The accompanying notes are an integral part of these
consolidated unaudited financial statements
The accompanying notes are an integral
part of these consolidated unaudited financial statements
The accompanying notes are an integral part of these
consolidated financial statements
The accompanying notes are an integral part of these
consolidated unaudited 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.
On September 19, 2017, the Company entered the
domestic oilfield services market and executed an Agreement and Plan of Share Exchange with MG Cleaners LLC, a Texas based product
and services company focused on drilling rig contractors and oilfield customers.
On September 19, 2017, SMG acquired one hundred
percent of the issued and outstanding membership interests of MG Cleaners LLC pursuant to which MG Cleaners LLC became our wholly-owned
subsidiary. In connection with the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to 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 was recorded as an Accounts
Payable – Related Party on the balance sheet. On January 30, 2018 the Company changed its name from SMG Indium Resources
Ltd. to its present name SMG Industries Inc.
The merger was accounted for as a reverse acquisition
with MG Cleaners LLC being treated as the accounting acquirer. As such, the historical information for all periods presented prior
to the merger date relate to MG Cleaners LLC. Subsequent to the merger date, the information relates to the consolidated entities
of SMG with its subsidiary MG Cleaners LLC.
The Company today is a growth-oriented oilfield
services company that operates throughout the domestic Southwest United States. Through its wholly-owned operating subsidiaries,
the Company offers an expanding suite of products and services across the oilfield market segments of drilling, completions and
production.
MG Cleaners LLC., serves the drilling market segment
with proprietary branded products including detergents, surfactants and degreasers (such as Miracle Blue
®
) as well
as equipment and service crews that perform on-site repairs, maintenance and drilling rig wash services. SMG's oil tools rental
division includes an inventory of more than 800 bottom hole assembly (BHA) oil tools such as stabilizers, drill collars, crossovers
and bit subs rented to oil companies and their directional drillers. SMG's frac water management division, known as Momentum Water
Transfer, focuses in the completion or fracing market segment providing high volume above ground equipment and temporary infrastructure
to route water used on location for fracing. SMG Industries, Inc. headquartered in Houston, Texas has facilities in Carthage, Odessa
and Alice, Texas.
The accompanying unaudited interim financial statements
of SMG Industries Inc. (“we”, “our”, “SMG” or the “Company”) have been prepared
in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with
the audited financial statements and notes thereto for the years ended December 31, 2018 and 2017 with are included on a Form 10-K
filed on April 1, 2019. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.
The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements
for years ended December 31, 2018 and 2017 have been omitted.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basic and Diluted Net Loss per Share
The Company presents both basic and diluted net
loss per share on the face of the statements of operations. Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially
dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock
method. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For the three months ended March
31, 2019, 630,000 of stock options, 525,001 of warrants and 500,000 shares issuable from convertible notes were considered for
their dilutive effects. For the three months ended March 31, 2018, 500,000 of stock were considered for their dilutive effects.
Basic and Diluted Income (Loss)
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(710,262
|
)
|
|
$
|
19,743
|
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Shares:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
12,460,520
|
|
|
|
9,387,325
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
264,563
|
|
Dilutive shares
|
|
|
12,460,520
|
|
|
|
9,651,888
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities
on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance
for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative
information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty
of cash flows arising from leases. For public companies, The Company adopted this standard on January 1, 2019 using the modified
retrospective method. The new standard provides a number of optional practical expedients in transition. The Company elected the
‘package of practical expedients’, which permitted the Company not to reassess under the new standard its prior conclusions
about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition
practical expedients.
On adoption, the Company recognized additional
operating liabilities of $287,519, with corresponding Right of Use assets of the same amount based on the present value of the
remaining minimum rental payments under current leasing standards for its existing operating leases. The Company’s existing
capital lease under ASC 840 is classified as a finance lease under ASC 842, with a total finance liability of $94,280 at adoption.
See Note 12 for additional information on leases.
The new standard also provides practical expedients
for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption for its leases. For those
leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities. The Company also
made an accounting policy election to combine lease and non-lease components of operating leases for all asset classes.
NOTE 3 – GOING CONCERN
The Company
considered its going concern disclosure requirements in accordance with ASC 240-40-50. The Company concluded that its negative
working capital and negative cash flows from operating are conditions that raised substantial doubt about the Company’s ability
to continue as a going concern. Without a successful plan in place from management these conditions could negatively impact the
Company’s ability to meets its financial obligations over the next year. In response, the Company has implemented a plan
to alleviate such substantial
concern
as follows. The Company
plans
to
continue to generate additional revenue (and improve cash flows from operations) partly related to the Company’s
acquisition
of an additional operating company in
2018 and partly related to the Company
cross-selling
additional
sales initiatives already implemented
with the acquisition’s additional
customer base
. In addition, there were several one-time expenses in 201
8
related
to expansion to the new region and related to the
product line acquisition in September 2018
and the operating company acquisition in December 2018.
As a result,
following this
plan
substantial doubt about the Company’s ability to continue as a going concern is alleviated.
NOTE 4 – REVENUE
Disaggregation of revenue
The Company disaggregates revenue between services
and products revenue. All revenues are currently in the southern region of the United States.
|
|
Three months
ended March 31,
2019
|
|
|
Three months ended
March 31, 2018
|
|
Service revenue
|
|
$
|
897,012
|
|
|
$
|
355,549
|
|
Product revenue
|
|
|
855,692
|
|
|
|
642,629
|
|
Total revenue
|
|
$
|
1,752,704
|
|
|
$
|
998,178
|
|
Customer Concentration and Credit Risk
During the three months ended March 31, 2019, three
of our customers accounted for approximately 57% of our total gross revenues, with two customers each accounting for 21% and another
accounting for 15%. No other customers exceeded 10% of revenues during 2019. During the three months ended March 31, 2018, three
of our customers accounted for approximately 66% of our total gross revenues, with individual customers accounting for 30%, 20%
and 16%. No other customers exceeded 10% of revenues during 2018.
Two customers accounted for approximately 54% of
accounts receivable at March 31, 2019, and three customers accounted for approximately 51% of accounts receivable at December 31,
2018. No other customers exceeded 10% of accounts receivable as of March 31, 2019 and December 31, 2018. The Company believes it
will continue to reduce the customer concentration risks by engaging new customers and increasing activity of existing less active
customers and smaller, newer customer relationships. While the Company continues to acquire new customers in an effort to grow
and reduce its customer concentration risks, management believes these risks will continue for the foreseeable future.
NOTE 5 - INVENTORY
Inventory consisted of the following components:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
17,410
|
|
|
$
|
8,690
|
|
Work in progress
|
|
|
9,275
|
|
|
|
-
|
|
Finished and purchased products
|
|
|
101,740
|
|
|
|
131,972
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
128,425
|
|
|
$
|
140,662
|
|
NOTE 6 – LONG-LIVED ASSETS
Property and equipment at March 31, 2019 and December
31, 2018 consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,474,179
|
|
|
$
|
1,409,237
|
|
Downhole oil tools
|
|
|
700,000
|
|
|
|
700,000
|
|
Vehicles
|
|
|
169,697
|
|
|
|
151,497
|
|
Furniture, fixtures and other
|
|
|
45,660
|
|
|
|
43,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,389,536
|
|
|
|
2,304,164
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(379,541
|
)
|
|
|
(306,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,009,995
|
|
|
$
|
1,998,009
|
|
Depreciation expense for the three months ended
March 31, 2019 and 2018 was $73,386 and $14,286 respectively.
Intangible assets
Intangible assets as of December 31, 2018 are related
to the acquisition of the RigHands™ assets and the acquisition of tradenames of Momentum Water Transfer Services LLC.
Intangible assets at March 31, 2019 and December
31, 2018 consisted of the following:
|
|
Useful
Life
(yr)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
RigHands (Trademark & Formula)
|
|
15
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
MWST Tradename
|
|
10
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(17,594
|
)
|
|
|
(10,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
322,406
|
|
|
$
|
329,656
|
|
Amortization expense for the three months ended
March 31, 2019 and 2018 was $7,250 and $1,100, respectively. Future amortization of the intangible assets for the years ended
December 31, 2019, 2020, 2021, 2022, 2023 and beyond are $21,500, $29,000, $29,000, $29,000, $29,000 and $184,894, respectively.
NOTE 7 – ACCRUED EXPENSES AND OTHER
LIABILITIES
Accrued expenses as of March 31, 2019 and December
31, 2018 included the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Payroll and payroll taxes payable
|
|
$
|
76,721
|
|
|
$
|
84,916
|
|
Sales tax payable
|
|
|
53,817
|
|
|
|
67,124
|
|
Interest payable
|
|
|
14,967
|
|
|
|
12,325
|
|
Credit cards payable
|
|
|
16,147
|
|
|
|
-
|
|
Inventory purchases payable
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
100,888
|
|
|
|
43,546
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
262,540
|
|
|
$
|
207,911
|
|
NOTE 8 – NOTES PAYABLE
Notes payable included the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on October 15, 2010 and refinanced in January 2015 for purchase of all membership interest, bearing interest of 6% per year and due in monthly installments ending September 25, 2022
|
|
$
|
169,735
|
|
|
$
|
180,552
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021
|
|
|
46,557
|
|
|
|
49,885
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020
|
|
|
21,843
|
|
|
|
25,960
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023
|
|
|
33,494
|
|
|
|
35,562
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued June 27, 2018, bearing effective interest of 20%, due in daily installments ending April 2019, prinicipal balance $143,965, net of deferred financing costs of $43,412
|
|
|
43,024
|
|
|
|
143,965
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approxmately 8.8% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approxmately 7.5% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on December 7, 2018 related to the acquisition of Momentum Water Transfer Services LLC, bearing interest of 6% per year and due in monthly installments of $7,500, with a maturity date of December 8, 2023
|
|
|
792,469
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approxmately 8.8% of votes on January 11, 2019, bearing interest of 10% per year, due December 7, 2019, principal balance $100,000, net of deferred financing costs of $0
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507,122
|
|
|
|
1,535,924
|
|
Less discounts
|
|
|
(178,044
|
)
|
|
|
(239,750
|
)
|
Less current maturities
|
|
|
(392,184
|
)
|
|
|
(328,328
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
936,894
|
|
|
$
|
967,846
|
|
On October 15, 2010, the former managing member
of MG Cleaners purchased MG Cleaners from the previous membership interest owners. In connection with that transaction, a $450,000
seller note was issued to the sellers. The note bears an interest rate of 8% and principal and interest payments are made monthly.
The remaining principal balance of $307,391 was refinanced by the note holder in January 2015, bearing an interest rate of 6.00%,
with principal and interest payments due monthly. The note is secured by the land and building originally occupied by SMG, and
said property is no longer occupied.
On August 14, 2017, we refinanced a note payable
for $66,348. The unsecured note bears an interest rate of 7.25% per annum, has 47 monthly payments of $1,400, with a balloon payment
of $12,086 at maturity on August 1, 2021. The refinanced amount is identical to the remaining principal balance under the previous
loan, thus no gain or loss has been recognized.
On February 2, 2017, we refinanced two truck notes
existing with a community bank for one new note of $53,610. The term was principal and interest payments monthly over 42 months
with an interest rate of 6%. The note is secured by certain trucks and equipment of the Company. The refinanced amount is identical
to the remaining principal balance under the previous loan.
On January 2, 2018, we financed a truck with a
note to a bank. The $41,481 note has an interest rate of 6.29% and payments of principal and interest are paid monthly. The note
is secured by the truck purchased. This note matures in January 2023.
On December 7,
2018, the Company issued and sold secured promissory notes in the aggregate principal amount of $300,000 to three separate purchasers.
In addition to the issuance of the Notes an aggregate of 500,000 warrants (“Warrants”) were issued to the purchasers
of the Notes. The Warrants are exercisable for a period of five years and are exercisable at $0.40 per share. Interest on the Notes
shall be paid to the purchasers at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Note is one
year after the issuance date. The Notes are secured by all of the assets of the Company and the assets of MWTS, subject to prior
liens and security interests. The warrants were valued at $203,337 and recorded as a discount to the notes payable. The discount
will be amortized over the life of the notes payable.
On December 7,
2018 the Company issued a 6% note to the MWTS Member in the amount of $800,000 as part of the purchase price for MWTS. The note
requires monthly payment of $7,500, matures December 8, 2023 and is secured by all the assets of the Company subject to prior security
interests.
On January 11,
2019 the Company issued a 10% note to a shareholder who controls approximately 8.8%. The note matures on December 7, 2019 and is
secured by a junior lien against the Company assets.
Funding Advance Agreements – included
with secured notes
On June 27, 2018, the Company re-financed and paid
off a prior liability due to Libertas Funding LLC. The new facility had an original principal balance of $347,500. Payments of
principal and interest are paid daily. This note matures in May 2019. During the three months ended March 31, 2019, $30,544 of
debt discount was amortized to interest expense.
Future maturities of secured notes payable as of March 31, 2019 are
as follows:
2019
|
|
$
|
537,621
|
|
2020
|
|
|
124,483
|
|
2021
|
|
|
128,680
|
|
2022
|
|
|
100,168
|
|
2023
|
|
|
616,170
|
|
Total
|
|
$
|
1,507,122
|
|
Notes Payable – Unsecured
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Financed insurance premium, Note Payable issued on June 8, 2018, bearing interest of 6.5% per year and due in monthly installments ending April 1, 2019
|
|
$
|
17,935
|
|
|
$
|
31,126
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable with a shareholder who controls approximately 7.5% of votes. Note issued on August 10, 2018 for $40.000, due December 30, 2018 (extended to June 30, 2019) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced and due on demand
|
|
|
65,000
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured advances from the sellers of Momentum Water Transfer Services LLC, non-interest bearing and due on demand
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,935
|
|
|
|
131,126
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(117,935
|
)
|
|
|
(131,126
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes Payable (Related Party
)
On February 12, 2018, the Company’s wholly-owned
subsidiary, MG Cleaners LLC (“
MG
”) entered into an Intellectual Property Sale Agreement (“
Agreement
”)
with Stephen Christian, MG’s President, for the purchase of RigHands™ an industrial strength hand cleaner product line.
RigHands™ is a trademarked branded product which is focused on the oilfield and industrial markets. MG issued a promissory
note to Mr. Christian for the purchase price in the amount of $150,000. The note bears interest at the rate of 5% per year and
is payable in 36 equal monthly installments of $4,496. As of March 31, 2018, $88,932 remains outstanding with $50,642 included
as a current liability.
During the three months ended March 31, 2019, Stephen
Christian advanced $21,800 to the Company and was repaid $30,242 by the Company. As of March 31, 2019 and December 31, 2018, $0
and $8,443 remained outstanding, respectively, with no specific repayment terms or stated interest rate.
Accounts Receivable Financing Facility (Secured
Line of Credit)
On May 31, 2017, the Company entered into a $1 million revolving
accounts receivable financing facility with Crestmark Bank. The financing facility provides for MG to have access to the lesser
of (i) $1 million or (ii) 85% of the net amount of eligible receivables (as defined in the financing agreement). The financing
facility is paid for by the assignment of MG’s accounts receivable to Crestmark Bank and is secured by MG’s assets.
The financing facility has an interest rate of 7.25% in excess of the prime rate reported by the Wall Street Journal per annum,
with a floor minimum rate of 11.5%. Interest and maintenance fees will be calculated on the higher of the average monthly
loan balance from the prior month or a minimum average loan balance of $200,000. The financing facility is for an initial term
of two-years and will renew on a year to year basis, unless terminated in accordance with the financing agreement. Pursuant to
the terms of the financing facility, Crestmark has been granted a security interest in all of our assets and the assets of MG and
we have agreed to guaranty all amounts due under the facility upon an event of default, however, the guaranty does not restrict
the Company’s ability to incur debt in connection with its operations. On August 13, 2018, MG entered into amendment #2 of
the Crestmark Bank financing facility which increased the advance rate of which Crestmark would lend on Eligible accounts receivables
to 90% from 85%. On January 9, 2019, we entered into amendment #3 of the Crestmark Bank financing facility whereby we increased
the size of the line of credit to $1.5 million from $1 million and added our frac water subsidiary as an additional borrower with
its accounts receivable. We are guarantors of the financing facility and our subsidiaries as borrowers have cross-collateralized
their accounts receivable with this facility. The balance of this line of credit was $655,275 and $593,888 as of March 31,
2019 and December 31, 2018, respectively.
As part of our arrangement with Crestmark Bank
our customers pay accounts receivable directly to a lock-box. Crestmark Bank is then paid back for prior advances on the Company’s
Eligible Receivables. During the three months ended March 31, 2019, the Company received total cash proceeds of $1,449,426 and
repaid $1,419,539 of the Line of Credit via Crestmark Bank withholding amount collected in our lock-box. In addition, Crestmark
withheld $31,500 to pay for interest and fees. Net proceeds received during the three months ended March 31, 2019 on this
facility were $61,387.
During the three months ending March 31, 2018, the Company received
total cash proceeds of $850,213 and repaid $741,114 of the Line of Credit via Crestmark Bank withholding amount collected in our
lock-box. In addition, Crestmark withheld $15,709 to pay for interest and fees. Net proceeds received during the three months ending
March 31, 2018 on this facility were $124,808.
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 three months ended March 31, 2019, $11,875 of the discount was amortized.
NOTE 9 – COMMON STOCK
During the first quarter of 2019, the Company issued
27,046 of its restricted common stock in settlement of $8,572 of liabilities. The fair value of the common stock issued was $12,579
resulting in a loss on settlement of $4,007.
During the first quarter of 2019, the Company issued
936,000 shares of its restricted common stock for proceeds of $234,000 from accredited investors.
During the year ended December 31, 2018, the Company
issued a total of 80,000 common shares to three consultants for services. During the three months ended March 31, 2019, the Company
recognized expense of $20,375 related to these services.
NOTE 10 – STOCK OPTIONS AND WARRANTS
Summary stock option information is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2018
|
|
|
640,000
|
|
|
$
|
320,350
|
|
|
|
$0.24-$2.18
|
|
|
$
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(10,000
|
)
|
|
|
(19,800
|
)
|
|
|
$1.78-$2.18
|
|
|
$
|
1.98
|
|
Outstanding, March 31, 2019
|
|
|
630,000
|
|
|
$
|
300,550
|
|
|
|
$0.24-$2.13
|
|
|
$
|
0.48
|
|
Exercisable, March 31, 2019
|
|
|
463,334
|
|
|
$
|
211,551
|
|
|
|
$0.24-$2.13
|
|
|
$
|
0.46
|
|
The weighted average remaining contractual life is approximately 2.9
years for stock options outstanding on March 31, 2019. At March 31, 2019 there was $79,500 in intrinsic value of outstanding stock
options. During the three months ended March 31, 2019 and 2018 share based compensation expense of $14,045 and $0 was recognized,
respectively.
Summary Stock warrant information is as follows:
Warrants
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2018
|
|
|
525,001
|
|
|
|
218,750
|
|
|
|
$0.40-$0.75
|
|
|
$
|
0.42
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, March 31, 2019
|
|
|
525,001
|
|
|
$
|
218,750
|
|
|
|
$0.40-$0.75
|
|
|
$
|
0.42
|
|
Exercisable, March 31, 2019
|
|
|
525,001
|
|
|
$
|
218,750
|
|
|
|
$0.40-$0.75
|
|
|
$
|
0.42
|
|
The weighted average remaining contractual life is approximately 4.7
years for stock warrants outstanding on March 31, 2019. At March 31, 2019 there was $30,000 in intrinsic value of outstanding stock
warrants.
NOTE 11 – ACQUISITION
On December 7, 2018 (“Closing Date”),
we entered into an Agreement and Plan of Share Exchange dated as of such date (the “Exchange Agreement”) with Momentum
Water Transfer Services LLC, a Texas limited liability company (“MWTS”) and the sole member of MWTS (the “MWTS
Member”). On the Closing Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and
outstanding membership interests of MWTS (“MWTS Membership Interests”) from the MWTS Member pursuant to which MWTS
became our wholly owned subsidiary (“Acquisition”). In accordance with the terms of the Exchange Agreement, and in
connection with the completion of the Acquisition, on the Closing Date we issued 550,000 shares of our common stock, par value
$0.001 per share, paid $308,000 in cash, issued a short term payable of $53,710 that is due on demand and issued a 6% note to the
MWTS Member in the amount of $800,000 in exchange for all of the issued and outstanding MWTS Membership Interests.
The following schedule contains pro-forma consolidated
results of operations for the three months ended March 31, 2018 as if the acquisitions 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 acquisition had taken place on January 1, 2018, or of results that may occur in the future.
|
|
Three months
ended March
31, 2018
|
|
Revenue
|
|
$
|
1,012,147
|
|
Operating loss
|
|
$
|
(30,424
|
)
|
Net loss
|
|
$
|
(76,902
|
)
|
Loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
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.
Litigation
In May 2018, MG Cleaners LLC, a wholly owned subsidiary
of SMG Industries, Inc. was sued in the US District Court for the Western District of Texas, Houston Division, Civil action no.
4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Five former employees of MG Cleaners, the Plaintiffs, filed claims
under the Fair Labor Standards Act (FLSA) asserts amongst other things unpaid overtime wages. The Company adamantly denies these
claims.
SMG Industries has litigated this matter for several
months and considered a range of outcomes for this matter and determined that management’s best estimated amount to settle
this matter is for $40,000 probably during the fiscal year 2019. As such, management believes it is appropriate to accrue
for this on our year end 2018 financial statements.
From time to time, SMG may be subject to routine
litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the opinion of management;
no other pending or known threatened claims, actions or proceedings against SMG are expected to have a material adverse effect
on SMG’s financial position, results of operations or cash flows. SMG cannot predict with certainty, however, the outcome
or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims.
There can be no assurance as to the ultimate outcome of any lawsuits and investigations.
NOTE 13 – LEASES
The Company has operating and finance leases for
sales and administrative offices, motor vehicles and certain machinery and equipment. The Company’s leases have remaining
lease terms of 1 year to 4 years. For purposes of calculating operating lease liabilities, lease terms may be deemed
to include options to extend the lease when it is reasonably certain that the Company will exercise those options. Some leasing
arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and
tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company's
lease agreements do not contain any material restrictive covenants.
The components of lease cost for operating and
finance leases for the three months ended March 31, 2019 were as follows:
Lease Cost
|
|
Three Months Ended
March 31, 2019
|
|
Operating lease cost
|
|
$
|
50,454
|
|
Finance lease cost
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
8,424
|
|
Interest on lease liabilities
|
|
|
4,525
|
|
Total finance lease cost
|
|
$
|
12,949
|
|
Short-term lease cost
|
|
$
|
18,206
|
|
Variable lease cost
|
|
|
-
|
|
Sublease income
|
|
|
-
|
|
Total lease cost
|
|
$
|
81,609
|
|
Supplemental cash flow information related to leases
was as follows:
Other Lease Information
|
|
Three Months Ended March 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
50,454
|
|
Operating cash flows from finance leases
|
|
$
|
4,525
|
|
Financing cash flows from finance leases
|
|
$
|
13,817
|
|
At adoption of ASC 842, the Company recognized
right of use assets and liabilities for operating leases of $287,519. The Company’s existing capital lease under ASC 840
is classified as a finance lease under ASC 842. The Company also entered into two new operating leases for two vehicles. Each lease
is for a period of four years, with monthly payments of $875 per vehicle. The Company recognized initial right of use assets and
right of use operating lease liabilities of $65,266 in total for these vehicles.
During the three months ended March 31, 2019, the
Company entered into a new lease for a forklift that was determined to be a finance lease under ASC 842. The lease is for a period
of three years, with monthly payments of $671. The Company capitalized an asset and right of use finance lease liability of $19,901
related to this finance lease.
The following table summarizes the lease-related
assets and liabilities recorded in the consolidated balance sheets at March 31, 2019:
Lease Position
|
|
March 31, 2019
|
|
Operating Leases
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
313,372
|
|
Right of use liability operating lease short term
|
|
$
|
153,939
|
|
Right of use liability operating lease long term
|
|
|
159,433
|
|
Total operating lease liabilities
|
|
$
|
313,372
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
Equipment
|
|
$
|
166,255
|
|
Accumulated depreciation
|
|
|
(25,498
|
)
|
Property and equipment, net
|
|
$
|
140,757
|
|
Right of use liabilities – finance leases short term
|
|
|
25,495
|
|
Right of use liabilities – finance leases long term
|
|
|
74,869
|
|
Total finance lease liabilities
|
|
$
|
100,364
|
|
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
|
|
March 31, 2019
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
3.4
|
|
Finance leases
|
|
|
1.5
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
|
13.0
|
%
|
Finance leases
|
|
|
17.4
|
%
|
The following table provides the maturities of
lease liabilities at March 31, 2019:
Maturity of Lease Liabilities at March 31, 2019
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2019
|
|
$
|
151,361
|
|
|
$
|
61,125
|
|
2020
|
|
|
108,317
|
|
|
|
45,110
|
|
2021
|
|
|
82,861
|
|
|
|
8,047
|
|
2022
|
|
|
23,673
|
|
|
|
671
|
|
2023
|
|
|
-
|
|
|
|
-
|
|
2024 and thereafter
|
|
|
-
|
|
|
|
-
|
|
Total future undiscounted lease payments
|
|
$
|
366,212
|
|
|
$
|
114,953
|
|
Less: Interest
|
|
|
(52,840
|
)
|
|
|
(14,589
|
)
|
Present value of lease liabilities
|
|
$
|
313,372
|
|
|
$
|
100,364
|
|
At March 31, 2019, the Company had no additional leases which had not
yet commenced.
Future minimum lease payments for operating leases
accounted for under ASC 840, "Leases," with remaining non-cancelable terms in excess of one year at December 31, 2018
were as follows:
Minimum Lease Commitments at December 31, 2018
|
2019
|
|
$
|
145,940
|
|
2020
|
|
|
39,940
|
|
2021
|
|
|
18,340
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Total
|
|
$
|
204,220
|
|
NOTE 14 – RELATED PARTY TRANSACTIONS
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. As of March 31, 2019 and December 31, 2018 amounts due under this arrangement are $0 and $21,000,
respectively.
The Company has engaged the services of Mr. John
Boylan effective February 11, 2019, whereby Mr. Boylan will be paid as a consultant to the Company in connection with its mergers
and acquisition strategy, whereby Mr. Boylan shall provide us with mergers and acquisition support including economic analysis,
financial modeling and due diligence. Mr. Boylan will be paid $13,000 per month for his services.
NOTE 15 – SUBSEQUENT EVENTS
In April 2019, the Company issued 511,370 shares
of its restricted common stock to settle a $100,000 note payable and accrued interest in full that was originally issued in January
2019.
In April 2019, the Company issued 500,000 shares
of its restricted common stock to an accredited investor in return for $125,000.
In April 2019, the Company issued a convertible promissory note in the
amount of $50,000 to an individual accredited investor. The note bears an interest rate of 8 ½ %, payable in cash quarterly,
matures in two years and is convertible at anytime into shares of the Company’s common stock at a fixed conversion price
of $0.50 (fifty cents) per share.
In May 2019, the Company issued a promissory note in the amount of $100,000
to an individual accredited investor. The Company issued a warrant to purchase 100,000 shares of the Company’s common stock
at a fixed price of $0.30.