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, 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
San Antonio, Texas 78229
(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 November 03, 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............................................................ 8
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
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2006 2005
------------- ------------
(unaudited)
ASSETS
Current Assets
Cash $ 100,460 $ 98,468
Accounts receivable 35,432 93,142
Accounts receivable-related parties 45,353 --
Inventory 10,313 81,687
Other 13,737 13,088
------------ ------------
Total Current Assets 205,295 286,385
Property and equipment, net of accumulated depreciation of
$505,288 & $467,702 553,383 422,560
Deposits 255,000 4,000
------------ ------------
Total Assets $ 1,013,678 $ 712,945
============ ============
LIABILIITES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 612,013 $ 296,745
Accounts payable - related parties 63,000 54,000
Accrued interest and expense 198,488 375,985
Accrued interest and expense - related parties 500,307 311,076
Litigation settlement liability 90,000 87,500
Other Loans 500,000 --
Shareholder loans 3,899,487 3,494,887
------------ ------------
Total Current liabilities 5,863,295 4,620,193
Long-Term Liabilities
Litigation settlement liability 315,000 382,500
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Total Liabilities 6,178,295 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 19,557,600 19,429,420
Accumulated deficit (24,724,286) (23,721,232)
------------ ------------
Total Stockholders' Deficit (5,164,617) (4,289,748)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 1,013,678 $ 712,945
============ ============
Page 1
SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2006 and 2005
(unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenue $ 651,356 $ 1,187,170 $ 3,496,109 $ 1,794,958
Cost of sales 369,960 1,027,018 2,762,222 1,801,225
----------- ----------- ----------- -----------
Gross margin 281,396 160,152 733,887 (6,267)
General and administrative 434,817 455,369 1,292,668 1,934,593
Depreciation 16,677 23,606 44,083 67,152
Amortization 5,917 -- 35,500 --
Loss on disposal of equipment 18,754 2,607 28,932 2,607
----------- ----------- ----------- -----------
Total operating expenses 476,165 481,582 1,401,183 2,004,352
----------- ----------- ----------- -----------
Net Operating Loss (194,769) (321,430) (667,296) (2,010,619)
Interest expense (118,339) (74,511) (335,759) (236,900)
----------- ----------- ----------- -----------
NET LOSS $ (313,108) $ (395,941) $(1,003,055) $(2,247,519)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.02) $ (0.02) $ (0.05) $ (0.14)
Weighted average shares outstanding 20,690,386 20,640,386 20,684,708 16,346,493
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SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2006 and 2005
(unaudited)
2006 2005
----------- -----------
Cash Flows From Operating Activities
Net loss $(1,003,055) $(2,247,519)
Adjustments to reconcile net loss to net cash used in operating
activities:
Imputed Interest 122,684 79,246
Depreciation 44,083 67,152
Amortization 35,500 --
Loss on disposal of equipment 28,932 2,607
Changes in:
Accounts receivable 57,710 (41,723)
Accounts receivable - related parties (45,353) (44,716)
Inventory 71,374 (36,104)
Current assets (26,646) (13,280)
Accounts payable 315,269 295,954
Accounts payable - related parties 9,000 (2,000)
Accounts payable - settlement (65,000) --
Accrued expenses (177,497) 82,737
Accrued expenses - related parties 189,230 155,205
----------- -----------
Net Cash Used in Operating Activities (443,769) (1,702,441)
----------- -----------
Cash Flows From Investing Activities
Purchase of fixed assets (223,339) (152,913)
Deposit on equipment (255,000) --
Proceeds from sale of equipment 19,500
----------- -----------
Net Cash Used in Investing Activities (458,839) (152,913)
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SYSTEMS MANAGEMENT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2006 and 2005
(continued)
2006 2005
-------- ----------
Cash Flows From Financing Activities
Proceeds from shareholder loans 404,600 1,958,045
Proceeds from other loans 500,000 --
Contributions from related parties -- 10,000
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Net Cash Provided by Financing Activities 904,600 1,968,045
-------- ----------
Net change in cash 1,992 112,691
Cash at beginning of period 98,468 5,147
-------- ----------
Cash at end of period $100,460 $ 117,838
======== ==========
Supplemental disclosures:
Income Tax Paid $ -- $ --
Interest Paid 9,775 --
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
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. ("SMS") 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
SMS's financial statements filed with the SEC on Form 10-KSB for the year ended
December 31, 2005. 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 4)
NOTE 3 - ACQUISITION OF SMS ENVIROFUELS, INC.
On April 6, 2005, SMS acquired all of the outstanding stock of SMS Envirofuels,
Inc. ("SMSE"), 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 - PROMISSORY NOTE
On February 3, 2006, SMS borrowed $500,000 from 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. As
incentive to make this loan, the lender was issued 50,000 shares of SMS's common
stock. The interest is 10% and the note matured on August 1, 2006. Interest on
unpaid balance an interest is 18%. SMS is in default on this note and has been
in communications with the lender to work out a payment plan acceptable to both
parties. It is SMS's belief that it will come to a satisfactory conclusion on
this issue.
NOTE 5 - SUBSEQUENT EVENTS
On October 5, 2006, SMS received a Letter of Intent ("LOI") from Woodhill
Financial Group, LTD for the sale of the assets associated with the biodiesel
processing facility of SMS's subsidiary SMS Envirofuels, Inc. SMS is not able to
make any assurances of the final terms in relation to the letter or if the
transaction will occur.
Page 5
On October 5, 2006, SMS Envirofuels executed a promissory note payable to Earth
BioFuels, Inc. in relation to the LOI referenced above. The note is for a
maximum of $788,000 and matures at the first closing date for the LOI with an
interest rate of 18% on the matured and unpaid balance. The note is secured by a
second lien deed of trust from Texian Land and Cattle ("Texian") for the
property located at 8275 FM 476, Poteet Texas. Texian is a related party to SMS
and the landlord for its subsidiary SMSE. The biodiesel facility is located on
the pledged property, 8275 FM 476, Poteet, Texas. The note balance reflects any
monies paid to Cargill Oilseed on behalf of SMSE, (the subsidiary's largest
vendor with the largest outstanding payable balance) plus any monies forwarded
directly to SMSE. As of the date of this filing the balance on the note is
$350,000.
In October, SMS's subsidiary, SMSE, cancelled 3 purchase agreements with Cargill
Oilseeds, its main source for raw material. The agreements were for the purchase
of soy oil for the months of July, August and September. SMSE did not purchase
the agreed upon amounts and cancelled the agreements. Cargill in turn assessed a
cancellation fee of $80,000 which will be recorded in October.
ITEM 2. MANAGEMENT'S PLAN OF OPERATIONS
The following discussion and analysis should be read in connection with
SMS's consolidated financial statements and related notes thereto, included
elsewhere in this report.
SMS 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. ASPECT is a Microsoft Certified Partner which enables
it to remarket a specific line of software developed by Microsoft Corporation.
During the 3rd quarter, the majority of ASPECT's revenue was generated from two
sources, the implementation and customization of software and the sale of
BioLynx software for biometric time and attendance. The software implementation
and customization project began in June 2006 and will continue through October
2006. As ASPECT transitioned out of its focus on biometric time and attendance,
one customer expressed interest in the continued use of the product. ASPECT
agreed to sell a one time licensing fee for the use of this program created and
owned by ASPECT. Maintenance and software sales still continue to be strong on
all ASPECT's remaining clients. ASPECT has secured a new implementation and
customization project that will begin in November of 2006 and continue on into
2007. ASPECT continuously seeks out new industries and customers that would be
benefit from the Microsoft software. Currently, a couple of companies in the
flooring and countertop industries have shown interest and during the 4th
quarter, ASPECT will be developing software customizations to better fit those
in this industry.
Page 6
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 July 2006, SMSE was
able to maintain its sales prices and levels of production. In late July, SMSE
management determined that repairs and a reconfigurement of the processing
system of the plant was necessary to ensure greater safety and improved
efficiency for the higher levels of production expected after the completion of
the expansion incurred in the 2nd quarter. In early August, the plant production
was brought down and the repair/reconfigurement process began. This process
continued through the 3rd quarter. As of this filing, the plant has resumed
production and, in stages, will continue to ramp up production. SMSE has
inconvenienced, although not lost, its customer base due to the stop in
production and it expects to reach full production capacity and related sales in
mid-November.
In September, SMSE 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 2006 (U.S. Department of Agriculture, Commodity
Credit Corporation, Bioenergy Program). Gallons of biodiesel produced for the
second quarter was 649,500, however the program remits its subsidy based on the
gallons produced over the same quarter in the previous year. Therefore only
436,300 gallons were eligible for the subsidy payout. The program had an
expiration date of September 30, 2006. However, SMSE has received notification
that due to the exhaustion of funds, the USDA has terminated its agreement as of
June 30, 2006. This will be the last payout SMSE will receive under this
program. In August 2006, SMSE applied and was approved for the Texas Department
of Agriculture subsidy for biodiesel producers. The requirements dictate that
based on quarterly gallons produced, the biodiesel producer will pay in $0.032
to the fund. The fund in turn will pay out $0.20 for each gallon of biodiesel
produced. It will remain the goal of SMSE to operate without reliance on
subsidies. 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.
SMS incurred a net loss of $313,108 and $1,003,055 for the three months
and nine months ended September 30, 2006, respectively and had a working capital
deficit of $5,658,000, as of September 30, 2006. These conditions create an
uncertainty as to SMS's ability to continue as a going concern. SMS has seen
improvement in the operating results of ASPECT and SMS Envirofuels during the
past months.
However, SMS 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 SMS will continue to have such loans and advances
available. SMS will not be able to continue operations without them. SMS is
pursuing alternate sources of financing. This is reflected in the Letter of
Intent received in October (See Note 5) for the sale of certain assets of one of
its subsidiaries SMSE. It remains the central focus of SMS to pursue profitable
projects and expand its presence in the biodiesel industry.
Page 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 as of the end of the
period covered by this report in timely alerting them to material
information required to be included in SMS'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 SMS was obligated on the lease even
though no authorized officer of SMS had signed the same. This lawsuit was
dismissed in February, 2006 pursuant to a Comprehensive Settlement Agreement
which required SMS 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. The final payment will be due in March
2011.
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
Page 8
(b) Reports on Form 8-K:
1. On August 20, 2004, SMS filed a Current Report on Form 8-K
announcing the change of SMS's name to Systems Management
Solutions, Inc.
2. On February 8, 2005, the Board of Directors of SMS voted to
change its fiscal year end from June 30 to December 31. SMS
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 SMS voted to
reduce the number of shares outstanding of SMS'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, SMS 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, SMS 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 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 3, 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 10