SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
Quarterly Report of Small Business Issuers under Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
quarterly period ended September 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 November 11, 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.............................................................6
ITEM 3. CONTROLS AND PROCEDURES.....................................................................7
PART II - OTHER INFORMATION...........................................................................8
ITEM 1. LEGAL PROCEEDINGS...........................................................................8
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K............................................................8
SIGNATURES............................................................................................10
CERTIFICATIONS
EXHIBIT NO, 31.1 - CERTIFICATION PRESIDENT AND CHIEF EXECUTIVE OFFICER................................11
EXHIBIT NO. 31.2 - CERTIFICATION CHIEF FINANCIAL OFFICER..............................................12
EXHIBIT NO. 32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT - PRESIDENT
AND CHIEF EXECUTIVE OFFICER................................................13
EXHIBIT NO. 32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT - CHIEF
FINANCIAL OFFICER..........................................................14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2005
(unaudited)
ASSETS
Current Assets
Cash $ 117,838
Accounts receivable 42,758
Accounts receivable-related parties 26,812
Inventory 58,126
Prepaid expense 25,596
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Total Current Assets 271,130
Property and equipment, net of accumulated depreciation of
$465,056 369,821
Deposits 3,000
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Total Assets $ 643,951
============
LIABILIITES AND EQUITY
Current Liabilities
Accounts payable $ 364,255
Accounts payable - related parties 54,000
Accrued interest and expense 328,931
Accrued interest and expense - related parties 268,562
Shareholder loans 3,164,193
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Total Current liabilities 4,179,941
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 19,397,293
Accumulated deficit (22,935,347)
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Total Stockholders' Deficit (3,535,990)
------------
Total Liabilities and Stockholders' Deficit $ 643,951
============
3
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2005 and 2004
(unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
Restated Restated
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ 1,187,170 $ 3,226 $ 1,794,958 $ 14,516
Cost of sales 1,031,185 19,268 1,809,558 73,370
------------ ------------ ------------ ------------
Gross margin 155,985 (16,042) (14,600) (58,854)
General and administrative 477,415 620,477 1,996,019 1,923,641
Research and development -- 92,072 -- 378,688
------------ ------------ ------------ ------------
Total operating expenses 477,415 712,549 1,996,019 2,302,329
------------ ------------ ------------ ------------
Net Operating Loss (321,430) (728,591) (2,010,619) (2,361,13)
Interest expense (74,511) (53,310) (236,900) (283,173)
------------ ------------ ------------ ------------
Loss from continuing operations (395,941) (781,901) (2,247,519) (2,644,36)
Income from discontinued operations $ -- $ -- $ 2,621,157
------------ ------------ ------------ ------------
NET LOSS $ (395,941) $ (781,901) $ (2,247,519) $ (23,199)
============ ============ ============ ============
Basic and diluted loss per share
for continuing operations $ (0.02) $ (0.13) $ (0.14) $ (0.44)
Basic and diluted loss per share
for continuing operations $ -- $ -- $ -- $ 0.43
------------ ------------ ------------ ------------
Total Basic and diluted loss per
share $ (0.02) $ (0.13) $ (0.14) $ (0.00)
Weighted average shares outstanding 20,640,386 6,094,542 16,346,493 6,076,002
4
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 and 2004
(unaudited)
Restated
2005 2004
----------- -----------
Cash Flows From Operating Activities
Net loss $(2,247,519) $ (23,199)
Net Income from discontinued Operations -- $ 2,621,197
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Net loss before discontinued operations $(2,247,519) $(2,644,396)
Adjustments to reconcile net loss to net
cash used in operating activities:
Imputed Interest 79,246 130,593
Depreciation 67,152 38,966
Disposal of Equipment 2,607 --
Changes in:
Accounts receivable (41,723) (2,667)
Accounts receivable -
related parties (44,716) --
Inventory (36,104) (16,516)
Current assets (13,280) 16,687
Accounts payable 295,954 9,552
Accounts payable - related parties (2,000) 33,000
Accrued expenses 82,737 384,613
Accrued expenses - related parites 155,205
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Net Cash Used in Continuing Operations $(1,702,441) $(2,050,168)
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Net Cash Used in Discontinued Operations -- (58,401)
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Net Cash Used in Operating Activities $(1,702,441) $(2,108,569)
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Cash Flows From Investing Activities
Purchase of fixed assets (152,913) (96,052)
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Net Cash Used in Continuing Operations (152,913) (96,052)
Net Cash Provided by Discontinued Operations -- 3,049,283
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Net Cash Provided by (Used in)
Investing Activities (152,913) 2,953,231
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5
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Cash Flows From Financing Activities
Proceeds from shareholder loans 1,958,045 2,176,800
Contributions from related parties 10,000 --
Payments on notes payable -- (30,000)
Payments on lease payable -- (47,220)
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Net Cash Provided by Continuing Operations 1,968,045 2,099,580
Net Cash Used in Discontinued Operations -- (2,961,000)
----------- -----------
Net Cash Provided by (Used in)
Financing Activities 1,968,045 (861,420)
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Net change in cash 112,691 (16,758)
Cash at beginning of period 5,147 16,780
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Cash at end of period $ 117,838 $ 22
=========== ===========
Supplemental disclosures:
Income Tax 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 subisdiary 144 --
6
SYSTEMS MANAGEMENT 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-QSB, 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 stockholder 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.
In addition, 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.
7
NOTE 4 - RESTATEMENT OF PRIOR YEAR DUE TO ACQUISITION
As a result of the acquisition discussed in Note 3, the numbers provided for the
three and nine months ending September 30, 2004 are restatements of prior
filings. The acquisition was accounted for by the Pooling of Interest business
combination method. Below is a schedule of those changes.
Three Months Nine Months
Ended September 30, 2004 Ended September 30, 2004
Previously Previously
Reported Restated Reported Restated
Net Income (619,217) (781,901) 530,455 (23,199)
Earnings Per Share (0.04) (0.13) 0.03 (0.44)
Weighted average shares outstanding* 15,236,355 6,094,542 15,236,355 6,076,002
* Board authorized on March 21, 2005 a 1:2.5 reverse stock split
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
consistently throughout the third quarter. The Company operates the bio-diesel
plant through SMS Envirofuels, Inc. its wholly owned subsidiary as a part of its
Environmental Solutions Division. This division is a compliment to the Company's
Business Solutions Division, which includes its wholly owned subsidiary, Aspect
Business Systems, Inc.
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 sales, custom programming, service and
support. ASPECT continued to experience operating losses during the period
covered by this report.
8
SMS Envirofuels began processing Biodiesel continuously, although not
consistently, in April 2005. The manufacturing facility has experienced a steady
demand for its product and has continued to perfect its process to achieve both
consistency and efficiency. During this quarter, management has increased sales
prices and the operating losses experienced during the early start-up months
have been reduced. In September, the company received a Biodiesel production
subsidy from the USDA for its production of Biodiesel using soy oil purchased
from American farmers during the second quarter of 2005 (U.S. Department of
Agriculture, Commodity Credit Corporation, Bioenergy Program). The subsidy for
the second quarter production was based on 239,058 gallons of Biodiesel produced
by SMS Envirofuels. This program has an expiration date of September 30, 2006.
It is anticipated by the Company that this subsidy will continue, although the
amount paid per gallon is subject to change, until the program's scheduled end
date. The subsidy was funded up to a certain dollar amount, therefore each
biodiesel and ethanol producing company will receive a subsidy based on each
company's prorated production amount. As increased production levels are
achieved nationwide, the subsidy allocation per gallon produced per company is
subject to change. The Company anticipates increasing demand and production
operations to remain at or near capacity in the 4th quarter of 2005.
SMS incurred a net loss of $395,942 for the three months ended September
30, 2005, and a net year to date net loss of $2,247,519 and had a working
capital deficit of $3,908,811 as of September 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. 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
and to expand its current biodiesel plant production capacity, which will
enhance the ability of the Company to satisfy its cash requirements.
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 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.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. 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:
1. 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.
2. 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.
3. 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 were truncated to the nearest
whole share and no cash was paid for any such fractional
share.
4. 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. was merged into SMSN Merger Sub, Inc.,
the name of SMSN Merger Sub, Inc. was changed to SMS
Envirofuels, Inc., and the shares of SMS Envirofuels,
Inc. were 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 markets 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.
5. On August 19, the Company filed the results of the audit
of the Years Ended December 31, 2003 and 2004 and the
review of the Quarter Ended March 31, 2005 for SMS
Envirofuels, Inc.
10
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
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James Karlak, President and
Chief Executive Officer
By: /s/ Morris Kunofsky
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Morris Kunofsky, Chief Financial Officer