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 March 31, 2006
Commission File No. 333-45210
SYSTEMS MANAGEMENT SOLUTIONS, INC.
(Name of Small Business Issuer in Its Charter)
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Nevada 88-0460457
(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) 541-9100
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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 May 15, 2006
- ------------------------------- ------------------------------
Common stock, $0.0001 par value 20,690,386
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...................................1
ITEM 2. MANAGEMENT'S PLAN OF OPERATIONS.....................................6
ITEM 3. CONTROLS AND PROCEDURES.............................................7
PART II - OTHER INFORMATION...................................................7
ITEM 1. LEGAL PROCEEDINGS...................................................7
ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K....................................8
SIGNATURES....................................................................9
CERTIFICATIONS
EXHIBIT NO, 31.1 - CERTIFICATION PRESIDENT AND CHIEF EXECUTIVE OFFICER........10
EXHIBIT NO. 31.2 - CERTIFICATION CHIEF FINANCIAL OFFICER......................11
EXHIBIT NO. 32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT
- PRESIDENT
AND CHIEF EXECUTIVE OFFICER........................12
EXHIBIT NO. 32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT
- CHIEF
FINANCIAL OFFICER..................................13
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
(unaudited)
ASSETS
Current Assets
Cash $ 86,597 $ 98,468
Accounts receivable 166,519 -
Accounts receivable-related parties 24,566 93,142
Inventory 95,085 81,687
Capitalized Loan Costs, net of accumulated
amortization of $10,000 20,000 -
Other 8,661 13,088
-------------- -----------------
Total Current Assets 401,428 286,385
Property and equipment, net of accumulated depreciation of
$479,170 & $ 467,702 502,360 422,560
Deposits 255,000 4,000
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Total Assets $1,158,788 $ 712,945
============== =================
LIABILIITES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 451,725 $ 296,745
Accounts payable - related parties 72,000 54,000
Accrued interest and expense 326,242 375,985
Accrued interest and expense - related parties 371,885 311,076
Litigation Settlement Liability 67,500 87,500
Other Loans 496,333 -
Shareholder loans 3,706,887 3,494,887
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Total Current liabilities 5,492,572 4,620,193
Long-Term Liabilities
Litigation Settlement Liability 382,500 382,500
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Total Liabilities 5,875,072 5,002,693
Stockholders' Deficit
Preferred stock, $.0001 par value, 5,000,000 shares authorized, no
shares issued and outstanding - -
Common stock, $.0001 par value, 100,000,000 shares
authorized, 20,690,386 & 20,640,386 shares issued and outstanding 2,069 2,064
Additional paid-in capital 19,472,486 19,429,420
Accumulated deficit (24,190,839) (23,721,232)
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Total Stockholders' Deficit (4,716,284) (4,289,748)
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Total Liabilities and Stockholders' Deficit $1,158,788 $ 712,945
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Page 1
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2006 and 2005
(unaudited)
Restated
2006 2005
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Revenue $ 876,253 $ 94,251
Cost of sales 781,008 96,078
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Gross margin 95,245 (1,827)
General and administrative 435,887 745,455
Depreciation 12,163 16,801
Amortization 11,833 --
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Total operating expenses 459,883 762,256
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Net Operating Loss (364,638) (764,083)
Interest expense (104,969) (88,331)
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NET LOSS $ (469,607) $ (852,414)
============ ============
Basic and diluted loss per share $ (0.02) $ (0.11)
Weighted average shares outstanding 20,673,164 7,550,253
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SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2006
(unaudited)
Restated
2006 2005
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Cash Flows From Operating Activities
Net loss $(469,607) $(852,414)
Adjustments to reconcile net loss to net cash used in
operating activities:
Imputed Interest 37,570 41,054
Depreciation 12,163 16,801
Amortization 11,833 --
Loss on disposal of equipment 7,595 --
Changes in:
Accounts receivable (73,377) (61,216)
Accounts receivable - related parties (24,566) (17,904)
Inventory (13,399) 12,575
Current assets (276,573) 10,713
Accounts payable 154,980 85,998
Accounts payable - related parties 18,000 13,000
Accounts payable - settlement (20,000) --
Accrued expenses (49,742) 24,905
Accrued expenses - related parties 60,809 --
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Net Cash Used in Operating Activities (624,314) (726,488)
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Cash Flows From Investing Activities
Purchase of fixed assets (99,558) (91,350)
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Net Cash Used in Investing Activities (99,558) (91,350)
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Page 3
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Cash Flows From Financing Activities
Proceeds from shareholder loans 212,000 812,036
Proceeds from other loans 500,000 --
Contributions from related parties -- 10,000
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Net Cash Provided by Financing Activities 712,000 822,036
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Net change in cash (11,871) 4,198
Cash at beginning of period 98,468 5,147
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Cash at end of period $ 86,597 $ 9,345
========== ==========
Supplemental disclosures:
Income Tax Paid $ -- $ --
Interest Paid 603 --
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
Common Stock issued as loan discount for Note Payable 5,500 --
Page 4
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 2005 as reported in Form
10-KSB, have been omitted.
NOTE 2 - EQUITY
On February 1, 2006, SMS issued 50,000 shares of common stock to a lender as
additional incentive to make such loan (see Note 5)
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.
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 months ending March 31, 2005 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 Ended
March 31, 2005
Previously
Reported Restated
Net Income (670,277) (852,414)
Earnings Per Share (0.09) (0.11)
Weighted average shares outstanding* 7,550,253 7,550,253
Page 5
NOTE 5 - NEW PROMISSORY NOTE
On February 3, 2006, The Company signed a secured promissory note in the amount
of $500,000 to an independent lender. The security pledged for this note is
equipment recently purchased plus the deposit placed on equipment currently
being prepared for delivery in the future. The interest is 10% and the note
expires on August 1, 2006. As incentive to make this loan, the lender was issued
50,000 shares of the Company's common stock.
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 is comprised of two wholly owned subsidiaries, Aspect Business
Solutions, Inc. ("ASPECT) and SMS Envirofuels, Inc. ("SMSE").
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. During the 1st quarter, the majority of ASPECT's revenue
was generated from two sources, the final stages of an implementation that was
begun in the summer of 2005 and client maintenance for the restructuring of the
customer's database. The remainder of the quarter was focused on new client
marketing and sales efforts. These efforts have produced one new customer
contract and several more contracts that are currently being negotiated.
SMS Envirofuels began processing biodiesel continuously, although not
consistently, in April 2005. Since then, 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 had increased its sales prices and expansion for the production of
biodiesel had begun. With the expansion targeted to be complete in June 2006,
SMSE can expect to increase its production from 2,000,000 gallons of biodiesel
per year to 5,000,000. In March, the company received a biodiesel production
subsidy from the USDA for its production of biodiesel using soy oil purchased
from American farmers during the fourth quarter of 2005 (U.S. Department of
Agriculture, Commodity Credit Corporation, Bioenergy Program). The subsidy for
the fourth quarter production was based on 215,058 gallons of biodiesel produced
by SMSE. This program has an expiration date of September 30, 2006. However,
SMSE has received notification that due to the exhaustion of funds, the USDA
will be terminating its agreements as of June 30, 2006. It has been the goal of
SMSE to operate without reliance on this subsidy. The expansion will allow SMSE
to take advantage of lower bulk pricing for its raw material and the increase in
margin generated from the increase in production out paces the costs associated
with the increase. The Company anticipates increasing demand and production
operations to remain at or near capacity in the 2nd quarter of 2006.
SMS incurred a net loss of $469,607 for the three months ended March 31,
2006, and had a working capital deficit of $5,091,144 as of March 31, 2006.
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 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
Page 6
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 as of the end of the period covered by this report in
timely alerting them to material information required to be included in the
Company's periodic reports and 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. This
lawsuit was dismissed in February, 2006 pursuant to a Comprehensive Settlement
Agreement which required the Company to make payments to WKB Value Partners, LP
in the amount of $470,000. The payment schedule called for $20,000 initial
payment, followed by monthly payments of $7,500 for 60 months
Page 7
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.
6. On February 20, 2006, the Company filed Item 4.02
Non-Reliance on Previously Issued Financial Statements
or a Related Audit Report or Completed Interim Review on
Form 8-K, as a result of the restatement of the
financial statements for the Year Ending December 31,
2002
Page 8
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: May 11, 2006
SYSTEMS MANAGEMENT SOLUTIONS, INC.,
a Nevada corporation
By: /s/ James Karlak
-----------------------------------------------
James Karlak, President and Chief Executive Officer
By: /s/ Morris Kunofsky
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Morris Kunofsky, Chief Financial Officer
Page 9