Company Quick10K Filing
Quick10K
SMG Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.75 14 $10
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-03 M&A, Sale of Shares, Regulation FD, Exhibits
8-K 2019-04-29 Regulation FD, Exhibits
8-K 2019-02-11 Regulation FD, Exhibits
8-K 2019-01-07 Regulation FD, Exhibits
8-K 2018-12-07 M&A, Sale of Shares, Exhibits
8-K 2018-09-27 M&A, Sale of Shares, Exhibits
8-K 2018-04-27 Officers, Exhibits
8-K 2018-03-19 Officers, Exhibits
8-K 2018-02-12 Other Events, Exhibits
CORVF Corvus Gold 196
HRGG Heritage Nola Bancorp 20
ADMT ADM Tronics Unlimited 11
AURX Nuo Therapeutics 3
LVGO Livongo Health 0
MCCX McorpCX 0
JBBT Jobbot 0
AMIH American International Holdings 0
NXGH Cuentas 0
IFCN IMH Financial 0
SMGI 2019-06-30
Note 1 &Mdash; Background and Basis of Presentation
Note 2 &Mdash; Summary of Significant Accounting Policies
Note 3 - Going Concern
Note 4 - Revenue
Note 5 - Inventory
Note 6 - Long-Lived Assets
Note 7 - Accrued Expenses and Other Liabilities
Note 8 - Notes Payable
Note 9 - Common and Preferred Stock
Note 10 - Stock Options and Warrants
Note 11 - Acquisition
Note 12 - Commitments and Contingencies
Note 13 - Leases
Note 14 - Related Party Transactions
Note 15 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Qualitative and Quantitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1.Legal Proceedings.
Item 1A.Risk Factors.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.Defaults Upon Senior Securities.
Item 4.Mine Safety Disclosures.
Item 5.Other Information.
Item 6.Exhibits.
EX-31.1 tv527354_ex31-1.htm
EX-31.2 tv527354_ex31-2.htm
EX-32.1 tv527354_ex32-1.htm
EX-32.2 tv527354_ex32-2.htm

SMG Industries Earnings 2019-06-30

SMGI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv527354_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

OR

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission File Number 000-54391

periods beginning after December

 

 

SMG INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 51-0662991
(State or other jurisdiction of incorporation or
organization)
(IRS Employer Identification No.)
   
710 N. Post Oak Road, Suite 315  
Houston, Texas 77024
(Address of Principal Executive Offices) (Zip Code)

 

(713) 821-3153

 

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x     No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files    x  Yes     ¨   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨ Accelerated filer   ¨
   
Non-accelerated filer   ¨ (Do not check if a smaller reporting company) Smaller reporting company   x
   
  Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨  No x

 

The number of shares of Common Stock, par value $0.001 per share, outstanding as of August 13, 2019 was 14,451,372.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Ticker symbol(s)   Name of each exchange on which registered
None   N/A   N/A

 

 

 

   

 

 

SMG INDUSTRIES INC.

 

Table of Contents

 

    Page 
Part I Financial Information  
     
Item 1. Financial Statements 1
     
  Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited) 1
     
  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) 2
     
  Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited) 3
     
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and  2018 (Unaudited) 4
     
  Notes to Unaudited Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Qualitative and Quantitative Disclosures about Market Risk 24
     
Item 4. Controls and Procedures 24
     
Part II Other Information  
     
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25
  Signatures 26

 

   

 

 

SMG INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

    June 30,     December 31,  
    2019     2018  
             
ASSETS                
Current assets:                
Cash and cash equivalents   $ 112,046     $ 1,608  
Accounts receivable, net of allowance for doubtful accounts of $50,000 and $25,000     2,179,419       703,959  
Inventory     139,526       140,662  
Assets held for sale     30,000       42,300  
Prepaid expenses and other current assets     206,609       96,871  
                 
Total current assets     2,667,600       985,400  
                 
Property and equipment, net of accumulated depreciation of $453,369 and $306,155     4,464,336       1,998,009  
Other assets     17,593       27,631  
Right of use assets - operating lease     358,565       -  
Intangible assets, net of accumulated amortization $24,843 and $10,344     315,157       329,656  
Goodwill     185,751       185,751  
                 
Total assets   $ 8,009,002     $ 3,526,447  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                
Current liabilities:                
Accounts payable   $ 2,423,810     $ 968,507  
Accounts payable - related party     61,173       21,000  
Accrued expenses and other liabilities     358,933       207,911  
Right of use liabilities - operating leases short term     146,569       -  
Right of use liabilities - finance leases short term     77,994       -  
Deferred revenue     -       39,877  
Secured line of credit     1,409,474       593,888  
Current portion of note payable - related party     63,651       62,750  
Current portion of unsecured notes payable     79,523       131,126  
Current portion of secured notes payable, net     654,391       328,328  
Current portion of convertible notes payable, net     -       -  
Current portion of capital lease liability     -       53,728  
                 
Total current liabilities     5,275,518       2,407,115  
                 
Long term liabilities:                
Convertible note payable, net of current portion     235,954       161,970  
Note payable - related party, net of current portion     25,230       46,913  
Notes payable - secured, net of current portion     1,404,865       967,846  
Right of use liabilities - operating leases, net of current portion     213,996       -  
Right of use liabilities - finance leases, net of current portion     29,493       -  
Capital lease liability, net of current portion     -       40,552  
                 
Total liabilities     7,185,056       3,624,396  
                 
Commitments and contingencies                
                 
Stockholders' equity (deficit)                

Preferred stock - $0.001 par value; authorized 1,000,000 shares

Preferred stock – Series A – designated 2,000 shares; issued and outstanding 2,000 and none at June 30, 2019 and December 31, 2018, respectively

    2       -  
Common stock - $0.001 par value; authorized 25,000,000 shares as of June 30, 2019 and December 31, 2018; issued and outstanding 14,085,106 and 11,910,690 at June 30, 2019 and December 31, 2018, respectively     14,085       11,911  
Additional paid in capital     4,178,458       1,567,567  
Accumulated deficit     (3,368,599 )     (1,677,427 )
                 
Total stockholders' equity (deficit)     823,946       (97,949 )
                 
Total liabilities and stockholders' equity (deficit)   $ 8,009,002     $ 3,526,447  

 

The accompanying notes are an integral part of these consolidated unaudited financial statements

 

 1 

 

 

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and six months ended June 30, 2019 and 2018

(unaudited)

 

    Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
    June 30, 2019     June 30, 2018     June 30, 2019     June 30, 2018  
                         
REVENUES   $ 1,094,181     $ 1,167,305     $ 2,846,885     $ 2,165,483  
                                 
COST OF REVENUES     896,600       649,394       2,377,315       1,159,509  
                                 
GROSS PROFIT     197,581       517,911       469,570       1,005,974  
                                 
OPERATING EXPENSES:                                
Selling, general and administrative     824,814       593,140       1,663,438       1,014,982  
                                 
Total operating expenses     824,814       593,140       1,663,438       1,014,982  
                                 
LOSS FROM OPERATIONS     (627,233 )     (75,229 )     (1,193,868 )     (9,008 )
                                 
OTHER INCOME (EXPENSE)                                
Gain (loss) on settlement of liabilities     (105,258 )     11,840       (105,258 )     11,840  
Loss on sale of assets     (12,008 )     -       (12,008 )     -  
Interest expense, net     (236,411 )     (84,726 )     (380,038 )     (131,204 )
                                 
NET LOSS   $ (980,910 )   $ (148,115 )   $ (1,691,172 )   $ (128,372 )
                                 
Net Loss Per Common Share                                
Basic   $ (0.07 )   $ (0.01 )   $ (0.13 )   $ (0.01 )
Diluted   $ (0.07 )   $ (0.01 )   $ (0.13 )   $ (0.01 )
                                 
Weighted average common shares outstanding                                
Basic     13,935,281       10,234,123       13,068,921       9,808,914  
Diluted     13,935,281       10,234,123       13,068,921       9,808,914  

  

The accompanying notes are an integral part of these consolidated unaudited financial statements

 

 2 

 

 

SMG INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the three and six months ended June 30, 2019 and 2018

(unaudited)

 

   Preferred Stock           Additional         
   Series A   Common Stock   Paid In   Accumulated     
   Shares   Value   Shares   Value   Capital   Deficit   Total 
                             
Balances at December 31, 2017   -   $-    8,865,190   $8,865   $(56,940)  $(534,049)  $(582,124)
                                    
Shares issued for cash   -    -    1,140,000    1,140    224,904    -    226,044 
Net income   -    -    -    -    -    19,743    19,743 
                                    
Balances at March 31, 2018   -   $-    10,005,190   $10,005   $167,964   $(514,306)  $(336,337)
                                    
Shares issued for cash   -    -    250,000    250    49,750    -    50,000 
Shares issued to settle liabilities   -    -    4,000    4    2,596    -    2,600 
Contributions to capital   -    -    -    -    326    -    326 
Share based compensation   -    -    -    -    14,991    -    14,991 
Net loss   -    -    -    -    -    (148,115)   (148,115)
                                    
Balances at June 30, 2018   -   $-    10,259,190   $10,259   $235,627   $(662,421)  $(416,535)
                                    
                                    
Balances at December 31, 2018   -   $-    11,910,690   $11,911   $1,567,567   $(1,677,427)  $(97,949)
                                    
Shares issued for cash   -    -    936,000    936    233,064    -    234,000 
Shares issued to settle liabilities   -    -    27,046    27    12,552    -    12,579 
Share based compensation   -    -    -    -    34,420    -    34,420 
Net loss   -    -    -    -    -    (710,262)   (710,262)
                                    
Balances at March 31, 2019   -   $-    12,873,736   $12,874   $1,847,603   $(2,387,689)  $(527,212)
                                    
Shares issued for cash   -    -    500,000    500    124,500    -    125,000 
Shares issued to settle liabilities   -    -    511,370    511    203,014    -    203,525 
Share based compensation   -    -    200,000    200    38,249    -    38,449 
Shares issued for acquisition of Trinity   2,000    2    -    -    1,799,998    -    1,800,000 
Warrants issued with notes payable – debt discount   -    -    -    -    165,094    -    165,094 
Net loss   -    -    -    -    -    (980,910)   (980,910)
                                    
Balances at June 30, 2019   2,000   $2    14,085,106   $14,085   $4,178,458   $(3,368,599)  $823,946 

 

The accompanying notes are an integral part of these consolidated unaudited financial statements

 

 3 

 

 

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2019 and 2018

(unaudited)

 

   2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,691,172)  $(128,372)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation   72,869    14,991 
Depreciation and amortization   172,400    34,160 
Amortization of debt discount and deferred financing costs   192,608    80,634 
Amortization of right of use assets - operating leases   82,120    - 
Asset impairment   12,300    - 
Loss (gain) on settlement of liabilities   105,258    (11,840)
Bad debt expense   -    (2,093)
(Gain) loss on disposal of equipment   (12,008)   614 
Changes in:          
Accounts receivable   (133,847)   (261,641)
Inventory   1,136    (3,433)
Prepaid expenses and other current assets   (62,597)   (19,417)
Other assets   10,038    (12,387)
Accounts payable   713,437    23,492 
Accounts payable related party   61,173    (45,585)
Accrued expenses and other liabilities   151,022    13,249 
Right of use operating lease liabilities   (80,120)   - 
Deferred revenue   (39,877)   - 
Net cash used in operating activities   (445,260)   (317,628)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash paid for acquisition of Trinity Services LLC, net   (449,051)   - 
Cash paid for purchase of property and equipment   (116,682)   (54,965)
Net cash used in investing activities   (565,733)   (54,965)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from secured line of credit, net   772,367    217,102 
Proceeds from notes payable   280,000    171,243 
Payments on notes payable   (267,473)   (206,735)
Proceeds from convertible notes payable   50,000    - 
Payments on ROU liabilities - finance lease   (30,681)   - 
Proceeds from sales of common stock   359,000    - 
Proceeds on notes payable, related party   125,239    23,100 
Payments on notes payable, related party   (146,021)   (24,694)
Payments on capital lease liability   -    (11,753)
Payments on MG Cleaners acquisition - related party   (21,000)   (29,000)
Proceeds from sales of common stock, net   -    276,044 
Net cash provided by financing activities   1,121,431    415,307 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   110,438    42,714 
           
CASH AND CASH EQUIVALENTS, beginning of period   1,608    85,570 
           
CASH AND CASH EQUIVALENTS, end of period  $112,046   $128,284 
           
Supplemental disclosures:          
Cash paid for income taxes  $-   $- 
Cash paid for interest  $188,204   $28,408 
           
Noncash investing and financing activities          
Capitalization of ROU assets and liabilities - finance  $43,888   $- 
Capitalization of ROU assets and liabilities - operating  $352,785   $- 
Non-cash consideration paid for business acquisition  $1,800,000   $- 
Intangible assets acquired from issuance of note payable, related party  $-   $150,000 
Purchase of fixed assets with note payable  $-   $41,481 
Property and equipment purchased with capital lease  $-   $131,718 
Property and equipment purchased with accounts payable  $-   $37,488 
Debt discount from issuance of common stock warrants  $165,094   $- 
Settlement of accounts payable with common stock issuance  $8,572   $2,000 
Settlement of notes payable with common stock issuance  $102,274   $- 
Prepaid expenses financed with note payable  $-   $75,931 

 

The accompanying notes are an integral part of these consolidated unaudited financial statements

 

 4 

 

 

SMG INDUSTRIES, INC.

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. Trinity Services LLC provides lease roads, location and pad development using construction equipment to build drilling pad locations and well site services using a work over rig to perform services on existing wells. SMG Industries, Inc. headquartered in Houston, Texas has facilities in Carthage, Waskom, Odessa and Alice, Texas.

 

The accompanying unaudited interim financial statements of SMG Industries Inc. (“we”, “our”, “SMG” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 2018 and 2017 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 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. For the six months ended June 30, 2018, 595,000 of stock were considered for their dilutive effects but concluded to be anti-dilutive.

 

 5 

 

 

Basic and Diluted Loss   June 30, 2019     June 30, 2018  
             
Net Loss   $ (1,691,172 )   $ (128,372 )
                 
Basic and Dilutive Shares:                
Weighted average basic shares outstanding     13,068,921       9,808,914  
Net dilutive stock options     -       -  
Dilutive shares     13,068,921       9,808,914  

 

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 June 2019 and partly related to the Company’s sales initiatives cross-selling our services with the recent acquisition’s added new customers. In addition, costs at the Company’s frac water division were reduced in the second quarter of 2019 bringing them more in line with current revenues in that area. As a result, following this plan substantial doubt about the Company’s ability to continue as a going concern is alleviated.

 

NOTE 4 – REVENUE

 

Disaggregation of revenue

 

The Company disaggregates revenue between services and products revenue. All revenues are currently in the southern region of the United States.

 

 6 

 

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018 
Service revenue  $511,943   $708,033   $1,408,955   $1,063,582 
Product revenue   582,238    459,272    1,437,930    1,101,901 
Total revenue  $1,094,181   $1,167,305   $2,846,885   $2,165,483 

 

Customer Concentration and Credit Risk

 

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. During the six months ended June 30, 2018, three of our customers accounted for approximately 61% of our total gross revenues, with individual customers accounting for 36%, 15% and 10%.  No other customers exceeded 10% of revenues during 2018.

 

Two customers accounted for approximately 36% of accounts receivable at June 30, 2019, and three customers accounted for approximately 49% of accounts receivable at December 31, 2018. No other customers exceeded 10% of accounts receivable as of June 30, 2019 and December 31, 2018. The Company believes it will continue to reduce the customer concentration risks by engaging new customers and by increasing activity with existing, less active customers and 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 at June 30, 2019 and December 31, 2018 consisted of the following components:

 

   June 30, 2019   December 31, 2018 
         
Raw materials and supplies  $24,507   $8,690 
Work in progress   9,275    - 
Finished and purchased products   105,744    131,972 
Total inventory  $139,526   $140,662 

 

NOTE 6 – LONG-LIVED ASSETS

 

Property and equipment at June 30, 2019 and December 31, 2018 consisted of the following:

 

    June 30, 2019     December 31, 2018  
             
Equipment   $ 4,009,759     $ 1,409,237  
Downhole oil tools     700,000       700,000  
Vehicles     160,305       151,497  
Furniture, fixtures and other     47,641       43,430  
                 
      4,917,705       2,304,164  
                 
Less: accumulated depreciation     (453,369 )     (306,155 )
                 
    $ 4,464,336     $ 1,998,009  

 

Depreciation expense for the six months ended June 30, 2019 and 2018 was $157,901 and $30,384 respectively.

 

 7 

 

 

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 June 30, 2019 and December 31, 2018 consisted of the following:

 

    Useful
 Life (yr)
  June 30, 2019     December 31, 2018  
                 
RigHands (Trademark & Formula)   15   $ 150,000     $ 150,000  
MWST Tradename   10     190,000       190,000  
                     
          340,000       340,000  
                     
Less: accumulated amortization         (24,843 )     (10,344 )
                     
        $ 315,157     $ 329,656  

 

Amortization expense for the six months ended June 30, 2019 and 2018 was $14,499 and $3,776, respectively. Future amortization of the intangible assets for the years ended December 31, 2019, 2020, 2021, 2022, 2023 and beyond are $29,000, $29,000, $29,000, $29,000, $29,000 and $184,656, respectively.

 

NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses as of June 30, 2019 and December 31, 2018 included the following:

 

    June 30, 2019     December 31, 2018  
             
Payroll and payroll taxes payable   $ 88,375     $ 84,916  
Sales tax payable     71,070       67,124  
Interest payable     37,264       12,325  
Credit cards payable     25,197       -  
Other     137,027       43,546  
                 
Total Accrued Expenses   $ 358,933     $ 207,911  

 

 8 

 

 

NOTE 8 – NOTES PAYABLE

 

Notes payable included the following:

 

    June 30,     December 31,  
    2019     2018  
Notes payable:                
                 
Secured note payable issued on October 15, 2010 and refinanced in January 2015 for purchase of all membership interest, bearing interest of 6% per year and due in monthly installments ending September 25, 2022.   $ 158,754     $ 180,552  
                 
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021.     -       49,885  
                 
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020.     17,670       25,960  
                 
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023.     32,100       35,562  
                 
Secured funding advance agreement issued June 27, 2018, bearing effective interest of 20%, due in daily installments ending April 2019, principal balance $143,965, net of deferred financing costs of $43,412.     -       143,965  
                 
Secured note payable issued to a shareholder who controls approximately 8.8% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446.     100,000       100,000  
                 
Secured note payable issued to a shareholder who controls approximately 7.5% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $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 approximately 8.8% of votes May 1, 2019, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. Note was extended to September 30, 2019.     100,000       -  
                 
Secured note payable issued to a shareholder who controls approximately 8.8% of votes May 1, 2019, bearing interest of 10% per year, due September 30, 2019.     80,000       -  
                 
Various notes payable secured by equipment of Big Vehicle & Equipment Company, LLC, bearing interest ranging from 2.72% to 8% maturing through August 2023.     814,482       -  
                 
      2,295,475       1,535,924  
Less discounts     (236,219 )     (239,750 )
Less current maturities     (654,391 )     (328,328 )
                 
Long term debt, net of current maturities   $ 1,404,865     $ 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.

 

 9 

 

 

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. As of June 30, 2019, the unamortized discount is $121,423.

 

On December 7, 2018 the Company issued a 6% note to the MWTS Member in the amount of $800,000 as part of the purchase price for MWTS. The note requires monthly payment of $7,500, matures December 8, 2023 and is secured by all the assets of the Company subject to prior security interests.

 

On January 11, 2019 the Company issued a $100,000. 10% note to a shareholder who controls approximately 8.8%. The note matures on December 7, 2019 and is secured by a junior lien against the Company assets. In April 2019, the Company issued 511,370 shares of its restricted common stock with a fair value of $203,525 to settle this $100,000 note payable and $2,274 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 June 30, 2019. On June 18, 2019, the Company issued 150,000 warrants with an exercise price of $0.30 and a term of ten years in exchange for an extension of the maturity date of the note through September 30, 2019. This change in the note payable was considered to not be a significant modification and the warrants were valued at $67,223 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 ten year a warrant to purchase 120,000 shares of the Company’s common stock at a fixed price of $0.30. The warrants were valued $53,780 and recorded as a debt discount. As of June 30, 2018, $6,205 was amortized leaving a discount balance of $47,575.

 

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 and is fully paid as of June 30, 2019. During the six months ended June 30, 2019, $43,411 of debt discount was amortized to interest expense.

 

Future maturities of secured notes payable as of June 30, 2019 for the following fiscal years are as follows:

 

2019   $ 725,838  
2020     329,990  
2021     337,582  
2022     265,523  
2023     636,542  
Total   $ 2,295,475  

 

 10 

 

 

Notes Payable – Unsecured

 

   June 30,   December 31, 
   2019   2018 
         
Financed insurance premium, Note Payable issued on June 8, 2018, bearing interest of 6.5% per year and due in monthly installments ending April 1, 2019  $4,523   $31,126 
           
Unsecured note payable with a shareholder who controls approximately 7.5% of votes. Note issued on August 10, 2018 for $40.000, due December 30, 2018 (extended to June 30, 2019) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced and due on demand   40,000    65,000 
           
Unsecured advances from the sellers of Momentum Water Transfer Services LLC, non-interest bearing and due on demand   35,000    35,000 
           
    79,523    131,126 
           
Less current maturities   (79,523)   (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 June 30, 2019, $76,513 remains outstanding with $51,283 included as a current liability. As of December 31, 2018, $101,220 remains outstanding with $54,307 included as a current liability.

 

During the six months ended June 30, 2019, Stephen Christian advanced $125,239 to the Company and was repaid $121,314 by the Company. As of June 30, 2019 and December 31, 2018, $12,368 and $8,443 remained outstanding, respectively, with no specific repayment terms or stated interest rate.

 

Accounts Receivable Financing Facility (Secured Line of Credit)

 

On May 11, 2017, SMG Industries, Inc., formerly SMG Indium Resources Ltd., (the “Borrower”) entered into a $1 million revolving accounts receivable financing facility with Crestmark Bank. The financing facility provides for the Borrower to have access to the lesser of (i) $1 million or (ii) 85% of Net Amount of Eligible Receivables (as defined in the financing agreement). The financing facility is paid for by the assignment of the Borrower’s accounts receivable to Crestmark Bank and is secured by the Borrower’s assets. The financing facility has an interest rate of 7.25% in excess of the prime rate reported by the Wall Street Journal per annum, with a floor minimum rate of 11.5%. There were no loan origination or closing fees and we paid $1,330 to Crestmark to reimburse them for documentation, legal and audit fees. Interest and maintenance fees will be calculated on the higher of the average monthly loan balance from the prior month or a minimum average loan balance of $200,000. The financing facility is for an initial term of two-years and will renew on a year to year basis, unless terminated in accordance with the financing agreement. If the facility is terminated prior to the first anniversary, Borrower is obligated to pay Crestmark Bank a fee of $20,000 and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a fee of $5,000. After the second anniversary of the financing facility, no exit fee is due. Crestmark has a senior security interest in the Borrower’s assets.

 

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 six months ended June 30, 2019, the Company received total cash proceeds of $1,851,690 and repaid $1,830,831 of the Line of Credit via Crestmark Bank withholding amount collected in our lock-box. In addition, Crestmark withheld $74,352 to pay for interest and fees.  Net proceeds received during the six months ended June 30, 2019 on this facility were $95,211.

 

 11 

 

 

During the six months ended June 30, 2018, the Company received total cash proceeds of $2,000,300 and repaid $1,819,803 of the Line of Credit via Crestmark Bank withholding amount collected in our lock-box. In addition Crestmark withheld $36,605 to pay for interest and fees.  Net proceeds received during the six months ended June 30, 2018 on this facility were $217,102.

 

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, Catalyst funding a total of $1,317,304. Of the amounts funded $500,000 was paid directly to the Seller of Trinity, $43,219 was used to pay of notes payable of MG Cleaners, $714,239 was used to pay off the Crestmark liability and the remaining $59,846 was deposited to the Company’s bank account.

 

The balances under the above lines of credit was $1,409,474 and $593,888 as of June 30, 2019 and December 31, 2018, respectively.

 

Convertible Notes Payable

 

On September 28, 2018, the Company entered into a secured note purchase agreement with an individual 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, 2019, $23,983 of the discount was amortized leaving an unamortized discount balance of $64,046.

 

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 any time into shares of the Company’s common stock at a fixed conversion price of $0.50 per share. The Company evaluated the Convertible Note and determined is a conventional convertible instrument. As a result, a beneficial conversion feature was calculated as $0 at the time of issuance.

 

NOTE 9 – COMMON AND PREFERRED STOCK

 

During the six months ended June 30, 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.

 

In April 2019, the Company issued 511,370 shares, with a fair value of $203,525, of its restricted common stock to settle a $100,000 note payable and accrued interest in full that was originally issued in January 2019.

 

During the six months ended June 30, 2019, the Company issued 1,436,000 shares of its restricted common stock for proceeds of $359,000 from investors.

 

During the year ended December 31, 2018, the Company issued a total of 80,000 common shares to three consultants for service. During the six months ended June 30, 2019, the Company recognized expense of $30,250 related to these services. The Company will recognize an additional $1,646 over the remaining service period of the contract.

 

 12 

 

 

In May 2019, the Company issued a total of 200,000 common shares with a fair value of $50,325 to consultants for services. During the six months ended June 30, 2019, the Company recognized expense of $19,063 related to these services. The Company will recognize an additional $31,262 over the remaining service period of the contract.

 

Preferred Stock – Series A Convertible Preferred stock

 

On June 4, 2019 the company filed a Certificate of Designation of Preferences, Rights and Limitations of 3% Series “A” Convertible Preferred Stock to create a new class of stock in connection with its pending acquisition. This Series A Convertible Preferred stock has designated 2,000 shares, has a stated value of $1,000 per share and was delivered to the seller of Trinity Services LLC at closing.

 

The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of the Corporation, rank senior to all classes of Common Stock and to each other class of Capital Stock of the Corporation or series of Preferred Stock of the Corporation existing or hereafter created. The Series A Preferred Stock shall pay a three percent (3%) annual dividend on the outstanding Series A Preferred Stock, all of which shall be accrued until the Series A Preferred Stock has been converted.

 

At any time from issuance, the stated value of each outstanding share of Series A Preferred Stock, plus accrued dividends thereon, shall be convertible (in whole or in part), at the option of the Holder into shares of the Company’s Common Stock at a fixed conversion price of $0.50 per share on the date on which the Holder notices a conversion. 

 

All outstanding shares of Series A Preferred Stock shall automatically convert into shares of the Company’s Common Stock upon the earlier to occur of: (i) twelve months after the date of issuance of the Series A Preferred Stock; or (ii) six months after the date of issuance of the Series A Preferred Stock, provided that (a) all shares of the Company’s Common Stock issued upon conversion may be sold under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing price of the Company’s Common Stock has been at least of $0.60 per share during the twenty (20) trading days prior to the date of conversion.

 

The Holders shall have the right to receive notice of any meeting of holders of Common Stock or Series A Preferred Stock and to vote upon any matter submitted to a vote of the holders of Common Stock or Series A Preferred Stock, on an as-converted basis. Except as otherwise expressly set forth in the Certificate of Incorporation (including this Certificate of Designation), the Holders shall vote on each matter submitted to them with the holders of Common Stock and all other classes and series of Capital Stock entitled to vote on such matter, taken together as a single class, if any.

 

NOTE 10 – STOCK OPTIONS AND WARRANTS

 

Summary stock option information is as follows:

 

               Weighted 
   Aggregate   Aggregate   Exercise   Average 
   Number   Exercise Price   Price Range   Exercise Price 
Outstanding, December 31, 2018   640,000   $320,350     $0.24-$4.03    $0.50 
Granted   -    -    -   $- 
Exercised   (15,000)   -    -    - 
Cancelled, forfeited or expired   (100,000)   (67,450)    $0.25-$3.37    $1.98 
Outstanding, June 30, 2019   525,000   $252,900     $0.24-$4.03    $0.48 
Exercisable, June 30, 2019   458,334   $200,901     $0.24-$4.03    $0.44 

 

The weighted average remaining contractual life is approximately 2.54 years for stock options outstanding on June 30, 2019. At June 30, 2019 there was $70,500 in intrinsic value of outstanding stock options. During the six months ended June 30, 2019 and 2018 share based compensation expense of $23,556 and $0 was recognized, respectively. At June 30, 2019 there was $70,500 in intrinsic value of outstanding stock warrants.

 

Summary Stock warrant information is as follows:

 

                      Weighted  
    Aggregate     Aggregate     Exercise     Average  
    Number     Exercise Price     Price Range     Exercise Price  
Outstanding, December 31, 2018     525,001       218,750       $4.12 - $4.44     $ 0.37  
Granted     370,000       -       $4.84 - $9.98     $ 0.37  
Exercised     -       -       -       -  
Cancelled, forfeited or expired     -       -       -       -  
Outstanding, June 30, 2019     895,001     $ 329,750       $4.12 - $4.44     $ 0.37  
Exercisable, June 30, 2019     895,001     $ 329,750       $4.12 - $4.44     $ 0.37  

 

The weighted average remaining contractual life is approximately 5.9 years for stock warrants outstanding on June 30, 2019. At June 30, 2019 there was $80,500 in intrinsic value of outstanding stock warrants.

 

NOTE 11 – ACQUISITION

 

Trinity

 

On June 3, 2019 we entered into a definitive 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 closed the acquisition of Trinity on June 26, 2019 (“Closing Date”). On the Closing Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and outstanding membership interests of Trinity (“Trinity Membership Interests”) from the Trinity Member pursuant to which Trinity 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 : (i) issued 2,000 shares of our 3% Series A Secured Convertible Preferred Stock (“Preferred Stock”), stated value $1,000 per share, (ii) paid $500,000 in cash to the Trinity Member, and (iii) assumed approximately $850,000 in notes related to equipment owned by Trinity (“Purchase Price”).

 

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The Preferred Stock is convertible at $0.50 per share at any time after the issuance thereof and is secured by all of the unencumbered assets of Trinity. All outstanding shares of Preferred Stock shall automatically convert into shares of the Company’s common stock upon the earlier to occur of: (i) twelve months after the date of issuance of the Preferred Stock; or (ii) six months after the date of issuance of the Preferred Stock, provided that (a) all shares of the Company’s common stock issued upon conversion of the Preferred Stock may be sold under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing price of the Company’s common stock has been at least of $0.60 per share during the twenty (20) trading days prior to the date of conversion.

 

All of the shares of Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value of $2,000,000. The fair value of the shares was based on an as if converted to common stock basis.

 

The acquisition of Trinity is being accounted for as a business combination under ASC 805. Due to the transaction closing late in the second quarter 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   $ 500,000  
Preferred stock, Series A issued     1,800,000  
Total purchase consideration   $ 2,300,000  
         
Preliminary Purchase Price Allocation        
Cash   $ 50,949  
Accounts receivable     1,255,613  
Prepaid expenses     47,141  
Property and equipment     2,537,650  
Right of use assets – operating leases     87,900  
Accounts payable and accrued expenses     (750,438 )
Right of use assets – operating leases     (87,900 )
Notes payable     (840,915 )
    $ 2,300,000  

 

The Company’s consolidated revenue and net loss for the three and six months ended June 30, 2019 include $50,441 and $34,519 related to the operations of Trinity since the acquisition date.

 

Momentum Water Transfer Services

 

On December 7, 2018 (“Closing Date”), we entered into an Agreement and Plan of Share Exchange dated as of such date (the “Exchange Agreement”) with Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”) and the sole member of MWTS (the “MWTS Member”). On the Closing Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and outstanding membership interests of MWTS (“MWTS Membership Interests”) from the MWTS Member pursuant to which MWTS became our wholly owned subsidiary (“MWTS Acquisition”). In accordance with the terms of the Exchange Agreement, and in connection with the completion of the Acquisition, on the Closing Date we issued 550,000 shares of our common stock, par value $0.001 per share, paid $308,000 in cash, issued a short term payable of $53,710 that is due on demand and issued a 6% note to the MWTS Member in the amount of $800,000 in exchange for all of the issued and outstanding MWTS Membership Interests.

 

Unaudited Pro Forma Financial Information

 

The following schedule contains pro-forma consolidated results of operations for the three and six months ended June 30, 2019 and 2018 as if the Trinity acquisition occurred on January 1, 2018 and as if the MWTS Acquisition had occurred on January 1, 2017. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2018, or of results that may occur in the future.

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Three months

ended June 30,

2019

  

Three months

ended June 30,

2018

  

Six months

ended June 30,

2019

  

Six months

ended June 30,

2018

 
Revenue  $2,566,978   $3,215,023   $5,776,546   $4,946,478 
Operating income (loss)  $(597,003)  $117,374   $(1,081,968)  $30,922)
Net income (loss)  $(977,867)  $36,290   $(1,617,141)  $(96,071)
Income (loss) per common share – basic and diluted  $(0.07)  $0.00   $(0.12)  $(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. In May 2019, the Company adjusted the pay to $14,167 per month.

 

On October 31, 2017, and made effective October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief Executive Officer. The term is for three years with a monthly salary of $15,000 for the period. The terms of the agreement also include providing health care, auto allowance of $750 per month if a car is not provided by the Company, and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Flemming six months’ severance pay.

 

Litigation

 

In May 2018, MG Cleaners LLC, a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court for the Western District of Texas, Houston Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Five former employees of MG Cleaners, the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserts amongst other things unpaid overtime wages. The Company adamantly denies these claims.

 

SMG Industries has litigated this matter for several months and considered a range of outcomes for this matter and determined that management’s best estimated amount to settle this matter is for $40,000 probably during the fiscal year 2019. As such, management believes it is appropriate to accrue for this in our 2019 financial statements.

 

From time to time, SMG may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the opinion of management; no other pending or known threatened claims, actions or proceedings against SMG are expected to have a material adverse effect on SMG’s financial position, results of operations or cash flows. SMG cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any lawsuits and investigations.

 

NOTE 13 – LEASES

 

The Company has operating and finance leases for sales and administrative offices, motor vehicles and certain machinery and equipment. The Company’s leases have remaining lease terms of 1 year to 4 years. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company's lease agreements do not contain any material restrictive covenants.

 

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The components of lease cost for operating and finance leases for the three and six months ended June 30, 2019 were as follows:

 

Lease Cost 

Three Months Ended

June 30, 2019

  

Six Months Ended

June 30, 2019

 
Operating lease cost  $52,456   $102,910 
Finance lease cost          
Amortization of right-of-use assets  $9,923   $17,741 
Interest on lease liabilities   4,969    15,890 
Total finance lease cost  $14,892   $33,631 
Short-term lease cost  $40,255   $58,461 
Variable lease cost   -    - 
Sublease income   -    - 
Total lease cost  $107,603   $195,002 

Supplemental cash flow information related to leases was as follows:

 

Other Lease Information  Six Months Ended June 30, 2019 
Cash paid for amounts included in the measurement of lease liabilities:     
Operating cash flows from operating leases  $80,120 
Operating cash flows from finance leases  $15,890 
Financing cash flows from finance leases  $30,681 

 

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at June 30, 2019:

 

Lease Position  June 30, 2019 
Operating Leases     
Operating lease right-of-use assets  $358,565 
Right of use liability operating lease short term  $146,569 
Right of use liability operating lease long term   213,996 
Total operating lease liabilities  $360,565 
      
Finance Leases     
Equipment  $166,255 
Accumulated depreciation   (32,816)
Net Property  $133,439 
Long-term debt due within one year   77,994 
Long-Term Debt   29,493 
Total finance lease liabilities  $107,487 

 

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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, 2019 
Weighted-average remaining lease term (years)     
Operating leases   3.7 
Finance leases   1.9 
Weighted-average discount rate     
Operating leases   13.0%
Finance leases   13.9%

 

The following table provides the maturities of lease liabilities at June 30, 2019:

 

Maturity of Lease Liabilities at June 30, 2019   Operating
Leases
    Finance
Leases
 
2019   $ 114,908     $ 80,780  
2020     132,317       15,769  
2021     106,861       15,769  
2022     47,673       10,404  
2023     24,000       1,287  
2024 and thereafter     10,000       -  
Total future undiscounted lease payments   $ 435,759     $ 124,009  
Less: Interest     (75,194 )     (16,522 )
Present value of lease liabilities   $ 360,565     $ 107,487  

 

At June 30, 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 

 

During the six months ended June 30, 2019, the Company entered into two new leases for forklifts that were determined to be finance leases under ASC 842. One lease is for a period of three years, with monthly payments of $671 and the second lease is for a period of 48 months with monthly payments of $644. The Company capitalized an asset and right of use finance lease liability of $43,888 related to these finance leases.

 

The Company also entered into two new operating leases for two vehicles. Each lease is for a period of four years, with monthly payments of $875 per vehicle. The Company recognized initial right of use assets and right of use operating lease liabilities of $65,266 in total for these vehicles. The Company also acquired an operating lease for office and warehouse space as part of the Trinity Acquisition and recognized a right of use asset and operating lease liability of $87,900 as part of the purchase price accounting. This lease is for a term of 60 months with a monthly payment of $2,000. The lessor is the seller of the Trinity business acquired in June 2019 and the holder of the Preferred Stock.

 

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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 June 30, 2019 and December 31, 2018 amounts due under this arrangement are $0 and $21,000, respectively.

 

The Company had engaged the services of Mr. John Boylan from February 2019 through July 2019, whereby Mr. Boylan will be paid as a consultant to the Company in connection with its mergers and acquisition strategy, whereby Mr. Boylan provided 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.

 

In June 2019 Mr. Flemming, Mr. Boylan and Mr. Christian were each awarded a bonus of $12,500 related to their efforts in closing the Trinity acquisition.

 

NOTE 15 – SUBSEQUENT EVENTS

 

In July 2019, the Company issued Roth Capital Partners 12,500 shares of its restricted common stock in connection with their advisory fee on behalf of the Company’s acquisition of Trinity Services LLC which closed June 26, 2019.

 

On July 26, 2019, 100,000 stock options were granted to each of the independent board members Messer’s Paulson, Gilbert and Villarreal for the right to acquire SMG common stock at a fixed exercise price of $0.45 per share anytime over five years. The board member compensation grant of options is for one year’s service July 2019 through June 2020.

 

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 $123,818. 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 of SMG restricted common stock.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Cautionary Note Regarding Forward-Looking Statements

 

Unless otherwise indicated, the terms “SMG Industries,” “SMG,” the “Company,” “we,” “us,” and “our” refer to SMG Industries Inc., and our wholly-owned subsidiaries MG Cleaners LLC, Momentum Water Transfer Services LLC, Jake Oilfield Solutions LLC, Trinity Services LLC and our SMG Oil Tools division.  In this Quarterly Report on Form 10-Q, we may make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms.  These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of SMG Industries Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. There are a number of factors that could negatively affect our business and the value of our securities, including, but not limited to, fluctuations in the market price of our common stock; changes in our plans, strategies and intentions; changes in market valuations associated with our cash flows and operating results; the impact of significant acquisitions, dispositions and other similar transactions; our ability to attract and retain key employees; changes in financial estimates or recommendations by securities analysts; asset impairments; decreased liquidity in the capital markets; and changes in interest rates. Such factors could materially affect our Company's future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to our Company. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues that we might face.  We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission (“SEC”) that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business including the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Overview

 

We are a growth-oriented oilfield services company that operates throughout the Southwest United States. Through our wholly-owned operating subsidiaries, we offer an expanding suite of products and services across the 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. Our SMG rental division includes an inventory of approximately 800 bottom hole assembly (BHA) oil tools such as stabilizers, drill collars, crossovers and bit subs rented to oil companies and directional drillers. Our frac water management division, known as Momentum Water Transfer Services LLC, focuses on the completion or fracing market segment providing high volume above ground equipment and temporary infrastructure to route water used on location for fracing. Trinity Services LLC performs lease road, location build, pad drilling sites and frac pits for its customers. Trinity also performs well site services with work-over and swab rigs.

 

We are headquartered in Houston, Texas with facilities in Odessa, Carthage, Waskom and Alice, Texas. Our web sites are  www.SMGIndustries.com, www.MGCleanersllc.com and www.MomentumWTS.com.

 

On September 19, 2017, we entered into an exchange agreement with all of the members of MG Cleaners, LLC (“MG”) pursuant to which we acquired one hundred percent of the issued and outstanding membership interests of MG (“MG Membership Interests”) pursuant to which MG became our wholly-owned subsidiary. In connection with the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash ($250,000 in cash at closing) to the MG Members.

 

The acquisition of MG Cleaners LLC by SMG Industries Inc. (formerly SMG Indium Resources Ltd.) on September 19, 2017, was accounted for as a reverse acquisition with MG Cleaners as the acquirer of SMG Industries for accounting purposes. The financial statements presented in this Annual Report on Form 10-K are presented as a continuation of the operations of MG Cleaners LLC with one adjustment to retroactively adjust the membership interests of MG Cleaners LLC to reflect the legal capital of SMG Industries prior to the September 19, 2017 acquisition, and one adjustment to eliminate the accumulated deficit of SMGI in accordance with the recapitalization of MG.

 

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On September 27, 2018, we acquired approximately 800 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs, including both non-mag and steel units in exchange for the issuance of an aggregate of one million (1,000,000) shares of our common stock to the sellers.

 

On December 7, 2018, we acquired one hundred percent of the issued and outstanding membership interests (“MWTS Membership Interests”) of Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”) pursuant to which MWTS became our wholly-owned subsidiary (the “MWTS Acquisition”). In connection with the MWTS Acquisition, we issued 550,000 shares of our common stock, paid $361,710 in cash to the MWTS Members and issued a note payable to the MWTS Member in the aggregate amount of $800,000.

 

On June 26, 2019, we acquired one hundred percent of the issued and outstanding membership interests (“Trinity Membership Interests”) of Trinity Services LLC, a Louisiana limited liability company (“Trinity”) pursuant to which Trinity became our wholly-owned subsidiary (the “Trinity Acquisition”). In connection with the Trinity Acquisition, we issued 2,000 shares of our 3% Series A Secured Convertible Preferred Stock (“Preferred Stock”), stated value $1,000 per share, paid $500,000 in cash to the Trinity Member, and we assumed approximately $850,000 in notes related to equipment owned by Trinity.

 

As a result of our acquisition of MG, MWTS, Trinity and the downhole oil tools, our growth-oriented oilfield service company can expand the service lines and market segments of which it focuses in the onshore domestic United States market. Through our operating subsidiaries we offer the following products and services:

 

for the Drilling Market Segment;

lease road build drilling pad site development and reserve pit construction

rig wash of drilling rigs

product sales including degreasers, surfactants and detergents, that remove oil based mud from drilling rigs

rig cleaning equipment sales including industrial pressure washers

parts sales for our installed base on equipment,

Mechanic and service repair crews for cleaning equipment on location for drilling rig operators

rentals of equipment on day rates or other terms for drilling rig contractors to clean rigs

Down hole bottom hole assembly (BHA) tools such as stabilizers, drill collars and cross over subs to directional driller and operators.

For the Completions Market Segment;

Frac water transfer services that provide for sending high volumes of water from a source such as a pond, river, lake or frac pit to a frac location using miles of lay flat frac hose, pumps and equipment.

Frac pit construction

 

For the Production Market Segment;

Well site services including work over rigs and swab rigs that perform jobs to keep oil and gas operators wells running

 

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 13 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.

 

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Critical Accounting Policies and Estimates

 

The preparation for financial statements and related disclosures in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For a description of our significant accounting policies, see the Company’s audited financial statements for the year ended December 31, 2018, included in the Company’s Form 10-K as filed with the SEC on April 1, 2019. Of these policies, the following are considered critical to an understanding of the Company’s condensed financial statements as they require the application of the most difficult, subjective and complex judgments: (1) Use of Estimates, (2) Share-Based Payment Arrangements, and (3) Income Taxes. Management will base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

 

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Results of Operations

 

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

 

Our sales for the three months ended June 30, 2019 were $1,094,181, a decrease of approximately 6%, from $1,167,305 for the three months ended June 30, 2018. The decrease in revenues for the three months ended June 30, 2019 was primarily attributable from reduced rig wash revenues in the West Texas market and decreased mechanic service revenues in East Texas partially offset by increased machine and product sales. The Trinity Services acquisition on June 26, 2019 allowed for three days of revenue during the period and is anticipated to provide ongoing revenues for future quarters.

 

During the three months ended June 30, 2019, cost of sales increased as a percentage of sales to 81.9% of revenues, or $896,600, compared to 55.6% of revenues or $649,394, for the comparable 2018 period. The increase in cost of sales as a percentage of revenues is primarily the result of higher vendor rental expense and equipment repairs and maintenance, higher contract labor in connection with the transition costs related to relocating portions of the frac water operations to East Texas, higher parts costs imposed by federal tariffs, higher third party costs, wage inflation with direct personnel, increased freight, shipping and fuel expenses along with increased depreciation expense from added equipment with our rental fleet.

 

For the three months ended June 30, 2019, selling, general and administrative expenses increased to $824,814, an increase of $231,674, from $593,140 for the three months ended June 30, 2018. This increase in selling, general and administrative expenses in the second quarter of 2019 over the second quarter of 2018 was primarily due to higher professional fees, one-time acquisition costs, operating lease expense from new accounting treatment, increased wage expense from an M&A advisor, and added insurance coverage and expenses. The remaining increase was attributable to non-cash stock based compensation, and deferred financing costs during the second quarter 2019, partially offset by lower travel and entertain expenses and truck and auto expense.

 

Other expense, net was $353,677, an increase of $280,791 for the three months ended June 30, 2019 compared to the second quarter in 2018. The increase in other expense during the three months ended June 30, 2019 resulted from higher interest expense with our revolving line of credit, funding agreements and notes payable, and loss on settlement of liabilities compared to the three months ended June 30, 2018.

 

During the three months ended June 30, 2019 we incurred a net loss of $980,910, or $0.07 per basic and diluted earnings per share. For the three months ended June 30, 2018 we incurred a net loss of $148,115 or $0.01 per basic and diluted earnings per share. The net loss in the quarter ended June 30, 2019 resulted primarily from lower revenues, lower gross margins from higher cost of sales expenses, increased sales, general and administrative expenses, including higher professional fees and transaction expenses in connection with the late June 2019 acquisition, and increased interest expense, compared to the second quarter 2018. The basic weighted average number of shares of common stock outstanding was 13,935,281 and 10,234,123 for the three months ended June 30, 2019 and 2018, respectively.

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

Our sales for the six months ended June 30, 2019 were $2,846,885, an increase of 31%, from $2,165,483 for the six months ended June 30, 2018. The increase in revenue for the six months ended June 30, 2019 is primarily attributable to sales growth in equipment rental income and increased machine and product sales in the West Texas market. Additionally, the frac water operations, acquired in late 2018, contributed revenues in 2019, not included in the comparable six month period ended June 30, 2018.

 

During the six months ended June 30, 2019, cost of sales increased as a percentage of sales to 83.5% of revenues, or $2,377,315, compared to 53.5% of revenues or $1,159,509, for the comparable 2018 period. The increase in cost of sales as a percentage of revenues is primarily the result of one-time cost overruns and related third party equipment repairs totaling approximately $390 thousand with a South Texas frac water services project, expenses with discontinuing the lower margin rig supply business, negative inventory adjustments, higher vendor rental expense, higher contract labor in connection with the impact of transitional costs related to the frac water operations, higher parts costs imposed by federal tariffs, wage inflation with direct personnel, increased freight, shipping and fuel expenses along with increased depreciation expense from added equipment with our rental fleet.

 

For the six months ended June 30, 2019, selling, general and administrative expenses increased to $1,663,438, an increase of $684,456, from $1,014,982 for the six months ended June 30, 2018. This increase in selling, general and administrative expenses in the six month period ended June 30, 2019 over the six month period ended June 30, 2018 was primarily due to higher professional fees, one-time acquisition costs, operating lease expense from new accounting treatment, increased wage expense from an M&A advisor, added insurance coverage and expense. The remaining increase was attributable to non-cash stock based compensation, and deferred financing costs during the second quarter 2019, partially offset by lower travel and entertainment expenses, and truck and auto expense.

 

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Other expense, net was $497,304, an increase of $377,940 for the six months ended June 30, 2019 compared to the comparable period in 2018. The increase in other expense during the six months ended June 30, 2019 resulted from higher interest expense with our revolving line of credit, funding agreements and notes payable, and loss on settlement of liabilities, compared to the six months ended June 30, 2018.

 

During the six months ended June 30, 2019 we incurred a net loss of $1,691,172, or $0.13 per basic and diluted earnings per share. For the six months ended June 30, 2018 we incurred a net loss of $128,372 or $0.01 per basic and diluted earnings per share. The net loss in the six month period ended June 30, 2019 resulted primarily from lower gross margins from higher cost of sales expenses, increased sales, general and administrative expense, and increased interest expense, compared to the comparable period in 2018. The basic weighted average number of shares of common stock outstanding was 13,068,921 and 9,808,914 for the six months ended June 30, 2019 and 2018, respectively.

 

Liquidity and Capital Resources

 

As of June 30, 2019, our total assets were $8,009,002, comprised of $112,046 in cash, $2,179,419 in accounts receivable, $139,526 in inventory, $30,000 in assets held for sale, other current assets of $206,609, $4,464,336 in net property and equipment, and $315,157 in net intangible assets. This is an increase in total assets of $4,482,555 over the total assets at December 31, 2018 of $3,526,447. As of June 30, 2019, we have a working capital deficit of $2,607,918, compared to a working capital deficit of $1,421,715 at December 31, 2018.

 

During the six months ended June 30, 2019, we had cash used in operating activities of $445,260 compared to $317,628 of cash used in operating activities for the six months ended June 30, 2018. The net cash used in operating activities for the six months ended June 30, 2019 consists primarily of our net loss, changes in accounts receivable, and deferred revenue, partially offset by increases to accounts payable, depreciation and amortization, as well as amortization of deferred financing costs, accrued expenses and other liabilities. During the six months ended June 30, 2018, we had cash used in operating activities of $317,628, primarily the result of our net loss, changes in our accounts receivable, accounts payable related party, and prepaid expenses, partially offset by our amortization of deferred financing costs and depreciation and amortization, and changes in accounts payable.

 

During the six months ended June 30, 2019, we had net cash used in investing activities of $565,733 from cash paid for the acquisition of Trinity Services and cash paid for the purchase of equipment during the period. There was $54,965 in net cash used in investing activities in the comparable 2018 period resulting from cash paid for the purchase of equipment.

 

Net cash provided by financing activities was $1,121,431 for the six months ended June 30, 2019, compared to net cash provided by financing activities of $415,307 for the six months ended June 30, 2018. Our net cash provided by financing activities for the six months ended June 30, 2019 resulted primarily from the net proceeds from our secured line of credit of $722,367, proceeds from sales of our common stock of $359,000, the proceeds from the issuance of notes payable of $280,000, which was partially offset by payments on notes payable of $267,473 and payments on note payable related party of $146,021, and payments on right of use liabilities – finance leases of $30,681.

 

Our net increase in cash for the six months ended June 30, 2019 was $110,438, as compared to a net cash increase of $42,714 in the six months ended June 30, 2018.

 

At June 30, 2019 and December 31, 2018, we had cash and cash equivalents of $112,046 and $1,608, respectively. Based on the company’s recent acquisition, current revenue, and anticipated gross margin improvement, along with anticipated new growth from cross selling our customers, we believe cash flow will improve during the remainder of 2019.

 

Our cash flows from operations and our available capital, including the accounts receivable line of credit with Catalyst Financial established in June 26, 2019 are presently sufficient to sustain our current level of operations for the next twelve months. At June 30, 2019 this line of credit had drawn approximately $1,409,000. Although our line of credit has no specific cap of an amount it functions as a percentage of eligible accounts receivables. Additionally, we believe we will need to raise additional funds in order to meet the growth, capital expenditures and acquisitions planned for our business through the next twelve months. Currently we are not a party to any binding agreement with respect to potential investments in, or acquisitions of businesses, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

 

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Historically, we have funded our capital expenditures internally through cash flow, leasing and financing arrangements. We intend to continue to fund future capital expenditures through cash flow, as well as through capital available to us pursuant to our line of credit, capital from the sale of our equity securities and through commercial leasing and financial programs.

 

Off-Balance-Sheet Transactions

 

We are not party to any off-balance-sheet transactions.

 

Contractual Commitments

 

None

 

Item 3.  Qualitative and Quantitative Disclosures about Market Risk.

 

We are a smaller reporting company and, therefore, we are not required to provide information required by this item.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures: Our management carried out an evaluation of the effectiveness and design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and interim Chief Financial Officer has concluded that, at June 30, 2019, such disclosure controls and procedures were not effective.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Interim Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Controls: Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Interim Chief Financial Officer has concluded, based on his evaluation as of the end of the period covered by this Quarterly Report that our disclosure controls and procedures were not sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting that occurred during the three month period ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

None.

 

Item 1A.Risk Factors.

 

We are a smaller reporting company and, therefore, we are not required to provide information required by this item.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the three month period ended June 30, 2019, the Company sold an aggregate of 500,000 shares of its restricted common stock to accredited investors at a price per share of $0.25. The shares were issued to the investors in a private transaction in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Proceeds from the restricted common stock sales were used for working capital and general corporate purposes.

 

Item 3.Defaults upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

Item 5.Other Information.

 

None.

 

Item 6.Exhibits.

 

Exhibit No.   Description of Document
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
     
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
     
32.1*   Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
     
32.2*   Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
     
101.ins   XBRL Instance Document
     
101.sch   XBRL Taxonomy Extension Schema Document
     
101.cal   XBRL Taxonomy Calculation Linkbase Document
     
101.def   XBRL Taxonomy Definition Linkbase Document
     
101.lab   XBRL Taxonomy Label Linkbase Document
     
101.pre   XBRL Taxonomy Presentation Linkbase Document

 

*A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SMG Industries Inc.
    (Registrant)
     

August 14, 2019

  /s/    Matthew C. Flemming
Date   Matthew C. Flemming
    Chief Executive Officer and Interim Chief Financial Officer
    (Principal Executive Officer and Principal Financial Officer)

 

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