UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or | (IRS Employer Identification No.) |
(Address of Principal Executive Offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Ticker symbol(s) |
| Name of each exchange on which |
N/A | N/A |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer , a smaller reporting company, or an emerging growth 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 ☐ |
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Smaller reporting company | |
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| 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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of common stock, par value $0.001 per share, outstanding as of August 14, 2023, was
SMG INDUSTRIES, INC.
Table of Contents
2
Item 1. Financial Statements
SMG INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, | December 31, | |||||
| 2023 |
| 2022 | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Accounts receivable, net of allowance for credit losses of $ |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation of $ |
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Right of use assets - operating lease | | | ||||
Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accounts payable – related party | |
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Accrued expenses and other liabilities |
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Current portion of right of use liabilities - operating leases |
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Deferred revenue | — | | ||||
Secured line of credit |
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Current portion of unsecured notes payable |
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Current portion of secured notes payable, net |
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Current portion of convertible note, net |
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Current liabilities of discontinued operations | |
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Total current liabilities |
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Long term liabilities: |
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Convertible note payable, net |
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Notes payable - secured, net of current portion |
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Right of use liabilities - operating leases, net of current portion |
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Long term liabilities of discontinued operations | |
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Total liabilities |
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Commitments and contingencies |
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Stockholders’ deficit |
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Preferred stock | ||||||
Series A preferred stock - $ |
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Series B convertible preferred stock - $ | ||||||
Common stock - $ |
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Additional paid in capital |
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Accumulated deficit |
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Total stockholders’ deficit |
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Total liabilities and stockholders’ deficit | $ | | $ | | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
SMG INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months ended June 30, 2023 and 2022
(Unaudited)
Three months ended | Six months ended | |||||||||||
| June 30, 2023 |
| June 30, 2022 |
| June 30, 2023 |
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REVENUES | $ | |
| $ | | $ | | $ | ||||
COST OF REVENUES |
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GROSS PROFIT |
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OPERATING EXPENSES: |
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Selling, general and administrative |
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Total operating expenses |
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INCOME (LOSS) FROM OPERATIONS |
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OTHER INCOME (EXPENSE) |
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Interest expense, net |
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Other expense | ( | — | ( | — | ||||||||
Other income | | | | — | ||||||||
Gain on disposal of assets | — |
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Total other income (expense) | ( |
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NET LOSS FROM CONTINUING OPERATIONS | ( | ( | ( | ( | ||||||||
Loss from discontinued operations | ( | ( | ( | ( | ||||||||
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NET LOSS | $ | ( |
| $ | ( | $ | ( | $ | ( | |||
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Net loss per common share |
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Continuing operations | $ | ( |
| $ | ( | $ | ( | $ | ( | |||
Discontinued operations | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss attributable to common shareholders | $ | ( |
| $ | ( | $ | ( | $ | ( | |||
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Weighted average common shares outstanding |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
SMG INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the six months ended June 30, 2023 and 2022
(Unaudited)
Additional | |||||||||||||||
Common stock | Paid In | Accumulated | |||||||||||||
| Shares |
| Value |
| Capital |
| Deficit |
| Total | ||||||
Balances at December 31, 2022 |
| | $ | | $ | | $ | ( | $ | ( | |||||
Cumulative-effect adjustment upon adoption of ASU 2020-06 | — | — | ( |
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Share based compensation | — | — | | — | | ||||||||||
Shares issued for deferred financing costs | | | | — | | ||||||||||
Shares issued for debt extension | | | | | | ||||||||||
Net loss | — | — | — | ( | ( | ||||||||||
Balances at March 31, 2023 | | | | ( | ( | ||||||||||
Share based compensation | — | — | | — | | ||||||||||
Net loss | — | — | — | ( | ( | ||||||||||
Balances at June 30, 2023 | | $ | | $ | | $ | ( | $ | ( | ||||||
Balances at December 31, 2021 | | $ | | $ | | $ | ( | $ | ( | ||||||
Shares issued for deferred financing costs | | | | — | | ||||||||||
Share based compensation | — | — | | — | | ||||||||||
Net loss | — | — | — | ( | ( | ||||||||||
Balances at March 31, 2022 | | | | ( | ( | ||||||||||
Share based compensation | — | — | | — | | ||||||||||
Net loss | — | — | — | ( | ( | ||||||||||
Balances at June 30, 2022 |
| | $ | | $ | | $ | ( | $ | ( | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
SMG INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2023 and 2022
(Unaudited)
June 30, | June 30, | |||||
| 2023 |
| 2022 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss from continuing operations | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Share based compensation |
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Depreciation and amortization |
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Amortization of deferred financing costs |
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Shares issued for debt extension | | — | ||||
Amortization of right of use assets - operating leases |
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Bad debt expense |
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Gain on disposal of assets |
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Changes in: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Other assets |
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Accounts payable |
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Accounts payable - related party |
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Accrued expenses and other liabilities |
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Right of use operating lease liabilities |
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Deferred revenue |
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Net cash provided by (used in) operating activities from continuing operations | | ( | ||||
Net cash used in operating activities from discontinued operations | ( | — | ||||
Net cash provided by (used in) operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Cash proceeds from disposal of property and equipment |
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Cash paid for purchase of property and equipment |
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Net cash provided by (used in) investing activities from continuing operations | ( | | ||||
Net cash used in investing activities from discontinued operations | — | — | ||||
Net cash provided by( used in) investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds (payments) on secured line of credit, net |
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Proceeds from notes payable | |
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Payments on notes payable |
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Proceeds from convertible notes payable |
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Net cash provided by (used in) financing activities from continuing operations | ( | | ||||
Net cash provided by (used in) financing activities from discontinued operations | — | — | ||||
Net cash provided by (used in) financing activities |
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NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | | $ | | ||
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Supplemental disclosures: |
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Cash paid for income taxes | $ | — | $ | — | ||
Cash paid for interest | $ | | $ | | ||
Noncash investing and financing activities | ||||||
Prepaid expenses financed with note payable | $ | | $ | | ||
Shares issued for deferred financing costs | $ | | $ | | ||
Note receivable for property and equipment | $ | | $ | | ||
Equipment financed with note payable | $ | | $ | | ||
Convertible notes payable issued to settle accounts payable and accrued expenses | $ | | $ | — | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
SMG INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BACKGROUND AND BASIS OF PRESENTATION
SMG Industries Inc. (“we”, “our”, the “Company” or “SMG”) is a corporation established pursuant to the laws of the State of Delaware on January 7, 2008. The Company’s original business was the acquisition and stockpile of a rare metal known as Indium used in cell phones and other industrial applications. The Company eventually sold its stockpile and distributed most of the proceeds to its stockholders via special dividends and share repurchases.
The Company is a growth-oriented transportation services company focused on the domestic infrastructure logistics market. Through several of the Company’s wholly-owned subsidiaries branded as the “5J Transportation Group,” it offers specialized heavy haul, super heavy haul, flatbed, brokerage, drilling rig mobilization and driveaway services. 5J’s (as defined below) engineered permitted jobs can support up to
SMG is headquartered in Houston, Texas with facilities in Floresville, Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill, South Carolina.
The accompanying unaudited interim consolidated financial statements of SMG 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 consolidated financial statements and notes thereto for the years ended December 31, 2022 and 2021 in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2023. 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 consolidated financial statements which would substantially duplicate the disclosures contained in the Annual Report on Form 10-K have been omitted.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Company prepares its consolidated financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly subsidiaries, 5J Trucking LLC, 5J Oilfield Services LLC, 5J Specialized LLC, 5J Transportation LLC, 5J Logistics Services LLC and 5J Driveaway LLC (together referred to as “5J “ or “5J Transportation Group”), Momentum Water Transfer Services, LLC, Jake Oilfield Solutions LLC (“Jake”) and Trinity Services LLC (“Trinity”), all of which have second quarter ends of June 30 and fiscal year end of December 31. All intercompany accounts, balances and transactions have been eliminated in the consolidation.
Cash and cash equivalents
The Company considers all highly liquid accounts with original maturities of three months or less at the date of acquisition to be cash equivalents. Periodically, the Company may carry cash balances at financial institutions in excess of the federally insured limit of $250,000. The amount in excess of the FDIC insurance as of June 30, 2023 was $
The following table provides a reconciliation of cash, cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows.
June 30, 2023 | December 31, 2022 | |||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
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Total | $ | | $ | | ||
7
Amounts presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical basis of assets, liabilities, results of operations, and cash flows of MG Cleaners LLC (“MG”) and Trinity. The discontinued operations exclude general corporate allocations.
Fair Value of Financial Instruments
The carrying value of short-term instruments, including cash, accounts receivable, accounts payable and accrued expenses, and short-term notes approximate fair value due to the relatively short period to maturity for these instruments. The long-term debt approximate fair value because the related rates of interest approximate current market rates.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:
Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3: inputs to the valuation methodology are unobservable and significant to the fair value
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
As of June 30, 2023 and December 31, 2022, the Company did not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
Discontinued Operations
In December 2020 we sold MG and decided to cease the operations of Trinity. An entity that is disposed of by sale or ceasing of operations is reported as discontinued operations if the transaction represents a strategic shift that will have a major effect on an entity’s operations and financial results. As such, MG and Trinity are reported as discontinued operations.
Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities of discontinued operations in the Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022. The results of discontinued operations are aggregated and presented separately in the Consolidated Statements of Operations as net income from discontinued operations for the three and six months ended June 30, 2023 and 2022. The cash flows of the discontinued operations are reflected as cash flows of discontinued operations within the Company’s Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022.
Basic and Diluted Net Loss per Share
The Company presents both basic and diluted net loss per share on the face of the consolidated 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 using the treasury-stock method, and as result of the adoption of Accounting Standards Update (“ASU”) 2020-06, using the if-converted method for outstanding convertible instruments. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For the three and six months ended June 30, 2023,
8
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under the CECL model entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. Further, ASU 2016-13 made certain targeted amendments to the existing impairment standards for available for sale debt securities. An entity will apply the amendments in ASU 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company determined that the update applied to its trade accounts receivable and adopted the guidance on January 1, 2023 with no material impact to the Company’s financial statements or results of operations. The Company estimates its expected credit losses based on the expected losses on its receivables based on a variety of data, including current economic conditions in the Company’s industry and the credit status of the Company’s customers.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in Accounting Standards Codification (“ASC”) 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The Company adopted this guidance on January 1, 2023, which resulted in a reduction to additional paid in capital of $
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. Entities should apply the amendments prospectively and early adoption is permitted. The Company adopted this standard on January 1, 2023. The adoption of ASU 2021-08 did not have a material impact on the Company's consolidated financial statements and related disclosures.
NOTE 3 — GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, no adjustments to the consolidated financial statements have been made to account for this uncertainty. The Company concluded that its recurring net losses and its negative working capital are conditions that raise substantial doubt about the Company’s ability to continue as a going concern. The Company plans to continue to generate additional revenue and improve cash flows from operations in connection with its heavy haul, super heavy haul, drilling rig mobilization, commodity freight, brokerage services and driveway services revenue streams.
NOTE 4 — REVENUE AND CONCENTRATIONS
Disaggregation of revenue
All of the Company’s revenue from continuing operations is currently generated from services. As such no further disaggregation of revenue information is provided. All revenues are currently in the southern region of the United States.
9
Customer Concentration and Credit Risk
During the three and six months ended June 30, 2023 and 2022, no customers exceeded 10% of revenue.
Vendor Concentration Risk
NOTE 5 — PROPERTY AND EQUIPMENT, NET
Property and equipment at June 30, 2023 and December 31, 2022 consisted of the following:
| June 30,2023 |
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Equipment | $ | | $ | | ||
Trucks and Trailers | | | ||||
Downhole oil tools |
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Vehicles |
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Buildings | | | ||||
Furniture, fixtures and other |
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Property and equipment, gross |
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Less: accumulated depreciation |
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Property and equipment, net | $ | | $ | | ||
Depreciation expense for the three months ended June 30, 2023 and 2022 was $
NOTE 6 — ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses as of June 30, 2023 and December 31, 2022 included the following:
| June 30,2023 |
| December 31, 2022 | |||
Payroll and payroll taxes payable | $ | | $ | | ||
State and local tax payable |
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Interest payable | | | ||||
Accrued operational expenses | | | ||||
Accrued general and administrative expenses | | | ||||
Other |
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Total Accrued Expenses | $ | | $ | | ||
10
NOTE 7 — NOTES PAYABLE
Notes payable included the following as of June 30, 2023 and December 31, 2022:
| June 30, |
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2023 | 2022 | |||||
Secured notes payable: |
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Secured note payable issued December 7, 2018 to a shareholder, bearing interest of | $ | | $ | | ||
Secured note payable issued December 7, 2018 to a shareholder, bearing interest of |
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Secured note payable issued December 7, 2018, bearing interest of | | | ||||
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Secured note payable issued on December 7, 2018 related to the acquisition of Momentum Water Transfer Services LLC, bearing interest of |
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Secured note payable issued May 1, 2019 to a shareholder, bearing interest of |
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Secured note payable issued June 17, 2019 to a shareholder, bearing interest of |
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Secured note payable with a related party issued February 27, 2020 in connection with the 5J acquisition, bearing interest of |
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Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from | — | | ||||
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Secured note payable with a related party issued on February 27, 2020, bearing interest of | — | | ||||
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Secured promissory notes for Jake, SMG Industries, Inc, and 5J Trucking LLC, with Small Business Administration Economic Injury Disaster Loans, bearing interest |
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Secured promissory note issued on June 20, 2020 in connection with an equipment purchase. The note is due and payable in | | | ||||
Secured promissory note issued on January 27, 2022. The note is due on May 1, 2026 and secured by machinery and equipment owned by the Company. The Company paid an initial installment of $ | | | ||||
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Secured promissory note issued on July 11, 2022. The note is due on June 8, 2027 and secured by equipment owned by the Company. The Company will pay monthly payments of approximately $ |
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Secured promissory note issued on November 30, 2022. The note is due and payable in | | | ||||
Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from | | — | ||||
Secured promissory note with Amerisource, a related party, issued on September 7, 2021 in the amount of $ | | | ||||
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Less current maturities |
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Long term secured notes payable, net of current maturities | $ | $ | | |||
11
Effective January 1, 2023, the Company issued
During the six months ended June 30, 2023, the Company entered into five new secured notes payable. The notes are due from April 2027 through March 2029 and secured by equipment owned by the Company. The Company will pay monthly payments ranging from $
Notes Payable – Unsecured
| June 30, |
| December 31, | |||
2023 | 2022 | |||||
Insurance premium financing note with original principal of $ | $ | — | $ | | ||
Insurance premium financing note with original principal of $ | — | | ||||
Unsecured note payable with a shareholder. Note issued on August 10, 2018 for $ | | | ||||