NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
NOTE 1 — BACKGROUND AND BASIS OF PRESENTATION
SMG Industries Inc. (the “Company”
or “SMG”) is a corporation established pursuant to the laws of the State of Delaware on January 7, 2008. The Company
original business was the acquisition and stockpile of a rare metal known as Indium used in cell phones and other industrial applications.
The Company eventually sold its stockpile and distributed most of the proceeds to its stockholders via special dividends and share
repurchases.
On September 19, 2017, the Company
entered the domestic oilfield services market and executed an Agreement and Plan of Share Exchange with MG Cleaners LLC, a Texas
based company focused on selling products and services to drilling rig contractors and oilfield customers.
On September 19, 2017, 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 its Managing MG Member, 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 was recorded as an Accounts
Payable – Related Party on the balance sheet. On January 30, 2018 the Company changed its name from SMG Indium Resources
Ltd. to its present name SMG Industries Inc.
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 today is a growth-oriented
oilfield services company that operates throughout the domestic Southwest United States. Through its wholly-owned operating subsidiaries,
the Company offers an expanding suite of products and services across the oilfield market segments of drilling, completions and
production.
MG Cleaners LLC., serves the drilling
market segment with proprietary branded products including detergents, surfactants and degreasers (such as Miracle Blue®) as
well as equipment and service crews that perform on-site repairs, maintenance and drilling rig wash services. SMG's oil tools rental
division includes an inventory of more than 800 bottom hole assembly (BHA) oil tools such as stabilizers, drill collars, crossovers
and bit subs rented to oil companies and their directional drillers. SMG's frac water management division, known as Momentum Water
Transfer, focuses in the completion or fracing market segment providing high volume above ground equipment and temporary infrastructure
to route water used on location for fracing. Trinity Services LLC provides lease roads, location and pad development using construction
equipment to build drilling pad locations and well site services using a work over rig to perform services on existing wells. SMG
Industries, Inc. headquartered in Houston, Texas has facilities in Carthage, Waskom, Odessa and Alice, Texas.
The accompanying unaudited interim
financial statements of SMG Industries Inc. (“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, 2018 and 2017 which are
included on our Form 10-K filed on April 1, 2019. 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, 2018 and 2017 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 nine months ended September 30, 2019, 820,000 of stock options, 895,001 of warrants,
4,000,000 shares issuable from Series A Preferred Stock and 600,000 shares issuable from convertible notes were considered
for their dilutive effects. For the nine months ended September 30, 2018, 1,165,000 of convertible notes, stock options and
warrants were considered for their dilutive effects.
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Basic and Diluted Loss
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,297,347
|
)
|
|
$
|
(408,066
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Shares:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
13,493,944
|
|
|
|
9,986,415
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
13,493,944
|
|
|
|
9,986,415
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued
ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity is 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 quantitative information about leasing 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, The Company adopted this standard on January 1, 2019 using
the modified retrospective method. The new standard provides a number of optional practical expedients in transition. The Company
elected the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard its
prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s
available transition practical expedients.
On adoption, the Company recognized
additional operating liabilities of $287,519, with corresponding Right of Use assets of the same amount based on the present value
of the remaining minimum rental payments under current leasing standards for its existing operating leases.
The new standard also provides
practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption for
its leases. For those leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities.
The Company also made an accounting policy election to combine lease and non-lease components of operating leases for all asset
classes.
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 negative
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 concern as
follows. The Company plans to continue to generate additional revenue (and improve cash flows from operations) partly
related to the Company’s acquisition of an additional operating company in 2019 and partly related to the Company cross-selling
additional sales initiatives already implemented with the acquisition’s additional customer base. In addition,
costs at the Company’s frac water division were reduced in 2019 bringing them more in line with current revenues in that
area. As a result, following this plan substantial doubt about the Company’s ability to continue as a going
concern is alleviated.
NOTE 4 – REVENUE
Disaggregation of revenue
The Company disaggregates revenue
between services and products revenue. All revenues are currently in the southern region of the United States.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Service revenue
|
|
$
|
1,446,111
|
|
|
$
|
438,207
|
|
|
$
|
2,855,066
|
|
|
$
|
1,501,789
|
|
Product revenue
|
|
|
618,405
|
|
|
|
588,742
|
|
|
|
2,056,335
|
|
|
|
1,690,643
|
|
Total revenue
|
|
$
|
2,064,516
|
|
|
$
|
1,026,949
|
|
|
$
|
4,911,401
|
|
|
$
|
3,192,432
|
|
Customer Concentration and Credit Risk
During the nine months ended September
30, 2019, three of our customers accounted for approximately 38% of our total gross revenues, with customers each accounting for
16%, 12% and 10% respectively. No other customers exceeded 10% of revenues during the nine months ended September 30, 2019.
During the nine months ended September 30, 2018, two of our customers accounted for approximately 52% of our total gross revenues,
with individual customers accounting for 21% and 31%. No other customers exceeded 10% of revenues during the 2018 period.
Three customers accounted for
approximately 48% of accounts receivable at September 30, 2019, and three customers accounted for approximately 51% of accounts
receivable at December 31, 2018. No other customers exceeded 10% of accounts receivable as of September 30, 2019 and December 31,
2018. The Company believes it will continue to reduce the customer concentration risks by engaging new customers and by increasing
activity with existing, less active customers and relatively smaller, newer customer relationships. While the Company continues
to acquire new customers in an effort to grow and reduce its customer concentration risks, management believes these risks will
continue for the foreseeable future.
NOTE 5 - INVENTORY
Inventory consisted of the following components:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Raw materials and supplies
|
|
$
|
35,215
|
|
|
$
|
8,690
|
|
Work in progress
|
|
|
-
|
|
|
|
-
|
|
Finished and purchased products
|
|
|
114,198
|
|
|
|
131,972
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
149,413
|
|
|
$
|
140,662
|
|
NOTE 6 – LONG-LIVED ASSETS
Property and equipment at September 30,
2019 and December 31, 2018 consisted of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Equipment
|
|
$
|
4,018,194
|
|
|
$
|
1,409,237
|
|
Downhole oil tools
|
|
|
700,000
|
|
|
|
700,000
|
|
Vehicles
|
|
|
161,667
|
|
|
|
151,497
|
|
Furniture, fixtures and other
|
|
|
71,929
|
|
|
|
43,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,951,790
|
|
|
|
2,304,164
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(609,753
|
)
|
|
|
(306,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,342,037
|
|
|
$
|
1,998,009
|
|
Depreciation expense for the nine months
ended September 30, 2019 and 2018 was $317,036 and $60,658 respectively.
Intangible assets
Intangible assets as of September
30, 2019 are related to the acquisition of the RigHands™ assets and the acquisition of tradenames of Momentum Water Transfer
Services LLC.
Intangible assets at September
30, 2019 and December 31, 2018 consisted of the following:
|
|
Useful
Life (yr)
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
RigHands (Trademark & Formula)
|
|
|
15
|
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
MWST Tradename
|
|
|
10
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
(32,092
|
)
|
|
|
(10,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
307,908
|
|
|
$
|
329,656
|
|
Amortization expense for the nine
months ended September 30, 2019 and 2018 was $21,748 and $6,275, respectively. Future amortization of the intangible assets for
the years ended December 31, 2019, 2020, 2021, 2022, 2023 and beyond are $29,000, $29,000, $29,000, $29,000, $29,000 and $184,894,
respectively.
NOTE 7 – ACCRUED EXPENSES
AND OTHER LIABILITIES
Accrued expenses as of September 30, 2019
and December 31, 2018 included the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Payroll and payroll taxes payable
|
|
$
|
203,505
|
|
|
$
|
84,916
|
|
Sales tax payable
|
|
|
75,661
|
|
|
|
67,124
|
|
Interest payable
|
|
|
69,541
|
|
|
|
12,325
|
|
Credit cards payable
|
|
|
5,226
|
|
|
|
-
|
|
Other
|
|
|
47,384
|
|
|
|
43,546
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
401,317
|
|
|
$
|
207,911
|
|
NOTE 8 – NOTES PAYABLE
Notes payable included the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
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.
|
|
$
|
147,608
|
|
|
$
|
180,552
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021.
|
|
|
-
|
|
|
|
49,885
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020.
|
|
|
13,434
|
|
|
|
25,960
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023.
|
|
|
29,635
|
|
|
|
35,562
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued June 27, 2018, bearing effective interest of 20%, due in daily installments ending April 2019, principal balance $143,965, net of deferred financing costs of $43,412.
|
|
|
-
|
|
|
|
143,965
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $19,924.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 7.5% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $19,924.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $19,923.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on December 7, 2018 related to the acquisition of Momentum Water Transfer Services LLC, bearing interest of 6% per year and due in monthly installments of $7,500, with a maturity date of December 8, 2023.
|
|
|
792,469
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes May 1, 2019, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. Note was extended to September 30, 2019.
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes May 1, 2019, bearing interest of 10% per year, due September 30, 2019.
|
|
|
80,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Various notes payable secured by equipment of Big Vehicle & Equipment Company, LLC, bearing interest ranging from 2.72% to 8% maturing through August 2023.
|
|
|
701,941
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued September 20, 2019, bearing interest of 12% per year, due in monthly installments ending December 2019.
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued July 26, 2019, bearing interest of 7% per year, due in monthly installments ending July 2020
|
|
|
123,818
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,488,905
|
|
|
|
1,535,924
|
|
Less discounts
|
|
|
(59,771
|
)
|
|
|
(239,750
|
)
|
Less current maturities
|
|
|
(1,085,994
|
)
|
|
|
(328,328
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
1,343,140
|
|
|
$
|
967,846
|
|
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.
On August 14, 2017, we refinanced
a 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 February 2, 2017, we refinanced
two truck notes existing with a community bank 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.
On January 2, 2018, we financed
a truck with a note to a bank. The $41,481 note has an interest rate of 6.29% and payments of principal and interest are paid monthly.
The note is secured by the truck purchased. This note matures in January 2023.
On December 7, 2018, the Company
issued and sold secured promissory notes in the aggregate principal amount of $300,000 to three separate purchasers. In addition
to the issuance of the Notes an aggregate of 500,000 warrants (“Warrants”) were issued to the purchasers of the Notes.
The Warrants are exercisable for a period of five years and are exercisable at $0.40 per share. Interest on the Notes shall be
paid to the purchasers at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Note is one year after
the issuance date. The Notes are secured by all of the assets of the Company and the assets of MWTS, subject to prior liens and
security interests. The warrants were valued at $203,337 and recorded as a discount to the notes payable. The discount will be
amortized over the life of the notes payable.
On December 7, 2018 the Company
issued a 6% note to the MWTS Member in the amount of $800,000 as part of the purchase price for MWTS. The note requires monthly
payment of $7,500, matures December 8, 2023 and is secured by all the assets of the Company subject to prior security interests.
On January 11, 2019 the Company
issued a $100,000 10% note to a shareholder who controls approximately 8.8%. The note matures on December 7, 2019 and is secured
by a junior lien against the Company assets. In April 2019, the Company issued 511,370 shares of its restricted common stock with
a fair value of $203,525 to settle this $100,000 note payable and $2,274 accrued interest in full. The transaction resulted in
a loss on settlement of $101,251.
In May 2019, the Company issued
a promissory note in the amount of $100,000 with a maturity date of July 1, 2019 to an individual accredited investor. The Company
issued a five-year warrant to purchase 100,000 shares of the Company’s common stock at a fixed price of $0.30. The warrants
were valued $44,091 and recorded as a debt discount that was fully amortized as of September 30, 2019. On June 18, 2019, the Company
issued 150,000 warrants with an exercise price of $0.30 and a term of ten years in exchange for an extension of the maturity date
of the note through September 30, 2019. The warrants were valued at $67,223 and will be amortized over the extension period of
the note. The promissory note is currently past due. The Company is negotiating an extension with the note holder.
In June 2019, the Company issued
a promissory note in the amount of $80,000 to an individual accredited investor. The Company issued a ten-year warrant to purchase
120,000 shares of the Company’s common stock at a fixed price of $0.30 per share. The warrants were valued at $53,780 and
recorded as a debt discount. As of September 30, 2019, $53,780 was amortized leaving a discount balance of $0. The promissory note is currently past due. The Company is negotiating an extension with the note holder.
On July 26, 2019, the Company
paid a vendor payable that totaled $247,637, by issuing a promissory note in the name of its frac water company Jake Oilfield Solutions
LLC for $123,819. The interest rate was 7% with principal and interest due at maturity July 25, 2020. The remaining balance of
$123,818 was converted into 353,766 shares of SMG’s restricted common stock.
On September 20, 2019, the Company
issued a $200,000 12% promissory note. The note is due and payable in three monthly installments, the first two installments are
interest only and the third and final installment for the balance of the principal and accrued interest is due at maturity December
20, 2019.
Funding Advance Agreements
– included with secured notes
On June 27, 2018, the Company
re-financed and paid off a prior liability due to Libertas Funding LLC. The new facility had an original principal balance of $347,500.
Payments of principal and interest are paid daily. This note matured in May 2019 and was paid in full. During the nine months ended
September 30, 2019, $43,411 of debt discount was amortized to interest expense.
Future maturities of secured notes payable as of September
30, 2019 are as follows:
2019
|
|
|
$
|
863,204
|
2020
|
|
|
|
399,461
|
2021
|
|
|
|
334,940
|
2022
|
|
|
|
262,843
|
2023
|
|
|
|
628,457
|
Total
|
|
|
$
|
2,488,905
|
Notes Payable – Unsecured
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Financed insurance premium, Note Payable issued on June 8, 2018, bearing interest of 6.5% per year and due in monthly installments ending April 1, 2019
|
|
$
|
-
|
|
|
$
|
31,126
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable with a shareholder who
controls approximately 7.5% of votes. Note issued on August 10, 2018 for $40.000, due December 30, 2018
(extended to June 30, 2019) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced
and due on demand
|
|
|
40,000
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured advances from the sellers of Momentum Water Transfer Services LLC, non-interest bearing and due on demand
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured note with vendor, issued a $135,375 10% promissory note due at October 30, 2019. The note was issued in exchange for of settlement of accounts payable.
|
|
|
85,375
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,375
|
|
|
|
131,126
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(160,375
|
)
|
|
|
(131,126
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes
Payable (Related Party)
On February 12, 2018, the Company’s
wholly-owned subsidiary, MG Cleaners LLC (“MG”) entered into an Intellectual Property Sale Agreement (“Agreement”)
with Stephen Christian, MG’s President, for the purchase of RigHands™ an industrial strength hand cleaner product line.
RigHands™ is a trademarked branded product which is focused on the oilfield and industrial markets. MG issued a promissory
note to Mr. Christian for the purchase price in the amount of $150,000. The note bears interest at the rate of 5% per year and
is payable in 36 equal monthly installments of $4,496. As of September 30, 2019 and December 31, 2018, $63,935 and $101,220 remains
outstanding with $51,932 and $54,307, respectively included as a current liability.
During the nine months ended September
30, 2019, Stephen Christian advanced $201,661 to the Company and was repaid $210,103 by the Company. As of September 30, 2019 and
December 31, 2018, $0 and $8,443 remained outstanding, respectively, with no specific repayment terms or stated interest rate.
Accounts Receivable Financing
Facility (Secured Line of Credit)
On May 11, 2017, SMG Industries,
Inc., formerly SMG Indium Resources Ltd., (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. The balance
of this line of credit was $1,348,916 and $593,888 as of September 30, 2019 and December 31, 2018, respectively.
As part of our arrangement with
Crestmark Bank our customers pay accounts receivable directly to a lock-box. Crestmark Bank is then paid back for prior advances
on the Company’s Eligible Receivables. During the nine months ended September 30, 2019, the Company received total cash proceeds
of $1,851,690 and repaid $1,830,831 of the Line of Credit via Crestmark Bank withholding amount collected in our lock-box. In addition,
Crestmark withheld $74,352 to pay for interest and fees. Net proceeds received during the nine months ended September 30,
2019 on this facility were $95,211.
During the nine months ended September
30, 2018, the Company received total cash proceeds of $2,919,038 and repaid $2,837,610 of the Line of Credit via Crestmark Bank
withholding amount collected in our lock-box. In addition, Crestmark withheld $53,509 to pay for interest and fees. Net proceeds
received during the nine months ending September 30, 2018 on this facility were $134,937.
On June 19, 2019, each of MG Cleaners
LLC (“MG”), Trinity Services LLC (“Trinity”) and Jake Oilfield Solutions LLC (“Jake”), each
of which is a wholly-owned subsidiary of the Company, entered into separate revolving accounts receivable financing facilities
(collectively the “AR Facility”) with Catalyst Finance L.P. (“Catalyst”). The AR Facility was funded on
June 27, 2019. The new AR Facility with Catalyst was used to pay off the Crestmark facility in full. The AR Facility provides for
the Company, through MG, Trinity and Jake, to have access to up to 90% of the net amount of eligible receivables (as defined in
the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of MG, Trinity and Jake
to Catalyst and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 2.25% in excess
of the prime rate reported by the Wall Street Journal per annum, plus a financing fee equal to 0.20% of the receivable balance
every 15 days, with a maximum cumulative rate of 1.6%. There are no origination fees, monitoring or early termination fees.
The AR Facility can be terminated by the Company with thirty days written notice. The Company is a guarantor of the financing facility
and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility.
On June 27, 2019, an accounts
receivable financing company funding a total of $1,317,304 pursuant to the AR facility. Of the amounts funded $500,000 was paid
directly to the seller of Trinity, $43,219 was used to pay off notes payable of MG Cleaners, $714,239 was used to pay off the Crestmark
liability and the remaining $59,846 was deposited to the Company’s bank account.
The balances under the above lines
of credit was $1,348,916 and $593,888 as of September 30, 2019 and December 31, 2018, respectively.
Convertible Notes Payable
On September 28, 2018, the Company
entered into a secured note purchase agreement with an individual accredited investor for the purchase and sale of a convertible
promissory note (“Convertible Note”) in the principal amount of $250,000. The Convertible Note is convertible at any
time after the date of issuance into shares of the Company’s common stock at a conversion price of $0.50 per share. Interest
on the Note shall be paid to the investor at a rate of 8.5% per annum, paid on a quarterly basis, and the maturity date of the
Convertible Note is two years after the issuance date. The Convertible Note is secured by all of the assets of the Company, subject
to prior liens and security interests. The Company evaluated the Convertible Note and determined is a conventional convertible
instrument. As a result, a beneficial conversion feature was calculated as $100,000 at the time of issuance and recorded as a discount.
During the nine months ended September 30, 2019, $36,295 of the discount was amortized.
In April 2019, the Company issued
a convertible promissory note in the amount of $50,000 to an individual accredited investor. The note bears an interest rate of
8 ½ %, payable in cash quarterly, matures in two years and is convertible at any time into shares of the Company’s
common stock at a fixed conversion price of $0.50 (fifty cents) per share.
NOTE 9 – COMMON AND PREFERRED STOCK
During the year ended December
31, 2018, the Company issued a total of 80,000 common shares to three consultants for services. During the nine months ended September
30, 2019, the Company recognized expense of $31,896 related to these services. In May 2019, the Company issued a total of 200,000
common shares to consultants for services. During the nine months ended September 30, 2019, the Company recognized expense
of $38,449 related to these services.
During the nine months ended September
30, 2019, the Company issued 393,312 shares of its restricted common stock in settlement of $138,012 of liabilities. The fair value
of the common stock issued was $124,685 resulting in a gain on settlement of $13,328.
During the nine months ended September
30, 2019, the Company issued 1,436,000 shares of its restricted common stock for proceeds of $359,000 from accredited investors.
In April 2019, the Company issued
511,370 shares of its restricted common stock to settle a $100,000 note payable and accrued interest of $2,474 in full that was
originally issued in January 2019.
Preferred Stock – Series A Convertible
Preferred stock
On June 4, 2019 the company filed
a Certificate of Designation of Preferences, Rights and Limitations of 3% Series “A” Convertible Preferred Stock to
create a new class of stock in connection with its pending acquisition. This Series A Convertible Preferred stock has designated
2,000 shares, has a stated value of $1,000 per share and was delivered to the seller of Trinity Services LLC at closing.
The Series A Preferred Stock shall,
with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of the Corporation, rank senior
to all classes of Common Stock and to each other class of Capital Stock of the Corporation or series of Preferred Stock of the
Corporation existing or hereafter created. The Series A Preferred Stock shall pay a three percent (3%) annual dividend on the outstanding
Series A Preferred Stock, all of which shall be accrued until the Series A Preferred Stock has been converted.
At any time from issuance, the
stated value of each outstanding share of Series A Preferred Stock, plus accrued dividends thereon, shall be convertible (in whole
or in part), at the option of the Holder into shares of the Company’s Common Stock at a fixed conversion price of $0.50 per
share on the date on which the Holder notices a conversion.
All outstanding shares of Series
A Preferred Stock shall automatically convert into shares of the Company’s Common Stock upon the earlier to occur of: (i)
twelve months after the date of issuance of the Series A Preferred Stock; or (ii) six months after the date of issuance of the
Series A Preferred Stock, provided that (a) all shares of the Company’s Common Stock issued upon conversion may be sold under
Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing price
of the Company’s Common Stock has been at least of $0.60 per share during the twenty (20) trading days prior to the date
of conversion.
The Holders shall have the right
to receive notice of any meeting of holders of Common Stock or Series A Preferred Stock and to vote upon any matter submitted to
a vote of the holders of Common Stock or Series A Preferred Stock, on an as-converted basis. Except as otherwise expressly set
forth in the Certificate of Incorporation (including this Certificate of Designation), the Holders shall vote on each
matter submitted to them with the holders of Common Stock and all other classes and series of Capital Stock entitled to vote on
such matter, taken together as a single class, if any.
NOTE 10 – STOCK OPTIONS AND WARRANTS
Summary stock option information is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2018
|
|
|
640,000
|
|
|
$
|
320,350
|
|
|
|
$0.24 - $2.18
|
|
|
$
|
0.50
|
|
Granted
|
|
|
300,000
|
|
|
|
135,000
|
|
|
|
0.45
|
|
|
$
|
0.45
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(120,000
|
)
|
|
|
(77,850
|
)
|
|
|
0.37 - 2.18
|
|
|
|
0.65
|
|
Outstanding, September 30, 2019
|
|
|
820,000
|
|
|
$
|
377,500
|
|
|
|
$0.24 - $2.00
|
|
|
$
|
0.46
|
|
Exercisable, September 30, 2019
|
|
|
786,667
|
|
|
$
|
351,167
|
|
|
|
$0.24 - $2.00
|
|
|
$
|
0.45
|
|
During the nine months ended September 30, 2019 the Company issued 100,000 common stock options to each of the three independent
directors. The options vest immediately, have an exercise price of $0.45 and a five-year term.
The weighted average remaining
contractual life is approximately 3.23 years for stock options outstanding on September 30, 2019. At September 30, 2019 there was
$66,300 in intrinsic value of outstanding stock options. During the nine months ended September 30, 2019 and 2018 share based compensation
expense of $147,431 and $42,012 was recognized, respectively.
Summary Stock warrant information
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2018
|
|
|
525,001
|
|
|
$
|
218,750
|
|
|
|
$0.40 - $0.75
|
|
|
$
|
0.42
|
|
Granted
|
|
|
370,000
|
|
|
|
111,000
|
|
|
|
0.30
|
|
|
|
0.30
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2019
|
|
|
895,001
|
|
|
$
|
329,750
|
|
|
|
$0.30 - 0.75
|
|
|
$
|
0.37
|
|
Exercisable, September 30, 2019
|
|
|
895,001
|
|
|
$
|
329,750
|
|
|
|
$0.30 - 0.75
|
|
|
$
|
0.37
|
|
The weighted average remaining
contractual life is approximately 5.73 years for stock warrants outstanding on September 30, 2019. At September 30, 2019 there
was $78,760 in intrinsic value of outstanding stock warrants.
NOTE 11 – ACQUISITION
Trinity Services LLC
On June 3, 2019 we entered into
an Agreement and Plan of Share Exchange dated as of such date (the “Trinity Exchange Agreement”) with Trinity Services
LLC, a Louisiana limited liability company (“Trinity”) and the sole member of Trinity (the “Trinity Member”).
We completed the closing of the acquisition of Trinity on June 26, 2019 (“Closing Date”). On the Closing Date, pursuant
to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and outstanding membership interests of Trinity
(“Trinity Membership Interests”) from the Trinity Member pursuant to which Trinity became our wholly owned subsidiary
(“Trinity Acquisition”). In accordance with the terms of the Trinity Exchange Agreement, and in connection with the
completion of the Acquisition, on the Closing Date we: (i) issued 2,000 shares of our 3% Series A Secured Convertible Preferred
Stock (“Preferred Stock”), stated value $1,000 per share, (ii) paid $500,000 in cash to the Trinity Member, and (iii)
assumed approximately $850,000 in notes related to equipment owned by Trinity (“Purchase Price”).
The Preferred Stock is convertible
at $0.50 per share at any time after the issuance thereof and is secured by all of the unencumbered assets of Trinity. All outstanding
shares of Preferred Stock shall automatically convert into shares of the Company’s common stock upon the earlier to occur
of: (i) twelve months after the date of issuance of the Preferred Stock; or (ii) six months after the date of issuance of the Preferred
Stock, provided that (a) all shares of the Company’s common stock issued upon conversion of the Preferred Stock may be sold
under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing
price of the Company’s common stock has been at least of $0.60 per share during the twenty (20) trading days prior to the
date of conversion.
All of the shares of Preferred
Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition
are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities
Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section
4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value
of $2,000,000. The fair value of the shares was based on an as if converted to common stock basis.
The acquisition of Trinity is
being accounted for as a business combination under ASC 805. The Company
is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the
fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date. The
following information summarizes the provisional purchase consideration and preliminary allocation of the fair values assigned
to the assets at the purchase date:
Preliminary Purchase Price:
|
|
|
|
|
Cash, net
|
|
$
|
500,000
|
|
Common Stock issued
|
|
|
1,800,000
|
|
Total purchase consideration
|
|
$
|
2,300,000
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
|
|
|
|
Cash
|
|
$
|
50,949
|
|
Accounts receivable
|
|
|
1,255,613
|
|
Prepaid expenses
|
|
|
47,141
|
|
Property and equipment
|
|
|
2,537,650
|
|
Right of use assets – operating leases
|
|
|
87,900
|
|
Accounts payable and accrued expenses
|
|
|
(750,438
|
)
|
Right of use assets – operating leases
|
|
|
(87,900
|
)
|
Notes payable
|
|
|
(840,915
|
)
|
|
|
$
|
2,300,000
|
|
The Company’s consolidated
revenue and net loss for the three and nine months ended September 30, 2019 include revenue of $1,098,191 and $1,148,63, respectively
and net income of $100,374 and $65,855, respectively related to the operations of Trinity since the acquisition date.
Momentum Water Transfer
Services
On December 7, 2018 (“Closing
Date”), we entered into an Agreement and Plan of Share Exchange dated as of such date (the “Exchange Agreement”)
with Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”) and the sole member of MWTS (the
“MWTS Member”). On the Closing Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of
the issued and outstanding membership interests of MWTS (“MWTS Membership Interests”) from the MWTS Member pursuant
to which MWTS became our wholly owned subsidiary (“MWTS Acquisition”). In accordance with the terms of the Exchange
Agreement, and in connection with the completion of the Acquisition, on the Closing Date we issued 550,000 shares of our common
stock, par value $0.001 per share, paid $308,000 in cash, issued a short term payable of $53,710 that is due on demand and issued
a 6% note to the MWTS Member in the amount of $800,000 in exchange for all of the issued and outstanding MWTS Membership Interests.
Unaudited Pro Forma Financial
Information
The following schedule contains
pro-forma consolidated results of operations for the three and nine months ended September 30, 2019 and 2018 as if the Trinity
acquisition occurred on January 1, 2018 and as if the MWTS Acquisition had occurred on January 1, 2017. The pro forma results of
operations are presented for informational purposes only and are not indicative of the results of operations that would have been
achieved if the acquisition had taken place on January 1, 2018, or of results that may occur in the future.
|
|
Three months ended
September 30, 2019
|
|
|
Three months ended
September 30, 2018
|
|
|
Nine months ended
September 30, 2019
|
|
|
Nine months ended
September 30, 2018
|
|
Revenue
|
|
$
|
2,064,516
|
|
|
$
|
2,245,281
|
|
|
$
|
7,841,062
|
|
|
$
|
7,191,759
|
|
Operating loss
|
|
$
|
(385,204
|
)
|
|
$
|
(269,927
|
)
|
|
$
|
(1,467,172
|
)
|
|
$
|
(239,005
|
)
|
Net loss
|
|
$
|
(552,175
|
)
|
|
$
|
(361,939
|
)
|
|
$
|
(2,223,316
|
)
|
|
$
|
(458,010
|
)
|
Loss per common share – basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.05
|
)
|
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
On October 31, 2017, and made
effective as of 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 and EVP of SMG. 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. In May 2019, the Company adjusted the pay to $14,167 per month.
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.
Litigation
In May 2018, MG Cleaners LLC,
a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court for the Western District of Texas, Houston
Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Five former employees of MG Cleaners,
the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserts amongst other things unpaid overtime wages. The
Company adamantly denies these claims.
SMG Industries has litigated this
matter for several months and considered a range of outcomes for this matter and determined that management’s best estimated
amount to settle this matter is for $40,000, expected to be settled during the fiscal year 2019. As such, management believes it
is appropriate to accrue for this in our 2019 financial statements.
From time to time, SMG may be
subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the
opinion of management; no other 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.
NOTE 13 – LEASES
The Company has operating and
finance leases for sales and administrative offices, motor vehicles and certain machinery and equipment. The Company’s leases
have remaining lease terms of 1 year to 4 years. For purposes of calculating operating lease liabilities, lease
terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those options.
Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as
insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability.
The Company's lease agreements do not contain any material restrictive covenants.
The components of lease cost for
operating and finance leases for the three and nine months ended September 30, 2019 were as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Lease Cost
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
109,529
|
|
|
$
|
212,439
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
10,476
|
|
|
|
28,216
|
|
Interest on lease liabilities
|
|
|
4,969
|
|
|
|
17,207
|
|
Total finance lease cost
|
|
$
|
15,445
|
|
|
$
|
45,423
|
|
Short-term lease cost
|
|
$
|
134,082
|
|
|
$
|
474,726
|
|
Variable lease cost
|
|
|
-
|
|
|
|
-
|
|
Sublease income
|
|
|
-
|
|
|
|
-
|
|
Total lease cost
|
|
$
|
259,056
|
|
|
$
|
732,588
|
|
Supplemental cash flow information related
to leases was as follows:
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
Other Lease Information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
123,212
|
|
Operating cash flows from finance leases
|
|
$
|
17,207
|
|
Financing cash flows from finance leases
|
|
$
|
48,376
|
|
The following table summarizes the lease-related
assets and liabilities recorded in the consolidated balance sheets at September 30, 2019:
|
|
September 30, 2019
|
|
Lease Position
|
|
|
|
Operating Leases
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
311,473
|
|
Right of use liability operating lease short term
|
|
$
|
128,969
|
|
Right of use liability operating lease long term
|
|
|
188,504
|
|
Total operating lease liabilities
|
|
$
|
317,473
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
Equipment
|
|
$
|
166,255
|
|
Accumulated depreciation
|
|
|
(41,792
|
)
|
Net Property
|
|
$
|
124,463
|
|
Long-term debt due within one year
|
|
|
62,389
|
|
Long-Term Debt
|
|
|
27,403
|
|
Total finance lease liabilities
|
|
$
|
89,792
|
|
The Company utilizes the incremental
borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.
|
|
September
30, 2019
|
|
Lease Term and Discount Rate
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
3.6
|
|
Finance leases
|
|
|
1.9
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
|
13.0
|
%
|
Finance leases
|
|
|
11.6
|
%
|
The following table provides the
maturities of lease liabilities at September 30, 2019:
At September 30, 2019, the Company
had no additional leases which had not yet commenced.
|
|
Operating
|
|
|
Finance
|
|
|
|
Leases
|
|
|
Leases
|
|
Maturity of Lease Liabilities at September 30, 2019
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
62,454
|
|
|
$
|
58,923
|
|
2020
|
|
|
132,317
|
|
|
|
15,769
|
|
2021
|
|
|
106,861
|
|
|
|
15,769
|
|
2022
|
|
|
47,673
|
|
|
|
10,404
|
|
2023
|
|
|
24,000
|
|
|
|
1,287
|
|
2024 and thereafter
|
|
|
10,000
|
|
|
|
-
|
|
Total future undiscounted lease payments
|
|
$
|
383,305
|
|
|
$
|
102,152
|
|
Less: Interest
|
|
|
(65,832
|
)
|
|
|
(12,360
|
)
|
Present value of lease liabilities
|
|
$
|
317,473
|
|
|
$
|
89,792
|
|
Future minimum lease payments
for operating leases accounted for under ASC 840, "Leases," with remaining non-cancelable terms in excess of one year
at December 31, 2018 were as follows:
Minimum Lease Commitments at December 31, 2018
|
|
|
|
|
2019
|
|
$
|
145,940
|
|
2020
|
|
|
39,940
|
|
2021
|
|
|
18,340
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Total
|
|
$
|
204,220
|
|
During the nine months ended September
30, 2019, the Company entered into two new leases for forklifts that were determined to be finance leases under ASC 842. One lease
is for a period of three years, with monthly payments of $671 and the second lease is for a period of 48 months with monthly payments
of $644. The Company capitalized an asset and right of use finance lease liability of $43,888 related to these finance leases.
The Company also entered into
two new operating leases for two vehicles. Each lease is for a period of four years, with monthly payments of $875 per vehicle.
The Company recognized initial right of use assets and right of use operating lease liabilities of $65,266 in total for these vehicles.
The Company also acquired an operating lease for office and warehouse space as part of the Trinity Acquisition and recognized a
right of use asset and operating lease liability of $87,900 as part of the purchase price accounting. This lease is for a term
of 60 months with a monthly payment of $2,000.
NOTE 14 – RELATED PARTY TRANSACTIONS
On September 19, 2017, in connection
with the acquisition of MG Cleaners, we issued 4,578,276 shares and agreed to pay $300,000 in cash to its Managing MG Member 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. As of September 30, 2019 and December 31, 2018 amounts due under this arrangement
are $0 and $21,000, respectively.
The Company engaged the services
of a Director, Mr. John Boylan, effective February 11, 2019, whereby Mr. Boylan was paid as a consultant to the Company in connection
with its mergers and acquisition work, whereby Mr. Boylan provided us with mergers and acquisition support including economic analysis,
financial modeling and due diligence. Mr. Boylan was paid $13,000 per month for his services. In June 2019 Mr. Flemming, Mr. Boylan
and Mr. Christian were each awarded a bonus of $12,500 related to their efforts in closing the Trinity acquisition.
On July 30, 2019 the Company appointed
R. Michael Villarreal to the Board of Directors filling the position left by the passing in early July 2019 of Director John Boylan.
The Company appointed Mr. Boylan Board member Emeritus status in honor of his service to the Company.
NOTE 15 – SUBSEQUENT EVENTS
On October 1, 2019, we entered
into a second amendment to a secured promissory note to extend the maturity of the secured note held by a stockholder to June 30,
2020 and capitalizing the accrued interest of $4,559 where the total principal of the promissory note is now $44,559. All other
terms of the note remained. In connection with this amendment, we issued a new common stock purchase warrant for 40,000 shares,
with a ten-year term and a fixed exercise price of $0.15 per share and customary other provisions.(Note to Document: This is also
discussed in the second item of Notes Payable – Unsecured)
On October 4, 2019, we sold for
$30,000 property categorized on our balance sheet as an asset held for sale. This vacant property acquired by MG Cleaners years
earlier is located in Carthage, Texas and not a part of our current operations. The original MG Cleaners seller note was secured
by this property and received the proceeds of this sale of approximately $30,000. The seller note had a balance of $147,608 at
the time of the sale of property. The remainder of the note was retired and paid in full by issuing 400,000 restricted shares of
our common stock.
Subsequent to September 30, 2019, we issued 30,000 shares of our restricted common stock and 25,000 fully
vested common stock options with a five-year term and exercisable at $0.25 for accounting consulting services.
On October 2, 2019 we entered
into a premium finance note on behalf of Trinity’s insurance renewal for its $125,377 annual premium. At execution, $21,009
was paid down with ten equal payments for the remainder and a 5.5% per annum interest rate.
On October 28, 2019 we entered
into a premium finance note on behalf of the Company for its insurance renewal for its $114,993 annual premium. At execution, $21,073
was paid down with ten equal payments for the remainder and a 6.5% per annum interest rate.
In November 2019, we received a total of $630,080, net of closing costs, in return for an assignment and transfer to a specialty
finance company of a specified percentage of the proceeds of each collection of future receipts received by us, collectively
"Future Receipts" until the finance company has received the purchased amount of $910,000. This transaction is accounted for
as a short term secured loan, with deferred financing costs of $279,920 recognized on the date of incurrence as a discount.
Pursuant to the agreement we have discounted early payoff options.