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. On September
19, 2017 SMG entered into an Agreement and Plan of Share Exchange with MG Cleaners LLC. On January 30, 2018 the Company changed
its name from SMG Indium Resources Ltd. to the current name of SMG Industries Inc.
SMG acquired one hundred percent of the
issued and outstanding membership interests of MG Cleaners LLC pursuant to which MG Cleaners LLC became our wholly-owned subsidiary.
In connection with the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen
Christian, payable with $250,000 at closing and the remaining $50,000 paid upon the completion of the Company’s sale of a
minimum of $500,000 of its securities in a private offering to investors. The $50,000 liability is recorded as an Accounts Payable
– Related Party on the balance sheet.
The merger was accounted for as a reverse
acquisition with MG Cleaners LLC being treated as the accounting acquirer. As such, the historical information for all periods
presented prior to the merger date relate to MG Cleaners LLC. Subsequent to the merger date, the information relates to the consolidated
entities of SMG with its subsidiary MG Cleaners LLC.
The Company is an emerging growth oilfield
service business focused on the drilling market segment in the domestic United States pursuant to which we offer the following
products and services: (i) product sales for the oilfield industry including degreasers, surfactants and detergents focused oilfield
cleaning, industrial cleaning, fleet and equipment cleaning; (ii) equipment sales for the oilfield industry including centrifugal
pumps and industrial pressure washers; (iii) parts sales for our installed base on equipment, including water guns, hoses and fittings;
(iv) service crews for the oilfield industry related to drilling rig wash and on location equipment repair, and (v) rentals of
bottom hole assembly tools including stabilizers and crossovers rented by directional drillers for their drilling applications.
On March 6, 2018 the Company filed an Information
Statement with the Securities and Exchange Commission stating that it had obtained the written consent of a majority of stockholders
as of the record date January 30, 2018, to change the name of the company to “SMG Industries, Inc.” and to adopt a
new incentive stock option plan with 2,000,000 shares authorized under the plan, subject to the Company’s Board and any other
required approvals. The name change to SMG Industries Inc. went effective April 2, 2018.
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, 2017 and 2016 which are included on the
Company’s Form 10-K filed on April 2, 2018. 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, 2017 and 2016 have been omitted.
NOTE 2 — SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Impairment of Long-Lived Assets
The Company’s long-lived assets,
including intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the historical-cost
carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted
future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future
net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between
the net book value and the fair value of the long-lived asset.
Long-lived assets were evaluated for impairment
and no impairment losses were incurred during the nine months ended September 30, 2018 and 2017, respectively.
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, 2018 and 2017, 1,165,000 and 370,000 of convertible notes, stock options and warrants were considered
for their dilutive effects, respectively.
Basic and Diluted Income (Loss)
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(408,066
|
)
|
|
$
|
(342,416
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Shares:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
9,986,415
|
|
|
|
1,665,192
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
9,986,415
|
|
|
|
1,665,192
|
|
Reclassification
Certain reclassifications have been made
to the prior year financial statements to conform to the current year presentation.
Recently issued accounting pronouncements
Effective January 1, 2018, the Company
adopted the provisions of ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of a Business”
(“ASU 2017-01”). ASU 2017-01 provides revised guidance to determine when an acquisition meets the definition of a business
or alternatively should be accounted for as an asset acquisition. ASU 2017-01 requires that, when substantially all of the fair
value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets, the asset or
group of similar identifiable assets does not meet the definition of a business and therefore is required to be accounted for as
an asset acquisition. Transaction costs will continue to be capitalized for asset acquisitions and expensed as incurred for business
combinations. ASU 2017-01 will result in most, if not all, of the Company’s post January 1, 2018 acquisitions being accounted
for as asset acquisitions because substantially all of the fair value of the gross assets the Company acquires are concentrated
in a single asset or group of similar identifiable assets. For asset acquisitions that are “owner occupied” (meaning
that the seller either is the tenant or controls the tenant) the purchase price, including capitalized acquisition costs, will
be allocated to land and building based on their relative fair values with no value allocated to intangible assets or liabilities.
For asset acquisitions where there is a lease in place but not “owner occupied” the Company will allocate the purchase
price to tangible assets and any intangible assets acquired or liabilities assumed based on their relative fair values.
Compensation—Stock Compensation:
On
June 20, 2018, the FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee
Share-Based Payment Accounting,
which aligns the accounting for share-based payment awards issued to employees and nonemployees.
Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction
is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost.
The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition,
the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The
Company elected to early adopt this standard in the second quarter of 2018. The adoption had no impact on the Company’s historic
financial statements.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity will be required to recognize right-of-use assets and
lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and 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, ASU No. 2016-02 is effective for annual reporting periods
beginning after December 15, 2018, including interim reporting periods within that reporting period, and requires a modified retrospective
adoption, with early adoption permitted. The Company is currently evaluating the provisions of the guidance and assessing its impact
on the Company’s consolidated financial statements and disclosure.
The Financial Accounting Standards Board,
or FASB, has issued Accounting Standards Update No. 2014-09, Revenue from contracts with Customers (Topic 606), or ASU 606. ASU
606 provides guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers in an amount that supersedes most current revenue recognition guidance. This guidance requires us to recognize revenue
when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. We are required to adopt ASU 606 at the beginning of our first quarter
of fiscal 2018. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance
obligations to customers and significant judgments in measurement and recognition. We implemented the new standard using the modified
retrospective approach effective January 1, 2018. The adoption of this guidance did not have an impact on our consolidated financial
statements within any accounting period presented.
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,
2018
|
|
September 30,
2017
|
|
September 30,
2018
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$
|
450,376
|
|
|
$
|
171,926
|
|
|
$
|
1,513,958
|
|
|
$432,092
|
Product revenue
|
|
|
576,573
|
|
|
|
448,158
|
|
|
|
1,678,474
|
|
|
1,370,394
|
Total revenue
|
|
$
|
1,026,949
|
|
|
$
|
620,084
|
|
|
$
|
3,192,432
|
|
|
$1,802,486
|
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
doubt as follows. The Company will continue to generate additional revenue (and improve cash flows from operations) partly related
to the Company’s expansion into a new region during 2017 and 2018 and partly related to the Company wide sales initiatives
already implemented. In addition, there were several one-time expenses in 2017 related to expansion to the new region and related
to the merger transaction completed in September 2017. As a result, substantial doubt about the Company’s ability to continue
as a going concern is alleviated.
NOTE 4 - INVENTORY
Inventory consisted of the following components
at September 30, 2018 and December 31, 2017:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
38,750
|
|
|
$
|
25,863
|
|
Finished and purchased products
|
|
|
109,745
|
|
|
|
116,190
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
148,495
|
|
|
$
|
142,053
|
|
NOTE 5 – LONG-LIVED ASSETS
Property and equipment
Property and equipment at September 30,
2018 and December 31, 2017 consisted of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Equipment
|
|
$
|
361,030
|
|
|
$
|
236,461
|
|
Rental equipment
|
|
|
700,000
|
|
|
|
-
|
|
Vehicles
|
|
|
200,876
|
|
|
|
165,867
|
|
Furniture, fixtures and other
|
|
|
37,153
|
|
|
|
16,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,299,059
|
|
|
|
418,934
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(272,484
|
)
|
|
|
(300,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,026,575
|
|
|
$
|
118,779
|
|
Depreciation expense for the nine months
ended September 30, 2018 and 2017 was $60,658 and $57,154, respectively.
Intangible assets
Intangible assets as of September 30, 2018
are all related to the acquisition of the RigHands™ assets discussed in Note 11. The estimated useful lives of the acquired
assets is 15 years which will result in an annual amortization of $10,000.
Intangible assets at September 30, 2018
and December 31, 2017 consisted of the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
RigHands (Trademark & Formula)
|
|
$
|
150,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
-
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(6,275
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
143,725
|
|
$
|
-
|
Amortization expense for the nine months
ended September 30, 2018 and 2017 was $6,275 and $0, respectively.
NOTE 6 – ACCRUED EXPENSES AND
OTHER LIABILITIES
Accrued expenses as of September 30, 2018
and December 31, 2017 included the following:
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Payroll and payroll taxes payable
|
|
$
|
86,655
|
|
|
$
|
24,854
|
|
Sales tax payable
|
|
|
51,904
|
|
|
|
7,325
|
|
Interest payable
|
|
|
1,708
|
|
|
|
2,273
|
|
Inventory purchases payable
|
|
|
-
|
|
|
|
23,440
|
|
Other
|
|
|
8,005
|
|
|
|
11,686
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
148,272
|
|
|
$
|
69,578
|
|
NOTE 7 – NOTES PAYABLE
Notes payable included the following as of September 30, 2018
and December 31, 2017:
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
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
|
|
$
|
194,725
|
|
|
$
|
228,947
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021
|
|
|
54,211
|
|
|
|
63,752
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020
|
|
|
30,013
|
|
|
|
41,777
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued December 18, 2017, bearing effective interest of 29.8%, due in daily installments ending October 2018, net of deferred financing costs of $0 and$55,729, respectively
|
|
|
-
|
|
|
|
188,500
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023
|
|
|
37,388
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued June 27, 2018, bearing effective interest of 20%, due in daily installments ending April 2019, net of deferred financing costs of $104,599
|
|
|
170,950
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,287
|
|
|
|
522,976
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(256,182
|
)
|
|
|
(264,615
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
231,105
|
|
|
$
|
258,361
|
|
Secured
On October 15, 2010, the former managing
member of MG Cleaners purchased MG Cleaners from the previous membership interest owners. In connection with that transaction,
a $450,000 seller note was issued to the sellers.
The note bears an interest rate of 8% and
principal and interest payments are made monthly. The remaining principal balance of $307,391 was refinanced by the note holder
in January 2015, bearing an interest rate of 6.00%, with principal and interest payments due monthly. The note is secured by the
land and building originally occupied by SMG, and said property is no longer occupied. The balance of this note at September 30,
2018 and December 31, 2017 was $194,725 and $228,947, respectively.
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.
Funding Advance Agreements – included
with secured notes
On December 18, 2017, we received $195,000
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 $278,000. This transaction is accounted for as a short term secured loan, with deferred financing costs of $83,000 recognized
on the date of incurrence.
On June 27, 2018, our company re-financed
and paid off the above December 18, 2017 note. This was accounted for as an extinguishment of the old note. During the nine months
ended September 30, 2018, $80,233 of debt discount was amortized to interest expense related to the old instrument. The new facility
had an original principal balance of $347,500. In conjunction with the new note we received $139,243 of proceeds, applied $103,257
towards the payoff of the old instrument and recorded deferred financing cost of $105,000 as a debt discount. Payments of principal
and interest are paid daily. This note matures in April 2019. During the nine months ended September 30, 2018, $31,045 of debt
discount was amortized to interest expense.
Future maturities of the above secured
notes payable are as follows:
|
2018
|
|
|
$
|
96,086
|
|
|
2019
|
|
|
|
181,174
|
|
|
2020
|
|
|
|
78,911
|
|
|
2021
|
|
|
|
81,522
|
|
|
2022
|
|
|
|
48,764
|
|
|
2023
|
|
|
|
830
|
|
|
|
|
|
$
|
487,287
|
|
Notes Payable - Unsecured
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
43,050
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
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 and 10% interest per year, balance of payable is due on demand
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,050
|
|
|
|
-
|
Less, discount
|
|
|
(11,199
|
)
|
|
|
-
|
|
|
|
96,851
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(96,851
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
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, 2018, $113,346 remains outstanding with $49,410 included
as a current liability.
During the nine months ended September
30, 2018, Stephen Christian advanced $43,100 to the Company, was repaid $30,850 by the Company, and paid $8,034 of expense on behalf
of the Company. As of September 30, 2018, $20,284 remains outstanding with no specific repayment terms or stated interest rate.
Capital Lease Liability
During the nine months ended September
30, 2018 the Company entered into a capital lease arrangement to purchase various equipment to be used in operations. Title to
the equipment will be transferred to the Company at the completion of the lease payments. The Company purchased $146,354 of equipment
payable through May 2020. A down payment of $20,607 was due at inception followed by 23 monthly payments of $5,972 and a final
payment of $13,172. As of September 30, 2018, $107,443 remains outstanding with $56,441 included as a current liability.
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 $488,912 and $353,975 as of September 30, 2018 and December 31, 2017, 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, 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 ended September 30, 2018 on this
facility were $134,937.
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, 2018, $417 of the discount was amortized.
NOTE 8 – STOCKHOLDERS’ EQUITY
(DEFICIT)
During the nine months ended September
30, 2018, the Company issued 1,390,000 common shares for proceeds of $278,000 from accredited investors. Expenses of $1,956 were
incurred related to raising these funds are recorded as a cost of capital.
During the nine months ended September
30, 2018, the Company issued 11,500 common shares in settlement of accounts payable of $5,000 resulting in a loss on settlement
of $3,149.
During the nine months ended September
30, 2018, the Company issued a total of 50,000 common shares to two consultants for services. The fair value of the shares of $39,500
will be recognized over a one-year service period ending July 2019. During the nine months ended September 30, 2018 $8,229 of expense
was recognized.
On September 28, 2018, in connection with
an asset purchase agreement the Company issued an aggregate of 1,000,000 shares of its common stock to the sellers. The assets
consist of approximately 850 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs,
including both non-mag and steel units. The Company plans to rent these assets to customers. The transaction was valued at $700,000
based on the fair value of the common shares on the date of issuance and will be depreciated over the estimated asset life of
ten years.
NOTE 9 – 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, 2017
|
|
|
510,000
|
|
|
$
|
261,700
|
|
|
$
|
.24-3.29
|
|
|
$
|
0.51
|
|
Granted
|
|
|
150,000
|
|
|
|
114,500
|
|
|
$
|
.75-.79
|
|
|
$
|
0.76
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(20,000
|
)
|
|
|
(55,850
|
)
|
|
$
|
2.45-3.29
|
|
|
$
|
2.79
|
|
Outstanding, September 30, 2018
|
|
|
640,000
|
|
|
$
|
320,350
|
|
|
$
|
.24-3.29
|
|
|
$
|
0.50
|
|
Exercisable, September 30, 2018
|
|
|
373,336
|
|
|
$
|
175,352
|
|
|
$
|
.24-2.18
|
|
|
$
|
0.47
|
|
In November 2017 the Company issued 150,000 stock options with
an exercise price of $0.37 that vest in three equal tranches on in November 2018, 2019 & 2020. Option expense of $41,840 will
be recorded over the vesting term.
In May 2018 the Company issued 100,000 stock warrant with an
exercise price of $0.75 that vest in twelve equal monthly tranches following issuance. The warrants expire five years after issuance.
Warrant expense of $51,567 will be recorded over the vesting term.
In July 2018, the Company granted 50,000
stock options to a consultant with a five-year term and an exercise price of $0.79. The options vest annually over a three-year
period with the first one-third vesting July 10, 2019.
The Company valued the options issued during
the nine months ended September 30, 2018 using the Black-Scholes model with the following key assumptions ranging from: Stock price,
$0.56 - $0.75, Exercise price, $0.75 - $0.79, Term 5 years, Volatility 158% - 159%, Discount rate, 2.8% - 2.9%. During the nine
months ended September 30, 2018, $33,781 of expenses was recorded related to the above options and warrants.
The weighted average remaining contractual
life is approximately 3.3 years for stock options outstanding on September 30, 2018. At September 30, 2018 and December 31, 2017,
there was $97,500 and $232,500, respectively, in 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, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
25,000
|
|
|
|
18,750
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2018
|
|
|
25,000
|
|
|
$
|
18,750
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Exercisable, September 30, 2018
|
|
|
25,000
|
|
|
$
|
18,750
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
In September 2018, the Company granted
25,000 stock warrants to a debt holder with a five-year term and an exercise price of $0.75. The warrants are fully vested at the
time of issuance.
The Company valued the options issued during
the nine months ended September 30, 2018 using the Black-Scholes model with the following key assumptions ranging from: Stock price,
$0.74, Exercise price, $0.75, Term 5 years, Volatility 169%, Discount rate, 2.8% . During the nine months ended September 30, 2018,
the fair value of $17,476 was recoded as a note payable discount and will be amortized over the life of the note payable.
The weighted average remaining contractual
life is approximately 4.8 years for stock options outstanding on September 30, 2018. At September 30, 2018 and December 31, 2017,
there was $0 and $0, respectively, in intrinsic value of outstanding stock warrants.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, SMG may be subject to
routine litigation, claims, or disputes in the ordinary course of business. In the opinion of management; no pending or known threatened
claims, actions or proceedings against SMG are expected to have a material adverse effect on SMG’s financial position, results
of operations or cash flows. SMG cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory
matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome
of any lawsuits and investigations.
Leases
Effective July 15, 2017, we leased a facility
in Midland, Texas for $3,000 per month for approximately 2,400 square feet of space and a shared yard with several acres of storage
area. The Midland lease was for a period of 3 years and expired on July 15, 2020. This lease was cancelled with mutual consent
effective January 2018.
On January 22, 2018, MG Cleaners, the Company’s
subsidiary entered into a two-year lease for a 6,500 square foot building on approximately 1.5 acres in Odessa, Texas providing
for three lease extensions totaling six additional years. The initial rent is $6,500 per month and increases to $8,500 per month
at the seventh month of the lease. After the first-year anniversary, the Lessee may cancel the lease with 30 days’ notice
to Lessor. Lease extensions are at the discretion of the Lessee and have increases. The Company is responsible for the repair,
maintenance, and insurance of the facility.
On June 1, 2018, MG Cleaners, the Company’s
subsidiary entered into an operating lease for a new location in Alice, Texas. The lease is a term of six months commencing on
June 1, 2018 with monthly payments due of $2,500. A deposit of $1,250 was paid with the commencement of the lease.
On June 18, 2018 the Company entered into
an operating lease for corporate office space in Houston, Texas. The lease is a term of three years commencing on August 1, 2018
with monthly payments due of $2,620. A deposit was due in July 2018 for $5,240.
In July 2018, the Company entered into
an agreement to purchase a residential property in Odessa, Texas. The contract is subject to the Company securing financing for
the purchase. Related to this property the Company entered into a lease for a 90-day period with total lease payments of $9,000
and a $5,000 deposit both of which were paid at the commencement of this term. The Company is currently using the property on
a month to month basis with total cost of $3,000 per month.
Rent expense for the nine months ended
September 30, 2018 and 2017 for these leases amounted to $114,010 and $15,887, respectively.
Future minimum lease payments in accordance
with the above leases is $53,860, $169,440, 60,940 and $7,860 for the fiscal years ending December 31, 2018, 2019, 2020 and 2021,
respectively.
NOTE 11 – RELATED PARTY TRANSACTIONS
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 trademark 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. In connection with the Agreement, Mr. Christian agreed
that he shall promptly, from time to time, fully inform and disclose to MG in writing all inventions, copyrightable material, designs,
improvements and discoveries of any kind which Mr. Christian now has made, conceived or developed (including prior to the date
of this Agreement), or which Mr. Christian may later make, conceive or develop, during the period of Mr. Christian’s employment
with MG, which pertain to or relate to MG’s business or any of the work or business carried on by MG. In addition to the
foregoing, the Agreement sets forth that all Inventions shall be the sole and exclusive property of MG, whether or not fixed in
a tangible medium of expression. Mr. Christian also assigned all rights in all Inventions and in all related patents, copyrights
and trademarks, trade secrets and other proprietary rights therein to MG. Mr. Christian further agreed that any copyrightable material
shall be deemed to be “works made for hire” and that MG shall be deemed the author of such works under the United States
Copyright Act, provided that in the event and to the extent such works are determined not to constitute “works made for hire”,
Mr. Christian has irrevocably assigned and transferred to MG all right, title and interest in such works.
On September 19, 2017, in connection with
the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen Christian, payable
with $250,000 at closing and the remaining $50,000 paid upon the completion of the Company’s sale of a minimum of $500,000
of its securities in a private offering to investors. During the nine months ended September 30, 2018, $29,000 was repaid leaving,
$21,000 as still due. The amounts are included in Accounts Payable related party.
On October 31, 2017, and made effective
September 20, 2017, the Company entered into an employment agreement with Stephen Christian, the former Managing Member, and current
President, of our subsidiary MG Cleaners LLC. The term is for three years with a monthly salary of $8,333 for the first six months
of the effective date and $10,000 a month thereafter. Other terms include payment of Mr. Christian’s health care insurance,
use of a company truck and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Christian
six months’ severance pay.
On October 31, 2017, and made effective
October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief Executive Officer. The term
is for three years with a monthly salary of $15,000 for the period. The terms of the agreement also include providing health care,
auto allowance of $750 per month if a car is not provided by the Company, and other customary benefits. Termination without cause,
as defined in the agreement, grants Mr. Flemming six months severance pay.
During the nine months ended September
30, 2018, Stephen Christian advanced $43,100 to the Company, was repaid $30,850 by the Company, and paid $8,034 of expense on behalf
of the Company. As of September 30, 2018, $20,284 remains outstanding with no specific repayment terms or stated interest rate.
NOTE 12 – SUBSEQUENT EVENTS
Subsequent to September 30, 2018, the Company issued 30,000 shares of common stock in exchange for consulting
services to be provided over a one-year period of time.