Item 1.
Financial
Statements.
SMG Indium Resources Ltd.
CONSOLIDATED BALANCE SHEETS
(unaudited)
|
|
September 30
|
|
|
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
98,000
|
|
|
$
|
22,461
|
|
Accounts receivable, net of allowance for doubtful accounts of $10,695 and $21,134
|
|
|
489,035
|
|
|
|
285,923
|
|
Inventory
|
|
|
114,966
|
|
|
|
10,948
|
|
Assets held for sale
|
|
|
45,000
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
43,301
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
790,302
|
|
|
|
319,332
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $328,253 and $302,931
|
|
|
102,765
|
|
|
|
214,587
|
|
Land
|
|
|
-
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
893,067
|
|
|
$
|
543,919
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
493,992
|
|
|
$
|
160,343
|
|
Accounts payable - related party
|
|
|
50,000
|
|
|
|
-
|
|
Accrued expenses and other liabilities
|
|
|
101,846
|
|
|
|
231,523
|
|
Secured line of credit
|
|
|
264,168
|
|
|
|
-
|
|
Current portion of secured notes payable
|
|
|
133,556
|
|
|
|
275,446
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,043,562
|
|
|
|
667,312
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Notes payable - secured, net of current portion
|
|
|
275,966
|
|
|
|
234,189
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,319,528
|
|
|
|
901,501
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred stock - $0.001 par value; authoirzed 1,000,000 shares as of September 30, 2017 and
December 31, 2016; isued and outstanding none at September 30, 2017 and December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.001 par value; authoirzed 25,000,000 shares as of September 30, 2017 and December
31, 2016; isued and outstanding 7,700,190 and 1,408,276 at September 30, 2017 and December 31, 2016
|
|
|
7,700
|
|
|
|
1,408
|
|
Additional paid in capital
|
|
|
(288,776
|
)
|
|
|
(556,021
|
)
|
Retained earnings (accumulated deficit)
|
|
|
(145,385
|
)
|
|
|
197,031
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
(426,461
|
)
|
|
|
(357,582
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
893,067
|
|
|
$
|
543,919
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SMG Indium Resources
Ltd.
CONSOLIDATED STATEMENTS
OF OPERATIONS
For the three
and nine months ended September 30, 2017 and 2016
(unaudited)
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
620,084
|
|
|
$
|
411,672
|
|
|
$
|
1,802,486
|
|
|
$
|
1,114,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
234,374
|
|
|
|
231,165
|
|
|
|
953,836
|
|
|
|
609,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
385,710
|
|
|
|
180,507
|
|
|
|
848,650
|
|
|
|
504,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
156,348
|
|
|
|
83,578
|
|
|
|
495,855
|
|
|
|
250,852
|
|
Stock based compensation
|
|
|
211,321
|
|
|
|
-
|
|
|
|
211,321
|
|
|
|
-
|
|
Impairment expense
|
|
|
24,666
|
|
|
|
75,850
|
|
|
|
24,666
|
|
|
|
75,850
|
|
Bad debt expense
|
|
|
3,224
|
|
|
|
-
|
|
|
|
3,285
|
|
|
|
23,219
|
|
Gain on asset sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(393
|
)
|
Acquisition cost
|
|
|
378,807
|
|
|
|
-
|
|
|
|
378,807
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
774,366
|
|
|
|
159,428
|
|
|
|
1,113,934
|
|
|
|
349,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(388,656
|
)
|
|
|
21,079
|
|
|
|
(265,284
|
)
|
|
|
155,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of liabilities
|
|
|
-
|
|
|
|
10,971
|
|
|
|
-
|
|
|
|
10,971
|
|
Interest expense, net
|
|
|
(23,970
|
)
|
|
|
(13,700
|
)
|
|
|
(77,132
|
)
|
|
|
(42,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(412,626
|
)
|
|
$
|
18,350
|
|
|
$
|
(342,416
|
)
|
|
$
|
124,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,176,200
|
|
|
|
1,408,276
|
|
|
|
1,665,192
|
|
|
|
1,408,276
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SMG Indium Resources Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September
30, 2017 and 2016
(unaudited)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(342,416
|
)
|
|
$
|
124,065
|
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
57,154
|
|
|
|
56,209
|
|
Amortization of deferred financing costs
|
|
|
39,481
|
|
|
|
-
|
|
Gain on settlement of accrued liability
|
|
|
-
|
|
|
|
(10,971
|
)
|
Bad debt expense
|
|
|
3,285
|
|
|
|
23,219
|
|
Stock based compensation
|
|
|
211,321
|
|
|
|
-
|
|
Impairment expense
|
|
|
24,666
|
|
|
|
75,850
|
|
Gain on asset sale
|
|
|
-
|
|
|
|
(393
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(206,395
|
)
|
|
|
(16,110
|
)
|
Inventory
|
|
|
(104,018
|
)
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
7,009
|
|
|
|
(84,468
|
)
|
Accounts payable
|
|
|
333,648
|
|
|
|
(63,968
|
)
|
Accrued expenses and other liabilities
|
|
|
(53,949
|
)
|
|
|
14,808
|
|
Net cash provided by (used in) operating activities
|
|
|
(30,214
|
)
|
|
|
118,241
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash received in reverse acquisition
|
|
|
21,164
|
|
|
|
-
|
|
Cash received from the sale of property and equipment
|
|
|
-
|
|
|
|
1,000
|
|
Cash paid for purchase of property and equipment
|
|
|
-
|
|
|
|
(5,000
|
)
|
Net cash provided by (used in) investing activities
|
|
|
21,164
|
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from secured line of credit, net
|
|
|
91,927
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
151,175
|
|
|
|
70,700
|
|
Payments on notes payable
|
|
|
(194,257
|
)
|
|
|
(76,739
|
)
|
Proceeds from member contributions
|
|
|
110,081
|
|
|
|
20,856
|
|
Payments for member distributions
|
|
|
(192,507
|
)
|
|
|
(106,817
|
)
|
Proceeds from sale of member interest
|
|
|
3,170
|
|
|
|
-
|
|
Proceeds from sales of common stock
|
|
|
115,000
|
|
|
|
-
|
|
Net cash provided by (used in) financing activities
|
|
|
84,589
|
|
|
|
(92,000
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
75,539
|
|
|
|
22,241
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
22,461
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$
|
98,000
|
|
|
$
|
22,634
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for interest
|
|
$
|
43,243
|
|
|
$
|
32,233
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities
|
|
|
|
|
|
|
|
|
Common shares issued for purchase of fixed assets
|
|
$
|
5,000
|
|
|
$
|
-
|
|
Payments on notes payable from secured line of credit proceeds
|
|
|
96,512
|
|
|
|
-
|
|
Payments on accrued liabilities from secured line of credit proceeds
|
|
|
75,729
|
|
|
|
-
|
|
Recapitalization of MG Cleaners, LLC
|
|
|
310
|
|
|
|
-
|
|
Reclassification of assets held for sale
|
|
|
45,000
|
|
|
|
-
|
|
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SMG INDIUM RESOURCES LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 –BACKGROUND AND BASIS OF PRESENTATION
SMG Indium Resources Ltd. (the “Company” or “SMG”)
is a corporation established pursuant to the laws of the State of Delaware on January 7, 2008. On September 19, 2017 SMG entered
into an Agreement and Plan of Share Exchange with MG Cleaners LLC.
SMG acquired one hundred percent of the issued and outstanding
membership interests of MG Cleaners LLC pursuant to which MG Cleaners LLC became our wholly-owned subsidiary. In connection with
the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen Christian, payable
with $250,000 at closing and the remaining $50,000 paid upon the completion of the Company’s sale of a minimum of $500,000
of its securities in a private offering to investors. The $50,000 liability is recorded as an Accounts Payable – Related
Party on the balance sheet.
The merger was accounted for as a reverse acquisition with
MG Cleaners LLC being treated as the accounting acquirer. As such, the historical information for all periods presented prior
to the merger date relate to MG Cleaners LLC. Subsequent to the merger date, the information relates to the consolidated entities
of SMG with its subsidiary MG Cleaners LLC.
The Company is an emerging growth oilfield service company
focused on the drilling rig operator market segment in the domestic United States pursuant to which we offer the following products
and services: (i) product sales for the oilfield industry focused on drilling rig wash, oilfield cleaning, industrial cleaning,
fleet and equipment cleaning; (ii) equipment sales for the oilfield industry; (iii) parts sales for our installed base on equipment,
including water guns, hoses and fittings, and (iv) service crews for the oilfield industry related to cleaning and repairing drilling
rigs on location.
In connection with the acquisition, net cash received was $21,164,
and costs incurred were $378,807 including professional fees for legal and accounting services, as well as registration and filing
fees.
The accompanying unaudited interim
financial statements of SMG Indium Resources Ltd. (“we”, “our”, “SMG” or the
“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of
America and should be read in conjunction with the audited financial statements and notes thereto for the years ended
December 31, 2016 and 2015 with are included on a Form 8-K filed on September 19, 2017 as amended on October 27, 2017. 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 the 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 disclosures contained in the audited financial statements
for years ended December 31, 2016 and 2015 have been omitted.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basic and Diluted Net Loss per Share
The Company presents both basic and diluted
net loss per share on the face of the statements of operations. Basic net loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to
all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using
the treasury-stock method. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored.
For the three and nine months ended September
30, 2017 370,000 potentially issuable shares of common stock have been excluded from the calculation because their effect would
be antidilutive to the Company’s net loss. For the three and nine months ended September 30, 2016, there was no common stock
equivalent. As such the basic EPS and diluted EPS are the same.
Recent Accounting Pronouncements
The Financial Accounting Standards Board, or FASB, has issued
Accounting Standards Update No. 2014-09,
Revenue from contracts with Customers (Topic 606)
, or ASU 606. ASU 606 provides
guidance outlining a single comprehensive model for entitites to use in accounting for revenue arising from contracts with customers
in an amount that supercedes most current revenue recognition giudance. This guidance requires us to recognize revenue when we
transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. We are required to adopt ASU 606 at the beginning of our first quarter of fiscal
2018. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations
to customers and significant judgments in measurement and recognition. The new guidance may be applied retrospectively to each
prior period presented or retrospectively with the cumulative effect recognized as of the date of the adoption. We will apply
the guidance when adopted, and provide the relevant disclosures in the first interim and annual periods in which we adopt the
guidance. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements within
any accounting period presented.
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (Topic 842) (ASU 2016-02)
. Under ASU No. 2016-2, an entity will be required to recognize right-of-use
assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers
specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose
qualitative and quantitavtive informatuion about leaseing arrangements to enable a user of the financial statements to assess
the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU No. 2016-02 is effective for annual
reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period, and requires
a modified retroaspective adoption, with early adoption permitted. The Company does not expect the adoption of this standard to
have a material impact on the Company’s consollidated financial statements.
NOTE 3 – GOING CONCERN
The Company considered its going concern
disclosure requirements in accordance with ASC 240-40-50. The Company concluded that its negative working capital and decreased
cash flows from operating are conditions that raised substantial doubt about the Company’s ability to continue as a going
concern. Without a successful plan in place from management these conditions could negatively impact the Company’s
ability to meets its financial obligations over the next year. In response, the Company has implemented a plan to alleviate
such substantial doubt as follows. The Company will continue to generate additional revenue (and positive cash flows from
operations) partly related to the Company’s expansion into a new region during 2017 and partly related to the Company wide
sales initiatives already implemented. In addition there were several one-time expenses in 2016 and 2017 related to expansion
to the new region and related to the merger transaction completed in September 2017. As a result substantial doubt about
the Company’s ability to continue as a going concern is alleviated.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2017 and December 31,
2016 consist of the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
-
|
|
|
$
|
10,000
|
|
Building and improvements
|
|
|
-
|
|
|
|
91,500
|
|
Vehicles and trailers
|
|
|
283,462
|
|
|
|
278,462
|
|
Equipment
|
|
|
130,946
|
|
|
|
130,946
|
|
Other
|
|
|
16,610
|
|
|
|
16,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431,018
|
|
|
|
527,518
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(328,253
|
)
|
|
|
(302,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,765
|
|
|
$
|
224,587
|
|
Depreciation expense as of the nine months ended September
30, 2017 and 2016 was $57,154 and $56,209, respectively.
During the period ended September
30, 2017, the Company decided to sell the land and building in Carthage, Texas and determined that this property met the
criteria for assets held for sale in September 2017. The market listing price for these assets was below the net book value
at the time of reclassification, resulting in the recognition of assets held for sale of $45,000 and impairment expense of
$24,666. The Company expects these assets to sell in the fourth quarter of 2017 or the first quarter of 2018.
NOTE 5 – ACCRUED EXPENSES
Accrued expenses as of September 30, 2017 and December 31,
2016 included the following:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Salaries payable
|
|
$
|
30,538
|
|
|
$
|
6,372
|
|
Payroll taxes payable
|
|
|
2,484
|
|
|
|
91,962
|
|
Sales tax payable
|
|
|
11,071
|
|
|
|
10,793
|
|
Interest payable
|
|
|
6,054
|
|
|
|
11,646
|
|
Credit cards payable
|
|
|
6,308
|
|
|
|
10,323
|
|
Inventory purchases payable
|
|
|
33,842
|
|
|
|
75,539
|
|
Other
|
|
|
11,549
|
|
|
|
24,888
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
101,846
|
|
|
$
|
231,523
|
|
NOTE 6 – NOTES PAYABLE
Notes payable included the following as of September 30, 2017
and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable
issued on October 15, 2010 and refinanced in January 2015 for purchase of all membership interest, bearing interest of 6% per
year and due in monthly installments ending September 25, 2022
|
|
$
|
245,427
|
|
|
$
|
274,077
|
|
|
|
|
|
|
|
|
|
|
Equipment floor plan financing agreement issued July 29, 2013, bearing interest of 7.50% and due in monthly installments
|
|
|
-
|
|
|
|
4,494
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued December 19, 2014, bearing interest of 7.25% per year, due in full on December 19, 2016
|
|
|
-
|
|
|
|
119,751
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021
|
|
|
66,348
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2015, bearing interest of 6% per year, due in monthly installments
|
|
|
-
|
|
|
|
24,075
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued April 16, 2015, bearing interest of 6% per year, due in monthly installments
|
|
|
-
|
|
|
|
32,772
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued
February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020
|
|
|
45,596
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance
agreement issued April 7, 2017, bearing effective interest of 54%, due in periodic installments net of deferred
financing costs of $10,165 ending November 8, 2017
|
|
|
22,313
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued June 6, 2016, bearing effective interest of 28.50%, due in periodic installments
|
|
|
-
|
|
|
|
54,466
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement
issued August 10, 2017, bearing effective interest of 27%, due in daily installments net of deferred financing costs of
$9,304 ending December 8, 2017
|
|
|
29,838
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409,522
|
|
|
|
509,635
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(133,556
|
)
|
|
|
(275,446
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
275,966
|
|
|
$
|
234,189
|
|
On October 15, 2010, the former managing member of MG Cleaners
purchased MG Cleaners from the previous membership interest owners. In connection with that transaction, a $450,000 seller note
was issued to the sellers. The note bears an interest rate of 8% and principal and interest payments are made monthly. The remaining
principal balance of $307,391 was refinanced by the note holder in January 2015, bearing an interest rate of 6.00%, with principal
and interest payments due monthly. The note is secured by the land and building originally occupied by SMG, and said property
is no longer occupied. The balance of this note at September 30, 2017 was $245,427.
On July 29, 2013, the Company entered into an equipment floor
plan financing totaling $23,843. The terms of this note were 7.5% interest per annum with principal and interest paid monthly
over the 48 month term. The note is secured by certain equipment of the Company. This note was paid in full during the nine months
ended September 30, 2017.
On December 19, 2014, we issued
a note to First State Bank & Trust (“FSB”) for $120,025, which is secured by accounts receivable and certain
equipment of the Company. Interest is paid monthly at a rate of 7.25% per annum. The principal is due in full at the end of
the term on December 19, 2016. This loan was refinanced on January 27, 2017 with a new note at the same community bank. The
refinanced amount is identical to the remaining principal balance under the previous loan, thus no gain or loss has been
recognized.
On January 27, 2017, we issued a note
to FSB for $119,776 which is secured by accounts receivable and certain equipment of the Company. Interest is paid monthly at
a rate of 7.25% per annum. The principal is due in full at the end of the term at August 1, 2018. A payment of $50,000 was
made against this loan in May 2017 in connection with the bank’s agreement to subordinate their note to the Crestmark
Bank facility. On August 14, 2017, our company refinanced this note payable for $66,348. The unsecured note bears an interest
rate of 7.25% per annum, has 47 monthly payments of $1,400, with a balloon payment of $12,086 at maturity on August 1, 2021.
The refinanced amount is identical to the remaining principal balance under the previous loan, thus no gain or loss has been
recognized.
On January 2, 2015, we financed a truck with a note to FSB. The $43,025 note has an interest rate of 6% and payments of principal and interest are paid monthly. The note is secured
by the truck purchased. This loan was refinanced and rolled together with the remaining principal of the note issued on April
16, 2015 on February 2, 2017.
On April 16, 2015, we financed a truck with a note to FSB. The $45,328 note has an interest rate of 6% and payments of principal and interest are paid monthly. The note is secured
by the truck purchased. This loan was refinanced and rolled together with the remaining principal of the note issued on January
2, 2015 on February 2, 2017.
On February 2, 2017, we re-financed two truck notes existing
with FSB for one new note of $53,610. The term was principal and interest payments monthly over 42 months with an
interest rate of 6%. The note is secured by certain trucks and equipment of the Company. The refinanced amount is identical to the
remaining principal balance under the previous loan, thus no gain or loss has been recognized.
On August 5, 2015, the Company entered into an accounts receivable
purchase agreement with security agreement against "Payment Card Receivables" in the initial amount of $40,800. We sold
$40,800 of receivables during the year ended December 31, 2015 and $70,700 of receivables during the year ended December 31, 2016;
the balance owed is paid by the automatic sale of new payment card receivables to a finance company, with the finance company
retaining an amount equal to 2/7ths of the face amount of the receivables. The balance of this agreement was $54,466 on December
31, 2016. On May 31, 2017, the Company paid off this financing arrangement in connection with closing the Crestmark Accounts Receivable
Financing Facility.
Accounts Receivable Financing Facility
On May 11, 2017, MG Cleaners, LLC
(the “Borrower”) entered into a $1 million revolving accounts receivable financing facility with Crestmark Bank.
The financing facility provides for the Borrower to have access to the lesser of (i) $1 million or (ii) 85% of Net Amount
of Eligible Receivables (as defined in the financing agreement). The financing facility is paid for by the assignment of
the Borrower’s accounts receivable to Crestmark Bank and is secured by the Borrower’s assets. The financing
facility has an interest rate of 7.25% in excess of the prime rate reported by the Wall Street Journal per annum, with a
floor minimum rate of 11.5%. There were no loan origination or closing fees and we paid $1,330 to Crestmark to
reimburse them for documentation, legal and audit fees. Interest and maintenance fees will be calculated on the higher of the
average monthly loan balance from the prior month or a minimum average loan balance of $200,000. The financing facility is
for an initial term of two-years and will renew on a year to year basis, unless terminated in accordance with the financing
agreement. If the facility is terminated prior to the first anniversary, Borrower is obligated to pay Crestmark Bank a
fee of $20,000 and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a
fee of $5,000. After the second anniversary of the financing facility no exit fee is due. Crestmark has a senior security
interest in the Borrower’s assets.
Certain debts were paid in
connection with the closing of the Crestmark Bank Line of Credit, including a $50,000 reduction to the First State Bank note,
pay off of the accounts receivable purchase agreement for $46,512, pay off of past due IRS taxes totaling $70,898, and pay
off of one other accrued liability of $4,831. Total payments to debt and accrued liabilities at Crestmark closing were
$172, 241.
Net proceeds received during the nine months ending September
30, 2017 on this facility were $91,927.
Funding Advance Agreements
On April 7, 2017 MG Cleaners LLC
(the “Seller”) received $100,000 in return for an assignment and transfer to Capital Stack LLC of a
specified percentage of the proceeds of each collection of future receipts received by seller, collectively
“Future Receipts” until Seller has received the Purchased Amount of $143,000. This transaction is accounted for
as a short term secured loan net of deferred financing costs of $43,000 recognized on the date of incurrence. Deferred
financing costs amortized and recognized as interest expense during the nine months ended September 30, 2017 were $34,591.
The outstanding balance of the loan is $32,478 at September 30, 2017, with a remaining deferred financing costs balance of
$10,165, and the loan was paid in full as of November 8, 2017.
On August 10, 2017 MG Cleaners LLC
(the “Seller”) received $51,150 in return for an assignment and transfer to Libertas Funding LLC of a specified
percentage of the proceeds of each collection of future receipts received by seller, collectively “Future
Receipts” until Seller has received the Purchased Amount of $67,100. This transaction is accounted for as a short term
secured loan, with deferred financing costs of $15,950 recognized on the date of incurrence. Deferred financing costs
amortized and recognized as interest expense during the nine months ended September 30, 2017 were $6,646. The outstanding
balance of the loan is $39,142 at September 30, 2017, with a remaining deferred financing costs balance of $9,304, and the
loan is scheduled to be paid in full on December 8, 2017.
A summary of the activity in notes payable for the nine months
ended September 30, 2017 and 2016 is shown below:
Notes payable
Balance at January 1, 2016
|
|
$
|
533,940
|
|
Note issued secured by accounts receivable
|
|
|
70,700
|
|
Notes issued in connection with purchase of property and equipment
|
|
|
-
|
|
Less: payments on notes payable
|
|
|
(76,739
|
)
|
|
|
|
527,901
|
|
Less - current maturities, net
|
|
|
(252,982
|
)
|
Long-term notes payable, net September 30, 2016
|
|
$
|
274,919
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
$
|
509,635
|
|
Secured borrowings, net
|
|
|
264,168
|
|
Notes issued in connection with purchase of property and equipment
|
|
|
25
|
|
Notes issued in connection with funding advance agreements
|
|
|
210,100
|
|
Amortization of deferred financing costs
|
|
|
39,481
|
|
Less: payments on notes payable from secured line of credit proceeds
|
|
|
(96,512
|
)
|
Less: payments on notes payable
|
|
|
(194,257
|
)
|
Less: deferred financing costs
|
|
|
(58,950
|
)
|
|
|
|
673,690
|
|
Less - current maturities, net
|
|
|
(397,724
|
)
|
Long-term notes payable, net September 30, 2017
|
|
$
|
275,966
|
|
NOTE 7 – STOCKHOLDERS’ EQUITY (DEFICIT)
As discussed in Note 1 – Background and Basis of Presentation,
effective September 19, 2017, SMG (formerly an inactive shell) entered into a reverse acquisition transaction with MG Cleaners
LLC. In conjunction with the transaction the Company was recapitalized, resulting in the capital structure outlined below. The
historical number of common shares presented in our financial statements were converted to post merger shares on a 1 to 1 basis.
Prior to the reverse acquisition transaction, MG Cleaners
LLC sold 3,170,000 membership interest units for $3,170. At the conclusion of the merger the former owners of SMG held
2,094,569 of common stock while the former owners of MG Cleaners LLC owned 4,578,276 shares of common stock.
The following shares of common stock were issued subsequent
to the reverse acquisition:
|
-
|
432,345 shares of common stock for services
valued at $211,321.
|
|
-
|
20,000 shares of common stock for assets
valued at $5,000.
|
|
-
|
575,000 shares of common stock for cash proceeds
of $115,000.
|
NOTE 8 – STOCK OPTIONS
Summary stock option information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
377,500
|
|
|
$
|
277,150
|
|
|
$
|
0.24-3.48
|
|
|
$
|
0.73
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(7,500
|
)
|
|
|
(25,900
|
)
|
|
$
|
3.40-3.48
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
370,000
|
|
|
$
|
251,250
|
|
|
$
|
0.24-3.29
|
|
|
$
|
0.69
|
|
In connection with the
acquisition discussed in Note 1, MG Cleaners LLC assumed the above options that were previously issued by SMG. The weighted
average remaining contractual life is 3.1 years for stock options outstanding on September 30, 2017. At September 30, 2017
and 2016, there was $43,500 and $0, respectively, in intrinsic value of outstanding stock options.
NOTE 9 – COMMITMENTS AND CONTINGENCIES.
Future maturities of required payments under capital and operating
leases as of December 31, 2016 are as follows:
|
|
Operating Leases
|
|
2017
|
|
$
|
24,000
|
|
2018
|
|
|
36,000
|
|
2019
|
|
|
36,000
|
|
2020
|
|
|
19,500
|
|
2021
|
|
|
-
|
|
|
|
|
|
|
Totals
|
|
$
|
115,500
|
|
Litigation
From time to time, SMG may be subject to routine litigation,
claims, or disputes in the ordinary course of business. In the opinion of management; no pending or known threatened claims, actions
or proceedings against SMG are expected to have a material adverse effect on SMG’s financial position, results of operations
or cash flows. SMG cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters
specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of
any lawsuits and investigations.
Leases
The Company has entered into various leases for office and
storage facilities for terms ranging from month to month to three years. At December 31, 2016, the Company was engaged in one
month to month lease which requires a 90 day termination notice. Rent expense for the nine months ended September 30, 2017 and
2016 for these leases amounted to $15,887 and $22,593, respectively.
Effective July 15, 2017, we leased a facility in Midland, Texas
for $3,000 per month for approximately 2,400 square feet of space and a shared yard with several acres of storage area. The Midland
lease is for a period of 3 years and expires on July 15, 2020.
NOTE 10 – RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2017 (prior to the
acquisition) and 2016, the former managing member of MG made contributions to the Company totaling $110,081 and $20,856, respectively.
During the nine months ended September 30, 2017 (prior to the
acquisition) and 2016, the Company made distributions to the former managing member of MG totaling $192,507 and $106,817, respectively.
On September 19, 2017, in connection with the acquisition,
we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen Christian, payable with $250,000
at closing and the remaining $50,000 paid upon the completion of the Company’s sale of a minimum of $500,000 of its securities
in a private offering to investors.
On September 21, 2017, the company issued 81,695 common shares
to its CFO for payment of services provided. The shares were valued at $28,593 and are included in the total shares of common
stock for services disclosed in Note 7.
NOTE 11 – SUBSEQUENT EVENTS
During October 2017, 975,000 common
shares were issued for cash proceeds of $195,000.
On October 31, 2017, and made effective September 20, 2017,
the Company entered into an employment agreement with Stephen Christian, the former Managing Member, and current President, of
our subsidiary MG Cleaners LLC. The term is for three years with a monthly salary of $8,333 for the first six months of the effective
date and $10,000 a month thereafter. Other terms include payment of Mr. Christian’s health care insurance, use of a company
truck and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Christian six months’
severance pay.
On October 31, 2017, and
made effective October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief
Executive Officer. The term is for three years with a monthly salary of $15,000 for the period. The terms of the agreement
also include providing health care, auto allowance of $750 per month if a car is not provided by the Company, and other
customary benefits. Termination without cause, as defined in the agreement, grants Mr. Flemming six months’ severance
pay.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking
Statements
Unless otherwise
indicated, the terms “SMG Indium,” “SMG,” the “Company,” “we,” “us,”
and “our” refer to SMG Indium Resources Ltd., and our wholly-owned subsidiary MG Cleaners LLC. In this
Quarterly Report on Form 10-Q, we may make certain forward-looking statements, including statements regarding our plans, strategies,
objectives, expectations, intentions and resources that are made pursuant to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995.
The statements
contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements may be identified
by the use of forward-looking terminology such as “should,” “could,” “may,” “will,”
“expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,”
or similar terms or variations of those terms or the negative of those terms. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief or current expectations of SMG Indium Resources Ltd.
Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking
statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results
may differ materially from our predictions. There are a number of factors that could negatively affect our business and the value
of our securities, including, but not limited to, fluctuations in the market price of our common stock; changes in our plans,
strategies and intentions; changes in market valuations associated with our cash flows and operating results; the impact of significant
acquisitions, dispositions and other similar transactions; our ability to attract and retain key employees; changes in financial
estimates or recommendations by securities analysts; asset impairments; decreased liquidity in the capital markets; and changes
in interest rates. Such factors could materially affect our Company's future operating results and could cause actual events to
differ materially from those described in forward-looking statements relating to our Company. Although we have sought to identify
the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor
is there any assurance that we have identified all possible issues that we might face. We assume no obligation to update
our forward-looking statements to reflect new information or developments. We urge readers to carefully review and consider the
various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission (“SEC”)
that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business including
the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, and our Current Report on Form
8-K as filed with the SEC on September 19, 2017, and as amended on October 27, 2017.
Overview
We are an emerging
growth oilfield service company focused on the drilling rig operator market segment in the domestic United States pursuant to
which we offer the following products and services: (i) selling branded products to the oilfield industry focused on drilling
rig wash, oilfield cleaning, industrial cleaning, fleet and equipment cleaning; (ii) equipment sales for the oilfield industry
including, industrial pressure washers; (iii) parts sales for our installed base on equipment, including water guns, hoses and
fittings, and (iv) service crews for the oilfield industry related to rig wash and repairing drilling rigs on location.
Industry Overview
On September 30,
2017, the domestic United States Rig Count, as measured by Baker Hughes, stood at 940, up 80% from 522 on September 30, 2016.
Rig Counts are a measurement of oilfield activity particularly relevant to us as we sell products to drilling rig operator
customers. As a result of favorable operating economics for oil and gas companies, there is a high concentration of rigs and
oilfield activity in Texas relative to other areas in the domestic United States. On September 30, 2017, Texas and the
adjacent New Mexico (Permian and Delaware basins) had 520 rigs operating, representing about 55% of the entire domestic
United States active drilling rigs, as measured by Baker Hughes.
MG
Cleaners’ Products and Services
Proprietary Products
Our branded products
have proprietary formulations that perform in specific applications. These products include soaps, surfactants and degreasers
which are environmentally friendly and sold primarily to drilling rig operators, exploration and production companies, and distribution
and supply companies serving this market segment.
Our
branded products have proprietary formulations that have been sold direct via our sales force and through distribution
supply companies for over ten years. Miracle Blue™, a powerful degreaser, Luma Brite™, an aluminum brightener
and descaler, and Wicked Green™, an enviro-friendly bio-degradable emulsifier used in oil remediation jobs, are some of
the Company’s top selling products. In total, we currently offer 12 branded and proprietary products used by industry
leading drilling contractors in the domestic United States including Nabors, UTI-Patterson, and Cactus Drilling. MG’s
products are sold throughout Texas using direct sales employees in the East Texas market (based in Carthage, Texas) and
distributors/suppliers in the West Texas Permian and Delaware basins (based in Midland, Texas).
Equipment and Parts
Sales
Additionally, through
long-standing relationships with manufacturers, we sell equipment and related parts, to our customers which strategically promote
our future product sales. We currently offer a full line of industrial and oilfield pressure washers along with compressors, heaters,
water pumps and combination units. We also sell spare parts to customers who have purchased equipment, which include water guns,
hoses and fittings.
Service Crews
MG’s service crews consist of Company
employees who perform cleaning and repair for drilling rig operator customers typically invoicing on a day-rate basis. Other customers
prefer to purchase equipment and perform their own maintenance on their equipment, using a variety of our cleaning products. In
other examples, customers prefer to outsource cleaning and repair services where our service crews become strategic to MG’s
business solving customer problems and using our products during service. Customers for this service work include drilling rig
operators, oil companies and other oilfield service companies
Critical Accounting
Policies and Estimates
The preparation
for financial statements and related disclosures in conformity with United States generally accepted accounting principles
(U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. For a description of our significant accounting policies, see the Company’s audited
financial statements for the year ended December 31, 2016, included in the Company’s Form 8-K as filed with the SEC on
September 19, 2017, as amended on October 27, 2017. Of these policies, the following are considered critical to an
understanding of the Company’s condensed financial statements as they require the application of the most difficult,
subjective and complex judgments: (1) Use of Estimates, (2) Share-Based Payment Arrangements, and (3) Income Taxes.
Management will base its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or
conditions.
Results of Operations
The results of operations are as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
620,084
|
|
|
$
|
411,672
|
|
|
$
|
1,802,486
|
|
|
$
|
1,114,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
234,374
|
|
|
|
231,165
|
|
|
|
953,836
|
|
|
|
609,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
385,710
|
|
|
|
180,507
|
|
|
|
848,650
|
|
|
|
504,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
156,348
|
|
|
|
83,578
|
|
|
|
495,855
|
|
|
|
250,852
|
|
Stock based compensation
|
|
|
211,321
|
|
|
|
-
|
|
|
|
211,321
|
|
|
|
-
|
|
Impairment expense
|
|
|
24,666
|
|
|
|
75,850
|
|
|
|
24,666
|
|
|
|
75,850
|
|
Bad debt expense
|
|
|
3,224
|
|
|
|
-
|
|
|
|
3,285
|
|
|
|
23,219
|
|
Gain on asset sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(393
|
)
|
Acquisition cost
|
|
|
378,807
|
|
|
|
-
|
|
|
|
378,807
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
774,366
|
|
|
|
159,428
|
|
|
|
1,113,934
|
|
|
|
349,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
(388,656
|
)
|
|
|
21,079
|
|
|
|
(265,284
|
)
|
|
|
155,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of liabilities
|
|
|
-
|
|
|
|
10,971
|
|
|
|
-
|
|
|
|
10,971
|
|
Interest expense, net
|
|
|
(23,970
|
)
|
|
|
(13,700
|
)
|
|
|
(77,132
|
)
|
|
|
(42,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(412,626
|
)
|
|
$
|
18,350
|
|
|
$
|
(342,416
|
)
|
|
$
|
124,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.21
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,176,200
|
|
|
|
1,408,276
|
|
|
|
1,665,192
|
|
|
|
1,408,276
|
|
Three Months Ended September 30,
2017 Compared to Three Months Ended September 30, 2016
Our sales for the
three months ended September 30, 2017 were $620,084, an increase of $208,412, or 50.6%, from $411,672 for the three months ended
September 30, 2016. The increase in revenue for the three month ended September 30, 2017 is primarily attributable to increased
customer activity and the increased number of active drilling rigs in our market, which we expanded to include the Permian Basin
in West Texas during the period. This activity increase generated a higher volume of product sales, equipment and parts sales
and service revenues.
During the three months
ended September 30, 2017, cost of sales increased to $234,374, representing approximately 37.8% of revenues, compared to $231,165,
or 56.2% of revenues for the comparable 2016 period. The decrease in cost of revenues as a percentage of sales is primarily the
result of operational efficiencies from higher sales volumes and improved supply chain economies within cost of revenues.
For the three
months ended September 30, 2017, selling, general and administrative expenses increased to $774,366, an increase of $614,938,
from $159,428 for the three months ended September 30, 2016. This increase in selling, general and administrative expenses in
2017 was primarily due to higher wages from managerial and additional service crew personnel in West Texas, higher travel
costs, $378,807 in non-recurring acquisition expenses, and $211,321 in non-cash stock based compensation expense paid to
consultants. Additionally, an asset impairment expense of $24,666 was recorded in the three months ended September 30, 2017
as compared to $75,850 in the three months ended September 30, 2016.
Other expense, net
was $23,970, an increase of $21,241 for the three months ended September 30, 2017 compared to the same period in 2016. The increase
in other expense during the quarter ended September 30, 2017 resulted from higher interest expense with our revolving line of
credit, funding advance agreements and notes payable, compared to $13,700 in interest expense and an offsetting gain on settlement
of liabilities of $10,971 in the three months ended September 30, 2016.
During the three months
ended September 30, 2017 we incurred a net loss of $412,626, or ($0.19) per basic and diluted share. For the three months ended
September 30, 2016 we realized net income of $18,350 or $0.01 per basic and diluted share. The net loss in the quarter ended September
30, 2017 resulted from acquisition expenses of $378,807 and non-cash stock charges of $211,321 not present in the 2016 period
comparison, partially offset by higher contributions from increased gross margin. The basic weighted average number of shares
of common stock outstanding was 2,176,200 and 1,408,276 for the three months ended September 30, 2017 and 2016, respectively.
Nine Months Ended September 30,
2017 Compared to Nine Months Ended September 30, 2016
Our sales for the
nine months ended September 30, 2017 were $1,802,486, an increase of $688,007, or approximately 62%, from $1,114,479 for the nine
months ended September 30, 2016. The increase in revenue for the nine months ended September 30, 2017 is primarily attributable
to the increased customer activity and their increased number of active drilling rigs in our market which we expanded to include
the Permian Basin in West Texas during the period. Increased product sales, equipment and parts sales as well as higher volume
of service crew work was attributable to the increase in revenue.
During the nine months
ended September 30, 2017, cost of sales increased to $953,836, representing approximately 52.9% of revenues, compared to $609,485,
or 54.7% of revenues for the comparable 2016 period. The slight decrease in cost of revenues as a percentage of sales is primarily
the result of higher revenues and operational efficiencies in the latter part of the nine month period.
For the nine
months ended September 30, 2017, selling, general and administrative expenses increased to $1,113,934, an increase of
$764,406, from $349,528 for the nine months ended September 30, 2016. This increase in selling, general and administrative
expenses in 2017 was primarily due to higher wages from managerial and additional service crew personnel in West Texas,
higher travel costs, $378,807 in non-recurring acquisition expenses, and $211,321 in non-cash stock based compensation
expense paid to consultants. Additionally, an asset impairment expense of $24,666 was recorded in the nine months ended
September 30, 2017 as compared to $75,850 in the nine months ended September 30, 2016.
Other expense, net
was $77,132, an increase of $45,731 for the nine months ended September 30, 2017 compared to other expense, net of $31,401 for
the nine months ended September 30, 2016. The increase in other expense during the nine months ended September 30, 2017 resulted
from higher interest expense with our revolving line of credit established in May 2017, funding advance agreements, and notes
payable, compared to $42,372 in interest expense and an offsetting gain on settlement of liabilities of $10,971 in the nine months
ended September 30, 2016.
During the nine months
ended September 30, 2017 we incurred a net loss of $342,416, or ($0.21) per basic and diluted share. For the nine months ended
September 30, 2016 we realized a net income of $24,065, or $0.09 per basic and diluted share. The net loss in the quarter ended
September 30, 2017 resulted from acquisition expenses of $378,807 and non-cash stock compensation expense of $211,321 not present
in the 2016 period comparison. The basic weighted average number of shares of common stock outstanding was 1,665,192 and 1,408,276
for the nine months ended September 30, 2017 and 2016, respectively.
Liquidity and Capital Resources
As of September 30,
2017, our total assets were $893,067, comprised of $98,000 in cash, $489,035 in accounts receivable, $114,966 in inventory, $45,000 in assets held for sale, other prepaid expenses of $43,301 and $102,765 in net property
and equipment. This is an increase in total assets of $349,148 over the total assets at December 31, 2016 of $543,919. We have
a working capital deficit as of September 30, 2017 of $253,260, compared to a working capital deficit of $347,980 at December 30,
2016.
During the
nine months ended September 30, 2017, we had cash used in operating activities of $30,214 compared to $118,241 of cash
provided by operating activities for the nine months ended September 30, 2016. The net cash used in operating activities for
the nine months ended September 30, 2017 consists primarily of the net loss of $342,416, increases in: accounts receivable of
$206,395 and inventory of $104,018, and a decrease in accrued liabilities of $53,949; which are offset by increases in
accounts payable of $333,648 and decreases in prepaid expenses of $7,009; stock based compensation expense of $211,321,
depreciation expense of $57,154, amortization of deferred financing costs of $39,481, impairment expense of $24,666, and bad
debt expense of $3,285.
During the nine months
ended September 30, 2017, we had net cash provided by investing activities of $21,164 from cash received in the reverse acquisition
during the period. During the nine months ended September 30, 2016, we had net cash used in investing activities of $4,000 consisting
of $5,000 for the purchase of equipment partially offset by $1,000 of cash received from the sale of equipment.
Net cash
provided by financing activities was $84,589 for the nine months ended September 30, 2017, compared to net cash used in
financing activities of $92,000 for the nine months ended September 30, 2016. Our net cash provided by financing activities
for the nine months ended September 30, 2017 resulted primarily from proceeds from notes payable of $151,175, the net
proceeds from our line of credit of $91,927, member contributions of $110,081, sales of common stock of $115,000, and sales
of member interest of $3,170 which was partially offset by payments on notes payable of $194,257 and payments for member
distributions prior to the acquisition of $192,507.
Our net increase in
cash for the nine months ended September 30, 2017 was $75,539, as compared to a net cash increase of $22,241 in the nine months
ended September 30, 2016.
At September 30, 2017
and December 31, 2016, we had cash and cash equivalents of approximately $98,000 and $22,634, respectively. Based on a planned
reduction in spending levels and normalized professional fees in the post-acquisition period, we believe that the cash, cash equivalents
and receivables at September 30, 2017 and cash generated from continuing operations should be sufficient to pay our operating
expenses at least through November 13, 2018.
Our cash flows
from operations and our available capital, including the line of credit of $1 million established earlier this year, are
presently sufficient to sustain our current level of operations for the next twelve months. Although we do not believe we
will need to raise additional funds in order to meet the expenditures required for operating our business through November 13,
2018, we may need to raise additional capital if we encounter unforeseen costs or if cash is needed for any corporate
initiatives. Although, currently we are not a party to any agreement with respect to potential investments in, or
acquisitions of businesses, we may enter into these types of arrangements in the future, which could also require us to seek
additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. We have begun
evaluating strategic options including the merger or acquisition of a new line of business or the sale or full liquidation of
the Company. There can be no assurances that we will enter into any such transactions, and if so, on terms favorable to
us.
Historically, we have
funded our capital expenditures internally through cash flow, leasing and financing arrangements. We intend to continue to fund
future capital expenditures through cash flow, as well as through capital available to us pursuant to our line of credit, capital
from the sale of our equity securities and through commercial leasing and financial programs.
On May 31, 2017,
MG Cleaners entered into a $1 million revolving accounts receivable financing facility with Crestmark Bank. The financial
facility provides for MG to have access to the lesser of (i) $1 million or (ii) 85% of the net amount of eligible receivables
(as defined in the financing agreement). The financing facility is paid for by the assignment of MG’s accounts
receivable to Crestmark Bank and is secured by MG’s assets. The financing facility has an interest rate of 7.25% in
excess of the prime rate reported by the Wall Street Journal per annum, with a floor minimum rate of 11.5%. Interest and
maintenance fees will be calculated on the higher of the average monthly loan balance from the prior month or a minimum
average loan balance of $200,000. The financing facility is for an initial term of two years and will renew on a year to year
basis, unless terminated in accordance with financing agreement. Pursuant to the terms of the financing facility. Crestmark
has been granted a senior security interest in all of MG’s assets and the Company has agreed to guaranty all amounts
due under the facility upon an event of default, however, the guaranty does not restrict the Company’s ability to incur
debt in connection with financing its operations.
Pursuant to the terms
of the financing facility, MG is not allowed to incur additional indebtedness, to create liens or other encumbrances, or to sell
or otherwise dispose of MG’s assets, without the prior written consent of Crestmark. The Crestmark facility does not restrict
the Company’s ability to finance its operations through the sale of its equity securities.
On October 15, 2010,
the former managing member of MG Cleaners purchased MG Cleaners from the previous membership interest owners. In connection with
that transaction, a $450,000 seller note was issued to the sellers. The note bears an interest rate of 8% and principal and interest
payments are made monthly. The remaining principal balance of $307,391 was refinanced by the note holder in January 2015, bearing
an interest rate of 6.00%, with principal and interest payments due monthly. The note is secured by the land and building originally
occupied by SMG, and said property is no longer occupied. The balance of this note at September 30, 2017 was $245,427. This note
does not restrict the Company’s ability to incur any additional indebtedness, or the sale of its equity securities, in connection
with financing its operations.
On February 2, 2017,
we re-financed two truck notes existing with First State Bank and Trust for one new note of $53,610. The term was principal and
interest payments monthly over 42 months with an interest rate of 6%. The note is secured by certain trucks and equipment of the
Company. This note does not restrict the Company’s ability to incur any additional indebtedness, or the sale of its equity
securities, in connection with financing its operations.
On April 7, 2017 MG
received $100,000 in return for an assignment and transfer to Capital Stack LLC of a specified percentage of the proceeds of each
future sale made by MG collectively “Future Receipts” until MG has received the purchased amount of $143,000. Pursuant
to the term of the Capital Stack agreement, MG cannot sell any position of its future sales that have previously been sold to
Capital Stack, however, it does not restrict the Company’s ability to incur any additional debt, or sell its equity securities,
in connection with financing its operations. The final payment to Capital Stack will be made in October, 2017 at which point the
Capital Stack agreement shall terminate by its terms.
On August 10, 2017
MG received $51,150 in return for an assignment and transfer to Libertas Funding LLC of a specified percentage of the proceeds
of each future sale made by MG collectively “Future Receipts” until MG has received the purchase amount of $67,100.
Pursuant to the terms of the Libertas agreement, MG cannot sell any portion of its future sales that have previously been sold
to Libertas, however, it does not restrict the Company’s ability to incur any additional debt, or sell its equity securities,
in connection with financing its operations. The final payment to Libertas will be made in November 2017, at which point the Libertas
agreement shall terminate by its items.
On August
14, 2017 MG refinanced a note dated January 27, 2017 with First State Bank and Trust for $66,348. The unsecured note bears an
interest rate of 7.25% per annum, has 47 monthly payments of $1,400, with a balloon payment of $12,086 at maturity on August
1, 2021. This note does not restrict the Company’s ability to incur any additional indebtedness, or the sale of
its equity securities, in connection with financing its operations.
Off-Balance-Sheet Transactions
We are not party to
any off-balance-sheet transactions.
Contractual Commitments
None