receivable (79,239) 3,395
Accounts receivable from related parties (17,905) --
Inventory (90,844) (11,011)
Current assets (2,765) 16,832
Accounts payable 537,494 38,112
Accounts payable to related parties 31,000 --
Accrued expenses 113,498 377,955
----------- -----------
Net Cash Used In Continuing Operations (1,261,600) (1,306,915)
Net Cash Used In Discontinued Operations -- (58,401)
----------- -----------
Net Cash Used In Operating Activities (1,261,600) (1,365,316)
----------- -----------
Cash Flows From Investing Activities
Purchase of fixed assets (152,913) (31,112)
----------- -----------
Net Cash Used In Continuing Operations (152,913) --
Net Cash Provided By Discontinued Operations -- 3,049,283
----------- -----------
Net Cash Used in Investing Activities (152,913) 3,018,171
----------- -----------
Cash Flows From Financing Activities
Proceeds from shareholder loans 1,399,366 1,353,997
Contributions from related parties 10,000 --
Payments on notes payable -- (30,000)
Payments on lease payable -- (31,124)
Proceeds from the sale of preferred stock -- --
----------- -----------
Net Cash Provided By Continuing Operations 1,409,366 1,292,873
Net Cash Provided By Discontinued Operations -- (2,961,000)
----------- -----------
Net Cash Provided by Financing Activities 1,409,366 (1,668,127)
----------- -----------
Net change in cash (5,147) (15,272)
Cash at beginning of period 5,147 16,780
----------- -----------
Cash at end of period $ -- $ 1,508
=========== ===========
Supplemental disclosures:
Income Taxes Paid $ -- $ --
Interest Paid -- --
Non-cash operating and financing activities:
Common Stock issued for conversion of note payable
and accrued interest to equity $ 2,310,304 $ --
Preferred stock dividend 510,300 --
Offset of Related Party Receivable with Note Payable
Due to Shareholder 75,232 --
Conversion of preferred stock to common stock 1,310 --
Stock issued for subsidiary 144 --
4
SYSTEMS MANAGMENT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Systems Management
Solutions, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the
Securities and Exchange Commission ("SEC"), and should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's financial statements filed with the SEC on Form 10-KSB. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein. The
results of operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosure contained in the audited
financial statements for the most recent fiscal year 2004 as reported in Form
10-KSB, have been omitted.
NOTE 2 - EQUITY
On March 18, 2005, SMS authorized the 50,000 shares of Series B Convertible
Preferred Stock. The stock has a face value of $100, maintains voting rights on
a fully diluted basis, and is convertible into common stock at $0.90 per share.
On March 21, 2005, the company issued 23,103 shares of Series B Convertible
Preferred Stock for $2,310,304 of debt.
On March 21, 2005, a majority shareholder converted all of the outstanding
Series A and Series B Cumulative Convertible Preferred Stock into 13,101,400
shares of the Company's common stock.
On March 21, 2005, the Board authorized a 1:2.5 reverse split of the company's
common stock. All references to common stock in these financials reflect the
effect of the reverse split.
NOTE 3 - ACQUISITION OF SMS ENVIROFUELS, INC.
On April 6, 2005, SMS acquired all of the outstanding stock of SMS Envirofuels,
Inc., a Texas corporation, in exchange for 1,444,444 shares of its common stock.
The acquisition was accounted for under the pooling method due to the fact that
a majority shareholder of SMS Envirofuels is also a majority shareholder of SMS.
All of the assets, liabilities, profit and loss of SMS Envirofuels are combined
with SMS as if the companies have been consolidated from their inception.
5
NOTE 4 - RESTATEMENT OF INCOME STATEMENT
For the period ending June 30, 2005, interest and general and administrative
expenses have been reclassified for proper presentation.
The schedule below restates the 2004 income statement numbers reported above.
This restatement was required due to the discovery of clerical errors.
For the three months ended June 30, 2004:
Previously Increase
Stated (Decrease) Restated
------------ ------------- -----------
Statement of Operations
Revenue $ 3,748 $ -- $ 3,748
Cost of sales (24,790) -- (24,790)
General and administrative (747,999) (8,956) (756,955)
Research and development (127,069) -- (127,069)
Interest expense (70,979) -- (70,979)
Interest income -- -- --
----------- ----------- -----------
Income (Loss) from continuing operations (967,089) (8,956) (976,045)
Income (Loss) from discontinued operations 2,667,097 -- 2,667,097
----------- ----------- -----------
NET LOSS $ 1,700,008 $ (8,956) $ 1,691,052
=========== =========== ===========
Basic and diluted income (loss) per share $ 0.28 $ 0.28
Weighted average shares outstanding 6,094,542 6,094,542
For the six months ended June 30, 2004:
Previously Increase
Stated (Decrease) Restated
------------ ------------- -----------
Statement of Operations
Revenue $ 11,290 $ -- $ 11,290
Cost of sales (54,102) -- (54,102)
General and administrative (1,285,310) (17,854) (1,303,164)
Research and development (127,069) (159,547) (286,616)
Interest expense (229,863) -- (229,863)
Interest income -- -- --
----------- ----------- -----------
Income (Loss) from continuing operations (1,685,054) (177,401) (1,862,455)
Income (Loss) from discontinued operations 2,621,158 (1) 2,621,157
----------- ----------- -----------
NET LOSS $ 936,104 $ (177,402) $ 758,702
=========== =========== ===========
Basic and diluted income (loss) per share $ 0.15 $ 0.12
Weighted average shares outstanding 6,081,209 6,081,209
6
ITEM 2. MANAGEMENT'S PLAN OF OPERATIONS
The following discussion and analysis should be read in connection with
the Company's consolidated financial statements and related notes thereto,
included elsewhere in this report.
The Company acquired on April 6, 2005 all of the outstanding stock of SMS
Envirofuels, Inc. ("SMS"), a Texas corporation, in exchange for 1,444,444 shares
of its $0.0001 par value common stock. SMS has developed a plant to produce
bio-diesel (a biodegradable alternative fuel) from soybean oil. The SMS plant
has the capacity to produce up to 2,000,000 gallons of bio-diesel per year. SMS
has established buyers for its production and has been making deliveries for
about three months. The Company will operate the bio-diesel plant through SMS
Envirofuels, Inc. its wholly owned subsidiary as a part of its Environmental
Solutions Division. This division will be a compliment to the Company's Business
Solutions Division, which includes its wholly owned subsidiary, Aspect Business
Systems, Inc.
ASPECT continued to experience operating losses during the period covered
by this report. As previously reported, ASPECT has expanded its product and
service offerings, which previously were focused on its biometric time and
attendance product. ASPECT now provides custom programming, support and
Microsoft systems products to its customers. During 2004 ASPECT became a
Microsoft Certified Partner which enabled it to remarket a specific line of
software developed by Microsoft Corporation. Adding these products and solutions
to the company's offerings has resulted in a new growth to the company revenue.
The majority of the revenue generated during the time period covered by this
filing has been generated from Microsoft solutions and custom programming.
SMS Envirofuels began processing Biodiesel continuously, although not
consistently, in April 2005. The manufacturing facility has experienced a steady
demand for its product and will continue to perfect its process to achieve both
consistency and efficiency. During this quarter, management has entered the
market with below market sales prices in an effort to gain confidence of buyers
and to study market trends. In late June, the sales prices began to fluctuate
more with the market rates as the demand for our product continued to be strong.
The Company anticipates stabilization of the plant in the 3re quarter of 2005.
Jim Karlak and Reagan Hicks each made a $5,000 contribution to the company
on March 24, 2005.
SMS incurred a net loss of $999,166 for the three months ended June 30,
2005, and a net year to date net loss of $1,851,578 and had a working capital
deficit of $3,564,130 as of June 30, 2005. These conditions create an
uncertainty as to The Company's ability to continue as a going concern. The
Company has seen improvement in the operating results of ASPECT and SMS
Envirofuels during the past six months. The Company continues to aggressively
pursue other acquisition targets which would contribute positively to the
company's profitability and cash flow. However, the Company continues to rely on
loans and advances principally from its major stockholder, United Managers
Group, Inc., to fund operating shortfalls and does not foresee a change in this
situation in the immediate future. There can be no assurance that the Company
will continue to have such loans and advances available. The Company will not be
able to continue operations without them. The Company does not plan on
significant changes in the number of employees in the near future. Neither does
the Company plan on a purchase or sale of plant or significant equipment.
However, it remains a central focus of the Company to pursue acquisition targets
that will enhance the ability of the Company to satisfy its cash requirements.
7
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the design and operation of our disclosure controls
and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on that
evaluation, our principal executive officer and our principal financial officer
concluded that the design and operation of our disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in the Company's periodic reports filed with the SEC
under the Securities Exchange Act of 1934, as amended. The restatement of this
report was the result of our third party filing company edgarizing a preliminary
draft of said report. We have implemented controls to ensure this will not
happen with future filings. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
(b) In addition, there were no significant changes in our internal control over
financial reporting identified in connection with the evaluation that occurred
during the last fiscal quarter that have materially affected, or that are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July of 2004, ARCOA, LLC, a Texas limited liability company, together
with a related individual, filed three actions in the Judicial District Court of
Harris County, Texas against Systems Management Solutions, Inc. and certain
related companies and individuals, claiming damages in connection with certain
loans made and services performed on behalf of YCO Holdings, Inc., a subsidiary
of the Company. ARCOA sought damages of approximately $500,000, plus attorneys'
fees and court costs. A Comprehensive Settlement Agreement was entered into by
the Company and all plaintiffs on October 19, 2004, settling all claims for a
total of $240,000 in payments. The parties have filed motions to dismiss for all
three cases. As of this filing, all liabilities related to this settlement have
been paid.
On November 24, 2004, the Company filed suit against James Taylor, Ronald
Mitchell, Mark Vance, Jim Pyle, and Tom Thomison; former officers and directors
of YCO Holdings, Inc. and certain of its subsidiaries. This litigation captioned
Systems Management Solutions, Inc. vs. James Taylor, et al, in the 281st
District Court of Harris County, Texas, Cause No. 2005-25265 claimed damages in
connection with the information provided to the Company in connection with the
acquisition of YCO Holdings, Inc. and its subsidiaries. On May 10, 2005, these
former employees countersued the Company for salaries claimed under certain
employment agreements, damages claimed in connection with purported assumption
of certain debts by the Company. The Company believes its claims will be
supported at the trial of these lawsuits and that the claims of the employees
are without merit.
In early 2005, the landlord for the offices occupied by YCO Holdings, Inc. and
its subsidiaries filed suit in the 295th District Court of Harris County, Texas
Cause No. 2005-04423 captioned WKB Value Partners, LP vs. Systems Management
Solutions, Inc., alleging that the Company was obligated on the lease even
though no authorized officer of the Company had signed the same. Management
believes that there is no basis for the landlord's claim and that upon trial of
the case, the Company will prevail.
8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
Officer
32.1 Section 1350 Certification of Principal Executive Officer
32.2 Section 1350 Certification of Principal Financial Officer
(b) Reports on Form 8-K:
On August 20, 2004, the Company filed a Current Report on Form 8-K
announcing the change of the Company's name to Systems Management
Solutions, Inc.
(C) On February 8, 2005, the Board of Directors of the Company voted to
change its fiscal year end from June 30 to December 31. The Company
last changed its fiscal year to correspond to the fiscal year of a
subsidiary that has since discontinued operations. Because the
quarter ended December 31, 2004, coincides with the end of the
Company's new fiscal year, the Company will not file Form 10-QSB for
the second quarter, but will instead file Form 10-KSB for the
transition period ended December 31, 2004. the Form 10-KSB will
include audited financial statements for the transition period and
is required to be filed no later than the ninetieth day following
the determination to change the Company's fiscal year end, or May 9,
2005.
(d) On March 22, 2005, the Board of Directors of the Company voted to
reduce the number of shares outstanding of the Company's $0.0001 par
value common stock by reverse split to exchange one (1) new share
for each two and one half (2 1/2) old shares. Any fractional shares
created by this reverse split shall be truncated to the nearest
whole share and no cash will be paid for any such fractional share.
(e) On April 6, 2005, the Registrant established a wholly owned
subsidiary named SMSN Merger Sub, Inc., a Texas corporation which
such corporation then entered into an Agreement and Plan of Merger
between itself, SMS Envirofuels, Inc., a Texas corporation, and the
Registrant. Under the terms of such Plan of Merger, SMS Envirofuels,
Inc. will be merged into SMSN Merger Sub, Inc., the name of SMSN
Merger Sub, Inc. will be changed to SMS Envirofuels, Inc., and the
shares of SMS Envirofuels, Inc. will be exchanged for 1,444,444
shares of the $0.0001 common stock of Registrant. SMS Envirofuels,
Inc. has developed a plant to produce bio-diesel from soybean oil
and has recently begun marketing such bio-diesel to distributors and
retailers. The Registrant plans to continue this business with the
operating assets of SMS Envirofuels, Inc. and to expand the
production and marketing of the bio-diesel product.
9
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 11, 2005
SYSTEMS MANAGEMENT SOLUTIONS, INC.,
a Nevada corporation
By: /s/ James Karlak
---------------------------------------------
James Karlak, President and
Chief Executive Officer
By: /s/ Morris Kunofsky
---------------------------------------------
Morris Kunofsky, Chief Financial Officer