The accompanying notes are an integral
part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited
consolidated financial statements
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.
The Company today is a growth-oriented
transportation services and industrial services business that operates throughout the domestic Southwest United States. Through
its wholly-owned operating subsidiaries, the Company offers heavy haul, super heavy haul logistics services as well as industrial
cleaning products and equipment along with construction equipment services to more than 200 customers.
On
June 3, 2019, we entered into an Agreement and Plan of Share Exchange dated as of such date (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. 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 Palestine, Floresville, Waskom, Carthage,
Odessa and Alice, Texas.
On
February 27, 2020, we entered into Membership Interest Purchase Agreements for the acquisition of all of the membership interests
of each of 5J Oilfield Services LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas
limited liability company (“5J Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as
the “5J Entities”). 5J Oilfield and 5J Trucking services the drilling rig transportation and midstream heavy
haul logistics market segments. 5J’s business includes transporting midstream compressors, production equipment and infrastructure
components such as cement bridge beams with a fleet of more than 100 trucks, 200 trailers and 15 cranes. 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.
On
June 18, 2020, we formed 5J Specialized LLC (“5J Specialized”), which we are the sole member. 5J Specialized was formed
as a limited liability company under the State of Texas by the filing of its Articles of Organization with the Secretary of State.
5J Specialized, was established for our expansion into the super heavy haul
niche of the Transportation Services market segment.
In
March 2020 the World Health Organization declared COVID-19 a pandemic. We are still assessing the impact COVID-19 may have on our
business, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of
COVID-19 or its consequences, including downturns in business sentiment generally. The extent to which the COVID-19 pandemic
and global efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain
and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain
or treat the COVID-19 pandemic.
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, 2019 and 2018 with are included on a Form 10-K filed on May 29, 2020. 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, 2019 and 2018 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 six months ended June 30, 2020, 2,855,000 of stock options, 1,763,335 of warrants, 4,000,000 shares issuable from Series A
Preferred Stock, 4,806,388 shares issuable from Series B Preferred Stock and 6,500,000 shares issuable from convertible notes were
considered for their dilutive effects. For the six months ended June 30, 2019, 525,000 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 but concluded to be anti-dilutive.
Basic and Diluted Loss
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Net Loss Attributable to Common Shareholders
|
|
$
|
(6,369,312
|
)
|
|
$
|
(1,691,172
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Shares:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
16,537,993
|
|
|
|
13,068,921
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
16,537,993
|
|
|
|
13,068,921
|
|
Recent Accounting Pronouncements
The Company does not believe that any recently issued effective
pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial
statements.
NOTE 3 – GOING CONCERN
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern, no adjustments to the financial statements have
been made to account for this uncertainty. The Company concluded that the uncertainty surrounding the COVID-19 global pandemic,
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. 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 2020
and partly related to the Company cross-selling additional sales initiatives already implemented with the acquisition’s
additional customer base. The Company believes that loans obtained under the Paycheck Protection Program in 2020 will be forgiven
in accordance with the terms of the program.
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 June 30, 2020
|
|
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2020
|
|
|
Six Months Ended June 30, 2019
|
|
Service revenue
|
|
$
|
7,987,452
|
|
|
$
|
511,943
|
|
|
$
|
13,466,869
|
|
|
$
|
1,408,955
|
|
Product revenue
|
|
$
|
451,914
|
|
|
$
|
582,238
|
|
|
$
|
948,897
|
|
|
$
|
1,437,930
|
|
Total revenue
|
|
$
|
8,439,366
|
|
|
$
|
1,094,181
|
|
|
$
|
14,415,766
|
|
|
$
|
2,846,885
|
|
Customer Concentration and Credit Risk
During the six months ended June 30, 2020,
no customers exceeded 10% of revenues. During the six months ended June 30, 2019, three of our customers accounted for approximately
47% of our total gross revenues, with customers each accounting for 22%, 13% and 12% respectively. No other customers exceeded
10% of revenues during the six months ended June 30, 2019.
One
customer accounted for approximately 10% of accounts receivable at June 30, 2020, and three customers accounted for approximately
48% of accounts receivable at December 31, 2019. No other customers exceeded 10% of accounts receivable as of June 30, 2020 and
December 31, 2019. 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
At June 30, 2020 and December 31, 2019, inventory consisted
of the following components:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Raw materials and supplies
|
|
$
|
61,062
|
|
|
$
|
46,237
|
|
Work in progress
|
|
|
-
|
|
|
|
-
|
|
Finished and purchased products
|
|
|
131,015
|
|
|
|
83,722
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
192,077
|
|
|
$
|
129,959
|
|
NOTE 6 – LONG-LIVED ASSETS
Property and equipment at June 30, 2020
and December 31, 2019 consisted of the following:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Equipment
|
|
$
|
23,064,698
|
|
|
$
|
4,368,196
|
|
Downhole oil tools
|
|
|
659,873
|
|
|
|
671,888
|
|
Vehicles
|
|
|
226,067
|
|
|
|
179,867
|
|
Building
|
|
|
715,921
|
|
|
|
-
|
|
Furniture, fixtures and other
|
|
|
54,011
|
|
|
|
47,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,720,570
|
|
|
|
5,267,616
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(3,115,775
|
)
|
|
|
(957,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,604,795
|
|
|
$
|
4,309,913
|
|
Depreciation expense for the six months
ended June 30, 2020 and 2019 was $2,162,926 and $157,901, respectively.
Intangible assets
Intangible assets as of June 30,
2020 are related to the acquisition of the RigHands™ assets and the acquisition of tradenames of Momentum Water Transfer
Services LLC.
Intangible assets at June 30,
2020 and December 31, 2019 consisted of the following:
|
|
Useful
Life (yr)
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
RigHands (Trademark & Formula)
|
|
|
15
|
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
MWST Tradename
|
|
|
10
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: impairment
|
|
|
|
|
|
|
(190,000
|
)
|
|
|
(190,000
|
)
|
Less: accumulated amortization
|
|
|
|
|
|
|
(23,756
|
)
|
|
|
(18,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,244
|
|
|
$
|
131,242
|
|
Amortization expense for the six
months ended June 30, 2020 and 2019 was $4,998 and $14,499, respectively. Future amortization of the intangible assets for the
years ended December 31, 2020, 2021, 2022, 2023, 2024 and beyond are $10,000, $10,000, $10,000, $10,000, $10,000 and $81,242, respectively.
NOTE 7 – ACCRUED EXPENSES
AND OTHER LIABILITIES
Accrued expenses as of June 30, 2020 and
December 31, 2019 included the following:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Payroll and payroll taxes payable
|
|
$
|
759,299
|
|
|
$
|
276,841
|
|
Sales tax payable
|
|
|
54,739
|
|
|
|
44,964
|
|
State income tax payable
|
|
|
3,000
|
|
|
|
-
|
|
Property tax payable
|
|
|
99,000
|
|
|
|
-
|
|
Interest payable
|
|
|
751,595
|
|
|
|
101,776
|
|
Credit cards payable
|
|
|
151,026
|
|
|
|
57,226
|
|
Operational accrued expenses
|
|
|
572,687
|
|
|
|
-
|
|
Accrued service contracts
|
|
|
52,000
|
|
|
|
-
|
|
Accrued dividend
|
|
|
161,836
|
|
|
|
-
|
|
Settlement accrual
|
|
|
230,750
|
|
|
|
60,000
|
|
Other
|
|
|
102,998
|
|
|
|
50,812
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses & Other Liabilities
|
|
$
|
2,938,930
|
|
|
$
|
591,619
|
|
NOTE 8 – NOTES PAYABLE
Notes payable included the following:
|
|
June
|
|
|
December
|
|
|
|
30, 2020
|
|
|
31, 2019
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020.
|
|
|
-
|
|
|
|
10,573
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023.
|
|
|
25,193
|
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 13.9% of votes issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%. Principal balance $100,000, net of deferred financing costs of $23,315.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 6.6% of votes issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%. Principal balance $100,000, net of deferred financing costs of $23,315.
|
|
|
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. Note is currently past due. If a default notice is received, the interest rate will be 14%.
|
|
|
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
|
|
|
|
792,470
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who
controls approximately 13.9% of votes issued May 1, 2019, bearing interest of 10% per year, due July 1, 2019, principal
balance $100,000, net of deferred financing costs of $7,125. Note was extended to March 30, 2020. Note is currently past due.
If a default notice is received the interest rate will be 14%.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 13.9% of votes May 1, 2019, bearing interest of 10% per year, due June 30, 2020.
|
|
|
80,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes December 12, 2019, bearing interest of 12% per year, due June 3, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.
|
|
|
25,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Various notes payable secured by equipment of Big Vehicle & Equipment Company, LLC, bearing interest ranging from 2.72% to 8% maturing through August 2023.
|
|
|
546,601
|
|
|
|
638,859
|
|
|
|
|
|
|
|
|
|
|
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 November 1, 2019, bearing interest of 18% per year, due in monthly installments until loan amount paid in full.
|
|
|
535,292
|
|
|
|
747,500
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note issued on January 23, 2020. The note is due and payable in thirty-six monthly installments of $35,355 commencing on March 25, 2020 and the final installment is due on February 25, 2023.
|
|
|
1,212,070
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued July 26, 2019, bearing interest of 7% per year, due in monthly installments ending July 2020. Note is currently past due. If a default notice is received the interest rate will be 10%.
|
|
|
123,818
|
|
|
|
123,818
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on February 27, 2020 to shareholder who owns 100% of Series B convertible preferred stock, bearing interest of 10% per year, due February 1, 2023.
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on February 28, 2020, bearing interest of 10.0% per year, due August 28, 2020.
|
|
|
211,804
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from 5.32% to 5.5% maturing through December 2022.
|
|
|
758,861
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on February 27, 2020,
bearing interest of 10.0% per year, due March 1, 2023. The note holder, owns approximately 13.8% of common shares and has an
officer on the Board of Directors of the Company.
|
|
|
1,231,815
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured Master Lease Agreement refinanced substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 which amount was financed based on 75% of the net forced liquidation value of the equipment.
|
|
|
11,712,169
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured promissory notes with Small Business Administration Economic Injury Disaster Loans, bearing interest 3.75% annually and matures in May and June 2050.
|
|
|
389,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,044,992
|
|
|
|
3,071,220
|
|
Less discounts
|
|
|
(774,825
|
)
|
|
|
(242,655
|
)
|
Less current maturities
|
|
|
(4,479,813
|
)
|
|
|
(1,692,775
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities and discounts
|
|
$
|
14,790,354
|
|
|
$
|
1,135,790
|
|
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 13.9%. 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 of 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 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 December 31, 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. On October 1, 2019, the Company issued 120,000 warrants with an exercise price of $0.15 and a term of ten years in exchange
for a second extension of the maturity date of the note through March 30, 2020 and is currently past due. If a default notice is
received, the interest rate will be 14%. The warrants were valued at $14,330 and will be amortized over the extension period of
the note.
In June 2019, the Company
issued a promissory note in the amount of $80,000 to an individual 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. On October 2,
2019, the Company issued 100,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension
of the maturity date of the note through March 30, 2020 and is currently past due. If a default notice is received, the interest
rate will be 14%. The warrants were valued at $11,942 and will be amortized over the extension period of the note.
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 in July 2019.
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.
On October 1, 2019, we
entered into a second amendment to an unsecured 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. The warrants were valued at $4,777 and will be amortized over the extension period of the note. See Notes Payable
– Unsecured table below.
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. See Note 8 – Stockholders’ Deficit.
On December 12, 2019, the
Company issued a $50,000 12% secured promissory note. The note is due and payable in monthly installments of the principal and
accrued interest with the first payment of $25,000 due on or before December 19, 2019. The remaining balance shall be
paid in $5,000 monthly installments until maturity on June 3, 2020. On December 12, 2019, the Company issued 75,000 warrants with
an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through
June 3, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued
at $17,947 and will be amortized over the extension period of the note.
On January 23, 2020, the Trinity
Services issued a secured promissory note for $1,272,780, which includes precomputed interest of $210,018. The note is due and
payable in thirty six monthly installments of $35,355 commencing on March 25, 2020 and the final installment is due on February
25, 2023. The note is secured by machinery and equipment owned by SMG.
On February 27, 2020, the
5J Entities entered into a Master Lease Agreement with Utica Leaseco LLC (“Utica”) pursuant to which Utica refinanced
substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 which amount was financed based on 75% of
the net forced liquidation value of the equipment. Pursuant to the terms of the Utica Financing, the 5J Entities will pay a monthly
fee to Utica for a period of 51 months, with a cash payment due at the end of the lease term in the amount of $831,880. The 5J
Entities own all of the assets financed pursuant to the Utica Financing, subject to Utica’s security interest in all of the
equipment of the 5J Entities pursuant to the terms of the security agreement. Each of the Company and Matthew Flemming, its CEO,
have entered into guaranty agreements with Utica, whereby they have guaranteed all of the obligations of the 5J Entities under
the Utica Master Lease Agreement, pursuant to the guaranty.
On May 19, 2020 the Company
entered into its first amendment to Lease Documents with Utica, whereby for a six month period effective April 27, 2020 the Company’s
payments were amended to $150,000 per month. Starting October 27, 2020, at the end of the modification period, the Company’s
payment resume to $366,763 through the maturity date.
On June 17, 2020, our wholly-owned
subsidiary, Momentum Water Transfer Services LLC, executed a note with the SBA for $90,000 in connection with the SBA’s EIDL
program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $439 are due monthly beginning twelve
months from the date of the Note. The Note grants the SBA a general security interest in Momentum’s collateral and has no
penalty of prepayment.
On May 27, 2020, our wholly-owned
subsidiaries, Trinity Services, LLC and MG Cleaners, LLC each executed notes with the SBA for $150,000 in connection with the
SBA’s economic injury disaster loan (“EIDL”) program. The notes have a thirty year term, an annual interest
rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the Note. The Note grants the SBA
a general security interest in Trinity Services’ and MG Cleaners’ collateral and has no penalty of prepayment.
Notes Payable – Unsecured
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Financed insurance premium, Note Payable issued on October 2, 2019, bearing interest of 5.5% per year and due in monthly installments ending July 31, 2020
|
|
$
|
19,348
|
|
|
$
|
75,576
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable with a shareholder who controls approximately 6.6% 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
|
|
|
44,559
|
|
|
|
44,559
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
15,375
|
|
|
|
85,375
|
|
|
|
|
|
|
|
|
|
|
Financed insurance premium, Note Payable issued on October 1, 2019, bearing interest of 6.5% per year and due in monthly installments ending July 28, 2020
|
|
|
10,654
|
|
|
|
73,554
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note with bank, bearing interest 5.750% annually and matures in March 6, 2021.
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory notes with Small Business Administration Paycheck Protection Program, bearing interest 1.00% annually and matures in April and May 2022
|
|
|
3,626,800
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable - unsecured
|
|
|
3,951,736
|
|
|
|
314,064
|
|
Less discount
|
|
|
-
|
|
|
|
(3,185
|
)
|
|
|
|
3,951,736
|
|
|
|
310,879
|
|
Less current portion
|
|
|
(1,925,450
|
)
|
|
|
(310,879
|
)
|
|
|
|
|
|
|
|
|
|
Notes payable - unsecured, net of current portion
|
|
$
|
2,026,286
|
|
|
$
|
-
|
|
Notes
Payable (Related Party)
During the year ended December
31, 2019, Stephen Christian advanced $10,400 to the Company and was repaid $35,777 by the Company and
received $25,279 of noncash advances from the Company. As of June 30, 2020 and December 31, 2019, $0 and $98 remained outstanding,
respectively, with no specific repayment terms or stated interest rate.
Accounts Receivable Financing
Facility (Secured Line of Credit)
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.
On February 27, 2020, the 5J
Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource
Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”).The Amerisource
Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”),
(ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving
line of credit up to $10,000,000 (“AR Facility”). The Company recorded deferred financing costs of $223,558 recognized
on the date of incurrence as a discount. During the six months ended June 30, 2020, $39,948 of debt discount was amortized to
interest expense.
The AR Facility has been issued
in an amount not to exceed $10,000,000, with the maximum availability limited to 85% of the eligible accounts receivable (as defined
in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities
and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime
rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35%
assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving
loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by
the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0%) of the then maximum
account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0%) of the then
maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the
Amerisource Financing. Amerisource serves as agent for the note holders, owns approximately 13.8% of common shares
and has an officer on the Board of Directors of the Company.
The balances under the above lines
of credit was $3,032,756 and $845,036 as of June 30, 2020 and December 31, 2019, respectively.
In April 2020, 5J Oilfield Services
LLC was informed by Hancock Whitney Bank, its lender, that they received approval from the U.S. Small Business Administration (“SBA”)
to fund 5J’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part
of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In
connection with the PPP Loan, 5J has entered into a two-year promissory note. Per the terms of the PPP Loan, 5J will receive total
proceeds of $3,148,100 from the Hancock Whitney Bank. In accordance with the requirements of the CARES Act, 5J intends to use the
proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on April 22, 2022, has a 1.00% interest
rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered
by the SBA under the CARES Act.
In April and May 2020, SMG
Industries, Inc., Trinity Services, LLC, Jake Oilfield Solutions, LLC and MG Cleaner, LLC (the “Companies”) were
informed by their lender, Prosperity Bank (the “Bank”), that the Bank received approval from the U.S. Small
Business Administration (“SBA”) to fund the Companies’ request for loans under the SBA’s Paycheck
Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loans, the Companies have entered
into two-year promissory notes. Per the terms of the PPP Loans, SMG will receive total proceeds of $72,500, Trinity will
receive total proceeds of $195,000, Jake will receive total proceeds of $21,200 and MG will receive total proceeds of
$190,000 from the Bank. In accordance with the requirements of the CARES Act, the Companies intend to use the proceeds from
the PPP Loans primarily for payroll costs. The PPP Loans are scheduled to mature on April 20, 2022 for SMG, April 28, 2020
for Trinity and May 1, 2022 for Jake and MG. The loans have a 1.00% interest rate and are subject to the terms and conditions
applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.
Convertible Notes Payable
On
February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation for the sale of a 10% convertible
promissory note in the principal amount of $1,600,000 (“Amerisource Stretch Note”) to Amerisource (“Amerisource
Loan Agreement”). The Amerisource Note matures on February 27, 2023 and is convertible into shares of the Company’s
common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Stretch Note increases to 11% per annum
on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736
shares of the Company’s common stock with a fair value of $419,788 were issued to the noteholder in connection with the sale
of the Amerisource Note. The Amerisource Stretch Note may be prepaid at any time by the Company on 10 days-notice to the noteholder
without penalty. Amerisource serves as agent for the note holders, owns approximately 13.8% of common shares
and has an officer on the Board of Directors of the Company.
On September 28, 2018, the Company
entered into a secured note purchase agreement with an individual 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 six months ended June 30, 2020, $39,075 of the discount was fully amortized. On February 27, 2020, the principal amount
of $250,000 was converted into the Amerisource Stretch Note and is convertible into the Company’s common stock at a fixed
exercise price of $0.25 per share anytime while the note is outstanding.
In April 2019, the Company issued
a convertible promissory note in the amount of $50,000 to an individual investor. The note bears an interest rate of
8 ½ %, payable in cash quarterly, matures in two years and is convertible at anytime into shares of the Company’s
common stock at a fixed conversion price of $0.50 (fifty cents) per share.
As of June 30, 2020, the convertible
notes, net balance was $1,276,856 which includes current portion of convertible notes of $50,000. As of December 31, 2019, the
convertible notes balance was $260,926.
Future Maturities of Debt
Future maturities of debt as of June 30, 2020 are as
follows:
2020
|
|
$
|
7,314,500
|
|
2021
|
|
|
8,178,522
|
|
2022
|
|
|
6,343,668
|
|
2023
|
|
|
4,500,856
|
|
2024
|
|
|
2,236,526
|
|
Thereafter
|
|
|
289,022
|
|
Total
|
|
$
|
28,863,094
|
|
NOTE 9 – STOCKHOLDERS’ DEFICIT
During the six months ended June
30, 2020, the Company issued 2,498,736 shares of the common stock to the noteholders in connection
with the sale of the Amerisource Stretch Note. Amerisource serves as agent for the note holders, owns approximately 13.8% of common
shares and has an officer on the Board of Directors of the Company.
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. As of June 30, 2020, the Company has accrued $60,740 for the Series
A preferred stock dividend included in accrued expenses and other liabilities.
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.
On August 5, 2020, the following
terms of the Series A Preferred Stock were amended:
|
-
|
The dividend was increased from 3% to 5%; and
|
|
-
|
All outstanding shares of the nonredeemable Series A Convertible
Preferred Stock shall automatically convert into the Company’s Common Stock on July 20, 2021.
|
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.
Preferred Stock – Series B Convertible
Preferred stock
On February 20, 2020 the company
filed a Certificate of Designation of Preferences, Rights and Limitations of 5% Series “B” Convertible Preferred Stock
to create a new class of stock in connection with its pending acquisition. This Series B Convertible Preferred stock has designated
6,000 shares, has a stated value of $1,000 per share and was delivered to the seller of 5J Entities at closing.
The Series B 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 B Preferred Stock shall pay a five percent (5%) annual dividend on the outstanding
Series B Preferred Stock, all of which shall be accrued until the Series B Preferred Stock has been converted.
At any time from issuance, the
stated value of each outstanding share of Series B 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 $1.25 per
share on the date on which the Holder notices a conversion. As of June 30, 2020, the Company has accrued $101,096 for the
Series B preferred stock dividend included in accrued expenses and other liabilities.
All
outstanding shares of Series B Preferred Stock, and accrued Dividends thereon, shall automatically convert into shares of the Corporation’s
Common Stock on the date that is thirty-six (36) months after the date of the issuance
The
Holders shall have the right to receive notice of any meeting of holders of Common Stock or Series B Preferred Stock and to vote
upon any matter submitted to a vote of the holders of Common Stock or Series B 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, 2019
|
|
|
845,000
|
|
|
$
|
383,750
|
|
|
|
$0.24 - $2.00
|
|
|
$
|
0.45
|
|
Granted
|
|
|
2,025,000
|
|
|
|
607,500
|
|
|
|
0.30
|
|
|
|
0.30
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(15,000
|
)
|
|
|
(28,450
|
)
|
|
|
1.80 - 2.00
|
|
|
|
1.90
|
|
Outstanding, June 30, 2020
|
|
|
2,855,000
|
|
|
$
|
962,800
|
|
|
|
$0.24 - $2.00
|
|
|
$
|
0.34
|
|
Exercisable, June 30, 2020
|
|
|
843,334
|
|
|
$
|
344,384
|
|
|
|
$0.24 - $2.00
|
|
|
$
|
0.41
|
|
On
February 28, 2020, the Company issued 2,025,000 common stock options to 5J and SMG employees. The options vest equally over a three-year
period starting on February 28, 2021. The stock options have an exercise price of $0.30 and a five-year term.
The weighted average remaining
contractual life is approximately 2.73 years for stock options outstanding on June 30, 2020. At June 30, 2020 there was no intrinsic
value of outstanding stock options.
Summary Stock warrant information
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2019
|
|
|
1,430,001
|
|
|
$
|
430,000
|
|
|
|
$0.15-$0.75
|
|
|
$
|
0.30
|
|
Granted
|
|
|
333,334
|
|
|
|
66,667
|
|
|
|
0.20
|
|
|
|
0.20
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2020
|
|
|
1,763,335
|
|
|
$
|
496,667
|
|
|
|
$0.15 - 0.75
|
|
|
$
|
0.28
|
|
Exercisable, June 30, 2020
|
|
|
1,763,335
|
|
|
$
|
496,667
|
|
|
|
$0.15 - 0.75
|
|
|
$
|
0.28
|
|
In March 2020, the Company granted 333,334
warrants to two debt holders with a ten-year term and an exercise price of $0.20. The warrants are fully vested at the time of
issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock
price, $0.18, Exercise price, $0.20, Term 10 years, Volatility 183.29%, Discount rate, 0.74%. During the six ended June 30, 2020,
the fair value of $59,439 was recoded as a notes payable discount and will be amortized over the life of the notes payable.
The weighted average remaining
contractual life is approximately 6.60 years for stock warrants outstanding on June 30, 2020. At June 30, 2020 there was no intrinsic
value of outstanding stock warrants.
NOTE 11 – ACQUISITION
5J Entities
On February 27, 2020 we entered
into Membership Interest Purchase Agreements for the acquisition of all of the membership interests of each of 5J Oilfield Services
LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas limited liability company (“5J
Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as the “5J Entities”) (the “Transaction”).
The total purchase price for the 5J Entities was $27.3 million. Due to the recent timing of the acquisition, the Company is currently
in the process of determining the fair value of the net assets acquired and liabilities assumed.
Pursuant to the terms of the
5J Oilfield Membership Interest Purchase Agreement (“5J Oilfield Agreement”), we acquired 100% of the issued and
outstanding membership interests from the sole member of 5J Oilfield (“5J Oilfield Member”), pursuant to which 5J
Oilfield has become a wholly-owned subsidiary of SMG Industries Inc. Pursuant to the terms of the 5J Oilfield Agreement, we
have: (i) paid the 5J Oilfield Member $6,840,000 in cash; (ii) issued 6,000 shares of our 5% Series B Convertible Preferred
Stock (“Preferred Stock”), stated value $1,000 per share; (iii) assumed or refinanced the obligation for truck
notes owed by 5J and its affiliates in the principal amount of $1,034,000 and paid off a community line of credit balance as
of closing in the amount of $5.86 million; and (iv) caused 5J Oilfield to issue a note (“Seller Note”) to the 5J
Oilfield Member in the principal amount of $2,000,000 (“5J Oilfield Purchase Price”).
The Preferred Stock issued in
connection with the acquisition of the 5J Entities is convertible at $1.25 per share at any time after its issuance and shall automatically
convert into shares of the Company’s common stock, par value $.001 per share, three years from the date of issuance. The
Company shall pay a quarterly dividend of 5% per annum to the holder of the Preferred Stock, subject to certain conditions related
to the EBITDA of the 5J Entities. In the event that the consolidated quarterly EBITDA of the 5J Entities is not in excess of the
aggregate fixed monthly payments made to Amerisource (defined below) and Utica (defined below), the 5J Oilfield Member will have
the option of accruing the dividend, or converting such amount due into shares of the Company’s common stock at the market
price at such time. The holder of the Preferred Stock shall vote on all matters presented to the Company’s common stockholders
on an as converted basis. 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 Transaction 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
acquisition of the 5J Entities 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
|
|
$
|
6,320,168
|
|
Preferred Series B shares issued
|
|
|
4,378,000
|
|
Seller note issued
|
|
|
2,000,000
|
|
Total purchase consideration
|
|
$
|
12,698,168
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation:
|
|
|
|
|
Accounts receivable
|
|
|
8,177,713
|
|
Prepaid expense
|
|
|
655,864
|
|
Notes receivable
|
|
|
814,347
|
|
Other current asset
|
|
|
338,222
|
|
Right of use assets - operating
|
|
|
1,510,897
|
|
Property and equipment
|
|
|
19,352,189
|
|
Accounts payable and accrued expenses
|
|
|
(4,945,881
|
)
|
Line of credit
|
|
|
(5,840,622
|
)
|
Right of use liabilities - Operating
|
|
|
(1,510,897
|
)
|
Notes payable
|
|
|
(5,853,664
|
)
|
Total purchase consideration
|
|
$
|
12,698,168
|
|
The Company’s consolidated
revenue for the three and six months ended June 30, 2020 were $7,499,226 and $11,859,607 and with consolidated net loss for the
three and six months ended June 30, 2020 of $2,535,566 and $3,340,380 related to the operations of 5J Entities since the acquisition
date.
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 expect to complete the closing of the acquisition of Trinity on or before June 21, 2019 (“Closing Date”). On the
Closing Date, pursuant to the Exchange Agreement, we will acquire one hundred percent (100%) of the issued and outstanding membership
interests of Trinity (“Trinity Membership Interests”) from the Trinity Member pursuant to which Trinity will become
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 will: (i) issue 2,000 shares of our 3% Series
A Secured Convertible Preferred Stock (“Preferred Stock”), stated value $1,000 per share, (ii) pay $500,000 in cash
to the Trinity Member, and (iii) assume 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 Preferred Stock was based on the Black-Scholes model with
the following key assumptions ranging from: Stock price $0.50, Exercise price $0.42, Term 3 years, Volatility 36% and Discount
rate of 1.7%.
The
acquisition of Trinity is being accounted for as a business combination under ASC 805. The following information summarizes the
final purchase consideration and allocation of the fair values assigned to the assets at the purchase date:
Purchase Price:
|
|
|
|
|
Cash, net
|
|
$
|
500,000
|
|
Common Stock issued
|
|
|
1,939,000
|
|
Total purchase consideration
|
|
$
|
2,439,000
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
|
|
Accounts receivable
|
|
$
|
1,195,534
|
|
Cost in excess of billings
|
|
|
31,303
|
|
Property and equipment
|
|
|
2,887,441
|
|
Right of use assets – operating leases
|
|
|
87,900
|
|
Accounts payable and accrued expenses
|
|
|
(834,363
|
)
|
Right of use assets – operating leases
|
|
|
(87,900
|
)
|
Notes payable
|
|
|
(840,915
|
)
|
|
|
$
|
2,439,000
|
|
The Company’s consolidated
revenue for the three and six months ended June 30, 2020 were $391,712 and $1,237,608 with consolidated net loss for the three
and six months ended June 30, 2020 of $165,046 and $364,458 related to the operations of Trinity since the acquisition date.
Unaudited Pro Forma Financial Information
The following schedule contains
pro-forma consolidated results of operations for the three and six months ended June 30, 2020 and 2019 as if the 5J
Acquisition and Trinity acquisition occurred on January 1, 2019 and as if the MWTS Acquisition had occurred on January 1,
2018. 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 acquisitions had taken place on the dates noted above, or of results that
may occur in the future.
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
Revenue
|
|
$
|
8,439,366
|
|
|
$
|
16,276,308
|
|
|
$
|
21,976,276
|
|
|
$
|
36,523,324
|
|
Operating loss
|
|
|
(2,074,637
|
)
|
|
|
(2,759,172
|
)
|
|
|
(4,011,156
|
)
|
|
|
(3,952,693
|
)
|
Net loss attributable to common shareholders
|
|
|
(3,190,910
|
)
|
|
|
(3,573,137
|
)
|
|
|
(6,113,774
|
)
|
|
|
(5,372,563
|
)
|
Net loss per common share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.41
|
)
|
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
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 six months ended June 30, 2020 and 2019 were as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
June 30, 2019
|
|
Lease Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
136,705
|
|
|
$
|
202,909
|
|
|
$
|
52,456
|
|
|
$
|
102,910
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
10,528
|
|
|
|
21,056
|
|
|
|
9,923
|
|
|
|
17,741
|
|
Interest on lease liabilities
|
|
|
1,540
|
|
|
|
3,717
|
|
|
|
4,969
|
|
|
|
15,890
|
|
Total finance lease cost
|
|
$
|
12,068
|
|
|
$
|
24,773
|
|
|
$
|
14,892
|
|
|
$
|
33,631
|
|
Short-term lease cost
|
|
$
|
109,308
|
|
|
$
|
231,392
|
|
|
$
|
40,255
|
|
|
$
|
58,461
|
|
Variable lease cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sublease income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total lease cost
|
|
$
|
258,081
|
|
|
$
|
459,074
|
|
|
$
|
107,603
|
|
|
$
|
195,002
|
|
Supplemental cash flow information related
to leases was as follows:
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
Other Lease Information
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
130,469
|
|
|
$
|
80,120
|
|
Operating cash flows from finance leases
|
|
$
|
3,717
|
|
|
$
|
15,890
|
|
Financing cash flows from finance leases
|
|
$
|
40,860
|
|
|
$
|
30,681
|
|
The following table summarizes the lease-related
assets and liabilities recorded in the consolidated balance sheets at June 30, 2020:
Lease Position
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
1,625,080
|
|
|
$
|
266,158
|
|
Right of use liability operating lease short term
|
|
$
|
452,362
|
|
|
$
|
113,479
|
|
Right of use liability operating lease long term
|
|
|
1,216,879
|
|
|
|
164,679
|
|
Total operating lease liabilities
|
|
$
|
1,669,241
|
|
|
$
|
278,158
|
|
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
190,241
|
|
|
$
|
190,241
|
|
Accumulated depreciation
|
|
|
(76,586
|
)
|
|
|
(38,691
|
)
|
Net Property
|
|
$
|
113,655
|
|
|
$
|
151,550
|
|
Long-term debt due within one year
|
|
|
12,800
|
|
|
|
47,382
|
|
Long-Term Debt
|
|
|
18,037
|
|
|
|
24,315
|
|
Total finance lease liabilities
|
|
$
|
30,837
|
|
|
$
|
71,697
|
|
The Company utilizes the incremental
borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.
Lease Term and Discount Rate
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4
|
|
|
|
3.6
|
|
Finance leases
|
|
|
2.4
|
|
|
|
1.6
|
|
Weighted-average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
13.0
|
%
|
|
|
13.0
|
%
|
Finance leases
|
|
|
2.9
|
%
|
|
|
9.0
|
%
|
The following table provides
the maturities of lease liabilities at June 30, 2020:
|
|
Operating
|
|
|
Finance
|
|
|
|
Leases
|
|
|
Leases
|
|
Maturity of
Lease Liabilities at June 30, 2020
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
320,128
|
|
|
$
|
8,528
|
|
2021
|
|
|
529,862
|
|
|
|
15,769
|
|
2022
|
|
|
470,674
|
|
|
|
10,404
|
|
2023
|
|
|
417,501
|
|
|
|
1,287
|
|
2024
|
|
|
202,000
|
|
|
|
-
|
|
2025 and thereafter
|
|
|
10,749
|
|
|
|
-
|
|
Total future undiscounted lease payments
|
|
$
|
1,950,914
|
|
|
$
|
35,988
|
|
Less: Interest
|
|
|
(281,673
|
)
|
|
|
(5,151
|
)
|
Present value of lease liabilities
|
|
$
|
1,669,241
|
|
|
$
|
30,837
|
|
At June 30, 2020 the Company had
no additional leases which had not yet commenced.
The
Company acquired six operating leases for equipment, office and warehouse space as part of the 5J Acquisition and recognized a
right of use asset and operating lease liability of $1,510,897 as part of the purchase price accounting. The remaining terms of
the acquired leases range from 36 and 60 months.
NOTE 14 – RELATED PARTY TRANSACTIONS
James
Frye, who currently serves as President of our 5J subsidiary, and owns our $6 million Series B Convertible Preferred Stock, also
owns or has control over 5J Properties LLC, an entity that is the lessor to three leases with the Company. These three leases
located in Palestine, West Odessa and Floresville Texas all have similar five year terms with options for renewal. The current
monthly rent for these leases totals approximately $14,250.
On June 15, 2020, the Company entered into an Interim Management
Services Agreement with Apex Heritage Group, Inc. (the “Consultant”), of which Steven H. Madden, a related party, has
sole voting and investment control over. The Consultant will provide Jeffrey Martini to serve as the Company’s Chief Financial
Officer, reporting to both the Company’s Chief Executive Officer and its Board of Directors. The Company shall pay to Consultant
an amount and in a form to be mutually agreed by both parties.
NOTE
15 – SUBSEQUENT EVENTS
On July 2, 2020, we issued 150,000 shares of our restricted
common stock with a fair value of $22,050 in settlement of accounts payable. A loss of $7,200 was recognized on the settlement
of accounts payable.
On
July 2, 2020, the Company issued 295,926 shares of our restricted common stock with a fair value of $43,797 to settle $29,593
of accrued interest owed to three noteholders. A loss of $14,204 was recognized on the settlement of accrued interest.
On
July 20, 2020, 5J Specialized issued a secured promissory note for $1,641,060, which includes precomputed interest of $287,560.
The note is due and payable in thirty six monthly installments of $45,585 commencing on July 20, 2020 and the final installment
is due on July 1, 2023. The note is secured by machinery and equipment owned by SMG.
On July 20, 2020, an affiliate, loaned a subsidiary $116,000
that is due on demand note and bears interest of 8% per annum.