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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| SMG Industries Inc (CE) | USOTC:SMGI | OTCMarkets | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.000199 | -99.50% | 0.000001 | 0.000001 | 0.000001 | 0.000001 | 10,000 | 15:34:41 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
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
(Exact name of registrant as specified in its charter)
Delaware | 51-0662991 |
(State or other jurisdiction of incorporation or | (IRS Employer Identification No.) |
20475 State Hwy 249, Suite 450 | |
Houston, Texas | 77070 |
(Address of Principal Executive Offices) | (Zip Code) |
(713) 955-3497
(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 ☒ No ☐
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). ☒ 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 ☒ | Smaller reporting company ☒ |
|
|
| 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 ☒
The number of shares of common stock, par value $0.001 per share, outstanding as of May 15, 2023, was 48,747,530.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Ticker symbol(s) |
| Name of each exchange on which |
None | N/A | N/A |
SMG INDUSTRIES, INC.
Table of Contents
2
Item 1. Financial Statements
SMG INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
ASSETS |
|
|
|
| ||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | 313,595 | $ | 127,225 | ||
Restricted cash | 1,105,818 | 1,105,818 | ||||
Accounts receivable, net of allowance for credit losses of $1,244,852 and $855,832 as of March 31, 2023 and December 31, 2022, respectively |
| 12,565,878 |
| 12,185,792 | ||
Prepaid expenses and other current assets |
| 2,100,032 |
| 2,308,067 | ||
Total current assets |
| 16,085,323 |
| 15,726,902 | ||
Property and equipment, net of accumulated depreciation of $16,116,896 and $15,329,817 as of March 31, 2023 and December 31, 2022, respectively |
| 4,950,858 |
| 5,414,830 | ||
Right of use assets - operating lease | 615,051 | 734,504 | ||||
Other assets |
| 227,801 |
| 305,451 | ||
Total assets | $ | 21,879,033 | $ | 22,181,687 | ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | 3,501,082 | $ | 3,014,598 | ||
Accounts payable – related party | 853,092 |
| 565,603 | |||
Accrued expenses and other liabilities |
| 3,452,804 |
| 2,850,547 | ||
Current portion of right of use liabilities - operating leases |
| 688,803 |
| 650,945 | ||
Deferred revenue | — | 128,000 | ||||
Secured line of credit |
| 9,699,648 |
| 10,623,887 | ||
Current portion of unsecured notes payable |
| 2,947,790 |
| 2,465,445 | ||
Current portion of secured notes payable, net |
| 7,913,546 |
| 6,990,486 | ||
Current portion of convertible note, net |
| 8,679,893 |
| 7,327,288 | ||
Current liabilities of discontinued operations | 185,994 |
| 200,994 | |||
Total current liabilities |
| 37,922,652 |
| 34,817,793 | ||
Long term liabilities: |
|
|
|
| ||
Convertible note payable, net |
| 491,926 |
| — | ||
Notes payable - secured, net of current portion |
| 12,508,420 |
| 13,307,309 | ||
Right of use liabilities - operating leases, net of current portion |
| 169,361 |
| 278,137 | ||
Long term liabilities of discontinued operations | 289,321 |
| 300,586 | |||
Total liabilities |
| 51,381,680 |
| 48,703,825 | ||
Commitments and contingencies |
|
|
|
| ||
Stockholders’ deficit |
|
|
|
| ||
Preferred stock 1,000,000 shares authorized: | ||||||
Series A preferred stock - $0.001 par value; 2,000 shares authorized; 0 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively |
|
| ||||
Series B convertible preferred stock - $0.001 par value; 6,000 shares authorized; 0 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | ||||||
Common stock - $0.001 par value; 250,000,000 shares authorized; 48,747,530 and 39,180,297 shares and at March 31, 2023 and December 31, 2022, respectively |
| 48,748 |
| 39,181 | ||
Additional paid in capital |
| 15,131,534 |
| 18,081,457 | ||
Accumulated deficit |
| (44,682,929) |
| (44,642,776) | ||
Total stockholders’ deficit |
| (29,502,647) |
| (26,522,138) | ||
Total liabilities and stockholders’ deficit | $ | 21,879,033 | $ | 22,181,687 | ||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
SMG INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2023 and 2022
(Unaudited)
| March 31, 2023 |
| March 31, 2022 | |||
REVENUES | $ | 20,869,763 |
| $ | 16,181,053 | |
COST OF REVENUES |
| 18,240,360 |
|
| 14,725,105 | |
GROSS PROFIT |
| 2,629,403 |
|
| 1,455,948 | |
OPERATING EXPENSES: |
|
| ||||
Selling, general and administrative |
| 3,062,601 |
|
| 2,463,881 | |
| ||||||
Total operating expenses |
| 3,062,601 |
|
| 2,463,881 | |
LOSS FROM OPERATIONS |
| (433,198) |
|
| (1,007,933) | |
OTHER INCOME (EXPENSE) |
|
| ||||
Interest expense, net |
| (2,897,167) |
|
| (2,619,037) | |
Other income | 8,634 | — | ||||
Other expense | (203,474) |
|
| (9,048) | ||
Total other income (expense) | (3,092,007) |
|
| (2,628,085) | ||
|
| |||||
NET LOSS FROM CONTINUING OPERATIONS | (3,525,205) | (3,636,018) | ||||
Income (loss) from discontinued operations | (1,835) | 4,888 | ||||
NET LOSS | $ | (3,527,040) |
| $ | (3,631,130) | |
| ||||||
Net loss per common share |
|
| ||||
Continuing operations | (0.08) |
| (0.11) | |||
Discontinued operations | (0.00) | (0.00) | ||||
Net loss attributable to common shareholders | (0.08) |
| (0.11) | |||
|
|
|
| |||
Weighted average common shares outstanding |
|
| ||||
Basic |
| 45,503,728 |
|
| 34,311,688 | |
Diluted |
| 45,503,728 |
|
| 34,311,688 | |
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 three months ended March 31, 2023 and 2022
(Unaudited)
Additional | |||||||||||||||
common stock | Paid In | Accumulated | |||||||||||||
| Shares |
| Value |
| Capital |
| Deficit |
| Total | ||||||
Balances at December 31, 2022 |
| 39,180,297 | $ | 39,181 | $ | 18,081,457 | $ | (44,642,776) | $ | (26,522,138) | |||||
Cumulative-effect adjustment upon adoption of ASU 2020-06 | — | — | (4,694,664) |
| 3,486,887 | (1,207,777) | |||||||||
Share based compensation | — | — | 30,554 | — | 30,554 | ||||||||||
Shares issued for deferred financing costs | 3,008,246 | 3,008 | 540,128 | — | 543,136 | ||||||||||
Shares issued for debt extension | 6,558,987 | 6,559 | 1,174,059 | — | 1,180,618 | ||||||||||
Net loss | — | — | — | (3,527,040) | (3,527,040) | ||||||||||
Balances at March 31, 2023 | 48,747,530 | $ | 48,748 | $ | 15,131,534 | $ | (44,682,929) | $ | (29,502,647) | ||||||
Balances at December 31, 2021 | 33,731,162 | $ | 33,732 | $ | 16,845,873 | $ | (33,032,536) | $ | (16,152,931) | ||||||
Shares issued for deferred financing costs | 1,393,648 | 1,393 | 396,380 | — | 397,773 | ||||||||||
Share based compensation | — | — | 15,605 | — | 15,605 | ||||||||||
Net loss | — | — | — | (3,631,130) | (3,631,130) | ||||||||||
Balances at March 31, 2022 |
| 35,124,810 | $ | 35,125 | $ | 17,257,858 | $ | (36,663,666) | $ | (19,370,683) | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
SMG INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2023 and 2022
(Unaudited)
March 31, | March 31, | |||||
| 2023 |
| 2022 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
| ||
Net loss from continuing operations | $ | (3,525,205) | $ | (3,636,018) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
| ||
Share based compensation |
| 30,554 |
| 15,605 | ||
Depreciation and amortization |
| 787,079 |
| 1,357,401 | ||
Amortization of deferred financing costs |
| 326,372 |
| 1,497,032 | ||
Shares issued for debt extension | 1,180,618 | — | ||||
Amortization of right of use assets - operating leases |
| 119,453 |
| 114,044 | ||
Bad debt expense |
| 402,160 |
| 153,801 | ||
Changes in: |
|
|
|
| ||
Accounts receivable |
| (782,246) |
| (1,023,905) | ||
Prepaid expenses and other current assets |
| 862,472 |
| 1,484,614 | ||
Other assets |
| 77,650 |
| (598,625) | ||
Accounts payable |
| 736,483 |
| (1,656,889) | ||
Accounts payable - related party |
| 287,489 |
| 46,716 | ||
Accrued expenses and other liabilities |
| 602,257 |
| 50,256 | ||
Right of use operating lease liabilities |
| (70,918) |
| 29,037 | ||
Deferred revenue |
| (128,000) |
| — | ||
Net cash provided by (used in) operating activities from continuing operations | 906,218 | (2,166,931) | ||||
Net cash used in operating activities from discontinued operations | (28,100) | — | ||||
Net cash provided by (used in) operating activities |
| 878,118 |
| (2,166,931) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| ||
Cash proceeds from disposal of purchase of property and equipment |
| 1,500 |
| — | ||
Cash paid for purchase of property and equipment |
| (6,189) |
| (37,022) | ||
Net cash used in investing activities from continuing operations | (4,689) | (37,022) | ||||
Net cash used in investing activities from discontinued operations | — | — | ||||
Net cash used in investing activities |
| (4,689) |
| (37,022) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| ||
Payment of deferred financing costs |
| — |
| — | ||
Proceeds on secured line of credit, net | — | 180,830 | ||||
Payments on secured line of credit, net |
| (952,667) |
| — | ||
Proceeds from notes payable |
| 2,000,000 |
| 5,229,098 | ||
Payments on notes payable | (2,156,338) | (1,035,443) | ||||
Proceeds from convertible notes payable |
| 421,946 |
| — | ||
Net cash provided by (used in) financing activities from continuing operations | (687,059) | 4,374,485 | ||||
Net cash provided by (used in) financing activities from discontinued operations | — | — | ||||
Net cash provided by (used in) financing activities |
| (687,059) |
| 4,374,485 | ||
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| 186,370 |
| 2,170,532 | ||
| ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period |
| 1,233,043 |
| 1,116,176 | ||
| ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | 1,419,413 | $ | 3,286,708 | ||
| ||||||
Supplemental disclosures: |
|
|
|
| ||
Cash paid for income taxes | $ | — | $ | — | ||
Cash paid for interest | $ | 2,192,989 | $ | 1,144,694 | ||
Noncash investing and financing activities | ||||||
Prepaid expenses financed with note payable | $ | 645,194 | $ | 1,353,151 | ||
Shares issued for deferred financing costs | $ | 543,136 | $ | 397,773 | ||
Note receivable for property and equipment | $ | 9,243 | $ | 275,000 | ||
Equipment financed with note payable | $ | 327,661 | $ | 843,844 | ||
Convertible notes payable issued to settle accounts payable and accrued expenses | $ | 250,000 | $ | — | ||
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 engineered permitted jobs can support up to 500-thousand-pound loads including infrastructure cargo associated with bridge beams, wind energy, power generation components, compressors, and refinery and construction equipment.
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 Form 10-K filed 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 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 (“MWTS”), Jake Oilfield Solutions LLC (“Jake”) and Trinity Services LLC (“Trinity”), all of which have quarter ends of March 31 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 March 31, 2023 was $32,054. The Company has not experienced losses on these accounts and management believes, based upon the quality of the financial institutions, that the credit risk with regard to these deposits is not significant.
The following table provides a reconciliation of cash, cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.
March 31, 2023 | December 31, 2022 | |||||
Cash and cash equivalents | $ | 313,595 | $ | 127,225 | ||
Restricted cash |
| 1,105,818 |
| 1,105,818 | ||
Total | $ | 1,419,413 | $ | 1,233,043 | ||
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 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 since 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 March 31, 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 March 31, 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 months ended March 31, 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 three months ended March 31, 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 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 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 months ended March 31, 2023, 2,165,000 of stock options, 1,763,335 of warrants and 86,189,050 shares issuable from convertible notes were considered for their dilutive effects. For the three months ended March 31, 2022, 1,525,000 of stock options, 1,763,335 of warrants and 79,467,400 shares issuable from convertible notes were considered for their dilutive effects. As a result of the Company’s net losses for the three months ended March 31, 2023 and 2022, all potentially dilutive instruments were excluded as their effective would have been anti-dilutive.
8
Recent Accounting Pronouncements
In June 2016, the 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 (“AFS”) 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 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 $4,694,664, a decrease in accumulated deficit of $3,486,887 and a reduction of remaining unamortized debt discount of $1,207,777 related to the previously recognized beneficial conversion features on the Company’s convertible debt.
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 within 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.
Customer Concentration and Credit Risk
During the three months ended March 31, 2023 and 2022, no customers exceeded 10% of revenue. No customer accounted for 10% of accounts receivable as of March 31, 2023 and one customer accounted for approximately 14% of accounts receivable December 31, 2022.
9
Vendor Concentration Risk
One vendor represented approximately 14% of accounts payable at March 31, 2023 and one vendor represented approximately 11% of accounts payable at December 31, 2022.
NOTE 5 — PROPERTY AND EQUIPMENT, NET
Property and equipment at March 31, 2023 and December 31, 2022 consisted of the following:
| March 31,2023 |
| December 31, 2022 | |||
Equipment | $ | 6,743,890 | $ | 6,743,890 | ||
Trucks and Trailers | 11,327,494 | 11,331,834 | ||||
Downhole oil tools |
| 659,873 |
| 659,873 | ||
Vehicles |
| 1,562,483 |
| 1,236,323 | ||
Buildings | 493,529 | 493,529 | ||||
Furniture, fixtures and other |
| 280,485 |
| 279,198 | ||
| ||||||
Property and equipment, gross |
| 21,067,754 |
| 20,744,647 | ||
| ||||||
Less: accumulated depreciation |
| (16,116,896) |
| (15,329,817) | ||
| ||||||
Property and equipment, net | $ | 4,950,858 | $ | 5,414,830 | ||
Depreciation expense for the three months ended March 31, 2023 and 2022 was $787,079 and $1,357,401, respectively.
NOTE 6 — ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses as of March 31, 2023 and December 31, 2022 included the following:
| March 31,2023 |
| December 31, 2022 | |||
Payroll and payroll taxes payable | $ | 1,224,733 | $ | 1,240,397 | ||
State and local tax payable |
| 224,142 |
| 169,238 | ||
Interest payable | 365,165 | 400,049 | ||||
Accrued operational expenses | 1,596,441 | 871,720 | ||||
Accrued general and administrative expenses | 22,752 | 59,621 | ||||
Other |
| 19,571 |
| 109,522 | ||
| ||||||
Total Accrued Expenses | $ | 3,452,804 | $ | 2,850,547 | ||
10
NOTE 7 — NOTES PAYABLE
Notes payable included the following as of March 31, 2023 and December 31, 2022:
| March 31, |
| December 31, | |||
2023 | 2022 | |||||
Secured notes payable: |
|
|
|
| ||
| ||||||
Secured note payable issued December 7, 2018 to a shareholder, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. On September 9, 2022, the note was extended to December 31, 2022. In January 2023 the note was extended to June 30, 2023. | $ | 100,000 | $ | 100,000 | ||
Secured note payable issued December 7, 2018 to a shareholder, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. On September 9, 2022, the note was extended to December 31, 2022. In January 2023 the note was extended to June 30, 2023. |
| 100,000 |
| 100,000 | ||
|
|
| ||||
Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. On September 9, 2022, the note was extended to December 31, 2022. In January 2023 the note was extended to June 30, 2023. | 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. On September 29, 2022, the Company entered into a settlement of debt agreement and release. Per the agreement, the Company converted approximately $467,000 of debt into shares of common stock. The Company will pay six remaining quarterly payments of approximately $45,833 per month beginning in December 2022 through March 31, 2024, the amended maturity date. |
| 229,167 |
| 275,000 | ||
|
|
| ||||
Secured note payable issued May 1, 2019 to a shareholder, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. Note was extended to March 30, 2020. On September 9, 2022, the note was extended to December 31, 2022. In January 2023 the note was extended to June 30, 2023. |
| 100,000 |
| 100,000 | ||
|
|
| ||||
Secured note payable issued June 17, 2019 to a shareholder, bearing interest of 10% per year, due June 30, 2020. On September 9, 2022, the note was extended to December 31, 2022. In January 2023 the note was extended to June 30, 2023. |
| 80,000 |
| 80,000 | ||
|
|
|
| |||
Secured note payable with a related party issued February 27, 2020 in connection with the 5J acquisition, bearing interest of 10% per year, matured on February 1, 2023. Note is currently past due. |
| 2,000,000 |
| 2,000,000 | ||
| ||||||
Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from 5.32% to 5.5% maturing from January 2023 through March 2023. Note is currently past due. If a default notice is received the interest rate will range from 10.32% to 10.5% | 8,247 | 64,521 | ||||
|
|
| ||||
Secured note payable with a related party issued on February 27, 2020, bearing interest of 10.0% per year, which matured on March 1, 2023. | — | 77,856 | ||||
|
| |||||
Secured promissory notes for Jake, SMG Industries, Inc, and 5J Trucking LLC, with Small Business Administration Economic Injury Disaster Loans, bearing interest 3.75% annually and matures in June, August, and September 2050. |
| 388,776 |
| 389,339 | ||
|
|
| ||||
Secured promissory note issued on June 20, 2020 in connection with an equipment purchase. The note is due and payable in thirty-six monthly installments of $45,585 commencing on July 20, 2020 and the final installment is due on July 1, 2023. | 220,622 | 347,045 | ||||
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 $95,025, with monthly payments of approximately $15,275 per month beginning in June 2022 through maturity. | 506,210 | 538,613 | ||||
|
|
| ||||
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 $2,372 per month beginning in July 2022 through maturity. |
| 103,842 | 109,833 | |||
Secured promissory note issued on November 30, 2022. The note is due and payable in thirty-six monthly installments of $3,304 commencing on December 30, 2022 and the final installment is due on November 30, 2025. | 96,430 | 104,103 | ||||
Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from 9.54% to 9.89% maturing from March 2027 through February 2028. | 327,661 | — | ||||
Secured promissory note with Amerisource, a related party, issued on September 7, 2021 in the amount of $12,740,000, bearing interest at 12%, maturing September 7, 2026. The Company is required to make monthly payments of interest only beginning October 1, 2021, with payments of principal and interest beginning in October 2022. On March 15, 2022, the Company entered into an agreement with Amerisource, to amend the Loan Agreement dated September 7, 2021, pursuant to which Amerisource agreed to increase the loan commitment to the Company from $12,740,000 to $16,740,000. In January 2023, the Company received $1,000,000 in additional proceeds under this facility, which has a maturity date of June 30, 2023 | 16,061,011 | 15,911,485 | ||||
|
| 20,421,966 |
| 20,297,795 | ||
Less current maturities |
| (7,913,546) |
| (6,990,486) | ||
Long term secured notes payable, net of current maturities | $ | 12,508,420 | $ | 13,307,309 | ||
Effective January 1, 2023, the Company issued 720,000 shares of common stock to holders of $480,000 in secured notes payable.
11
During the three months ended March 31, 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 $1,136 to $1,723 per month beginning in March 2023 through maturity.
Notes Payable – Unsecured
Effective January 1, 2023, the Company issued 2,585,487 shares of common stock to holders of $1,723,657 of unsecured notes payable.
12
On January 27, 2023, the Company issued an aggregate of 2,000,000 shares of its common stock to four purchasers of new promissory notes in the principal amount of $1,000,000. The Company recorded deferred financing cost of $360,000 based on the fair value of the shares issued to the lenders, which was recognized as a discount. The Company amortized total debt discount of $150,000 related to secured notes payable during the three months ended March 31, 2023. The new promissory notes mature on June 30, 2023 and bear interest at 12%.
Accounts Receivable Financing Facility (Secured Line of Credit)
On February 27, 2020, the 5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”).The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”). The Company recorded deferred financing costs of $223,558 recognized on the date of incurrence as a discount. During the three months ended March 31, 2023 and 2022, $0 and $27,059 of debt discount was amortized to interest expense, and the unamortized discount was $0 as of March 31, 2023 and December 31, 2022, respectively. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company.
The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 90% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0)% of the then maximum account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0)% of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing. The AR Facility originally matured on February 27, 2023, but automatically extended for an additional 12 months per the terms of the agreement.
On January 19, 2023, the Company and Amerisource entered into an agreement to provide the Company with an additional $1,000,000 advance amount on the existing AR Facility (the “Overadvance”). The Overadvance will have monthly payments of principal and interest beginning February 1, 2023, bear interest at 12% per year, and mature on September 7, 2026.
The balances under the above lines of credit was $9,699,648 and $10,623,887 as of March 31, 2023 and December 31, 2022, respectively.
Convertible Notes Payable
On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation, which has an equity ownership of 12.2% and is considered a related party, for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Stretch Note”). The Amerisource Stretch Note matured on March 31, 2023 and was extended to June 30, 2023, and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Stretch Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s common stock with a fair value of $419,788 were issued to the noteholder in connection with the sale of the Amerisource Note. The Company recorded deferred financing costs of $419,788 recognized on the date of incurrence as a discount and will be amortized over the life of the loan. During the year ended December 31, 2022, $151,589 of debt discount was amortized to interest expense, and there was $0 of unamortized discount as of December 31, 2022. The Amerisource Stretch Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty. As of March 31, 2023 and December 31, 2022, the outstanding principal balance was $1,600,000.
During the three months ended March 31, 2023, the Company entered into secured note purchase agreements with Steve Madden for the purchase and sale of convertible promissory notes in the principal amount of $422,164. The notes pay a 10% per annum interest rate, convertible into shares of the Company’s common stock at a fixed conversion price of $0.10 per share with a two year term. These convertible notes are secured by all of the assets of the Company, subject to prior liens and security interests. Mr. Madden was issued 633,246 shares of common stock related to the convertible notes payable which were recognized as a deferred finance cost.
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On March 31, 2023, Steve Madden was issued a $250,000 secured convertible note, paid in kind for services as Chief Transition Officer, that matures after two years, pays a 10% per annum interest rate, paid quarterly, and has a fixed conversion rate at $0.10 per share. The convertible note was recorded as a prepaid expense to be amortized over a one year period. Mr. Madden was issued 375,000 shares of common stock related to the convertible note payable which were recognized as a deferred finance cost.
Effective January 1, 2023, the Company issued 3,253,500 shares of common stock to holders of $2,169,000 of convertible promissory notes.
As of March 31, 2023, the convertible notes, net balance was $9,171,819 with long term convertible notes payable of $491,926 and a current portion of convertible notes of $8,679,893. As of December 31, 2022, the convertible notes, net balance was $7,327,288 with long term convertible notes payable of $0 and a current portion of convertible notes of $7,327,288. During the three months ended March 31, 2023 and 2022, $147,944 and $798,845 of debt discount was amortized to interest expense, and there was $407,086 and $3,871,373 of unamortized discount as of March 31, 2023 and December 31, 2022, respectively.
Future maturities of all Company debt as of March 31, 2023 are as follows:
2024 |
| $ | 29,678,201 |
2025 |
| 5,113,929 | |
2026 |
| 4,983,384 | |
2027 |
| 2,710,218 | |
2028 |
| 28,571 | |
Thereafter | 344,006 | ||
Total | $ | 42,858,309 |
NOTE 8 — STOCKHOLDERS’ DEFICIT
During the three months ended March 31, 2023, the Company issued an aggregate of 6,558,987 shares of its common stock to various holders of the Company’s promissory notes in exchange for the noteholders agreeing to extend the maturity date of an aggregate of $4,372,657 of the Company’s outstanding promissory notes to June 30, 2023. The Company recognized a total of $1,180,618 of interest expense based on the fair value of the shares issued to the lenders.
During the three months March 31, 2023, the Company issued a total of 3,008,246 shares of common stock to four lenders. These shares had a fair value of $543,136 and were recorded as deferred finance costs.
NOTE 9 — STOCK OPTIONS AND WARRANTS
Summary of stock option information is as follows:
|
| Aggregate |
|
| Weighted | ||||||
Aggregate | Exercise | Exercise | Average | ||||||||
Number | Price | Price Range | Exercise Price | ||||||||
Outstanding, December 31, 2022 |
| 1,525,000 | $ | 546,250 | $ | 0.25-0.75 | $ | 0.36 | |||
Granted |
| 620,000 |
| 155,000 | 0.25 | 0.25 | |||||
Exercised |
| — |
| — | — |
| — | ||||
Cancelled, forfeited or expired |
| — |
| — | — | — | |||||
Outstanding, March 31, 2023 |
| 2,145,000 | $ | 701,250 | $ | 0.25-0.75 | $ | 0.33 | |||
Exercisable, March 31, 2023 |
| 1,605,000 | $ | 546,250 | $ | 0.25-0.75 | $ | 0.36 | |||
During the three months ended March 31, 2023, the Company issued 620,000 common stock options to 5J and SMG employees valued at $126,873. Of the 620,000 options issued, 80,000 options vest upon issuance and the remaining options vest equally over a three-year period starting on January 2024. The Company valued the stock options using the Black-Scholes model with the following key assumptions range: Stock price $0.18 - $0.22, Exercise price $0.25, Term 5 years, Volatility 213.04% – 227.09% and Discount rate 3.48% – 4.52%.
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During the three months ended March 31, 2023, the Company recognized $30,554 of expense related to outstanding stock options. At March 31, 2023, the Company had $106,416 of unrecognized expenses related to options.
The weighted average remaining contractual life is approximately 2.34 years for stock options outstanding on March 31, 2023. At March 31, 2023, there was no intrinsic value to the outstanding stock options.
Summary Stock warrant information is as follows:
The weighted average remaining contractual life is approximately 3.85 years for stock warrants outstanding on March 31, 2023. At March 31, 2023 the outstanding stock warrants had an aggregate intrinsic value of $11,725.
NOTE 10 — DISPOSITION OF BUSINESSES
Trinity Services LLC
In December 2020, management decided to sell or dissolve Trinity. All assets and liabilities of Trinity are classified as assets and liabilities of discontinued operations and included within net income (loss) from discontinued operations. All of Trinity’s equipment was sold in the year ended December 31, 2021 at auction through a third party auctioneer. All proceeds are being utilized to retire outstanding Trinity debt.
MG Cleaners LLC
On December 22, 2020, the Company, as the sole member of MG Cleaners LLC (“MG”), entered into a share exchange agreement (“Agreement”) with S&A Christian Investments L.L.C. (“S&A”) pursuant to which the Company transferred all of the membership interests of MG (“MG Interests”) to S&A in exchange for Stephen Christian, the control person of S&A, returning 1,408,276 shares of the Company’s common stock, par value $.001 per share (“Exchanged Shares”) to the Company for cancellation, additional consideration received by the Company in connection with the transaction included the removal of the Company as a guarantor of certain MG debt. Upon the Company’s receipt of the Exchanged Shares, the Exchanged Shares will be retired and returned to treasury resulting in a decrease of 1,408,276 shares of its common stock issued and outstanding, and all 750,000 unvested incentive stock options previously granted to Mr. Christian will expire. Mr. Stephen Christian, the Company’s former Executive Vice President and Secretary, is the control person of S&A. As a result of the terms of the transaction, S&A became the owner of all of the MG Interests. In connection with the sale of MG, Mr. Christian resigned as Executive Vice President and Secretary of the Company. The Company also agreed to pay $150,000 in cash to MG Cleaners, with $35,000 and $75,000 paid in December 2021 and 2020, respectively.
The decision to sell Trinity assets and the MG sale agreement qualify as discontinued operations in accordance with U.S. GAAP, as each represents a significant strategy shift of the Company’s operations that will have a major effect on the Company’s operations. As a result, the Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 present the assets and liabilities of MG and Trinity as assets and liabilities of discontinued operations. The Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 present the results of MG and Trinity as Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 present operating, investing, and financing activities of MG and Trinity as cash flows from or used in discontinued operations.
15
The balance sheets of Trinity and MG combined are summarized below:
The statements of operations of Trinity and MG combined are summarized below:
| March 31, |
| March 31, | |||
2023 | 2022 | |||||
Other income | $ | — | $ | 7,749 | ||
Interest expense, net |
| (1,835) |
| (2,861) | ||
Net income (loss) from discontinued operations | $ | (1,835) | $ | 4,888 | ||
NOTE 11 — COMMITMENTS AND CONTINGENCIES
As of March 31, 2023 and December 31, 2022, the Company had cash collateral of $1,105,818 and as collateral for its insurance policy, respectively.
Litigation
From time to time, SMG may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the opinion of management; no other pending or known threatened claims, actions or proceedings against SMG are expected to have a material adverse effect on SMG’s financial position, results of operations or cash flows. SMG cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any lawsuits and investigations.
NOTE 12 — 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 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 vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company’s lease agreements do not contain any material restrictive covenants.
The components of lease cost for operating and finance leases for the three months ended March 31, 2023 and 2022 were as follows:
March 31, 2023 |
| March 31, 2022 | ||||
Lease Cost | ||||||
Operating lease cost | $ | 126,542 | $ | 300,758 | ||
Short-term lease cost | 181,704 | 151,021 | ||||
Total lease cost | $ | 308,246 | $ | 451,779 | ||
16
Supplemental cash flow information related to leases was as follows:
| ||||||
March 31, 2023 | March 31, 2022 | |||||
Other Lease Information | ||||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
| |||
Operating cash flows from operating leases | $ | 70,918 | $ | 29,037 | ||
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at March 31, 2023 and December 31, 2022:
The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.
Lease Term and Discount Rate |
| March 31, 2023 |
| December 31, 2022 |
|
Weighted-average remaining lease term (years) |
|
|
| ||
Operating leases |
| 1.8 | 13.5 | ||
Weighted-average discount rate |
| ||||
Operating leases |
| 8.5 | % | 8.6 | % |
The following table provides the maturities of lease liabilities at March 31, 2023:
At March 31, 2023, the Company had no additional leases which had not yet commenced.
NOTE 13 – RELATED PARTY TRANSACTIONS
James E. Frye, who currently serves as a director on our Board and President of our 5J subsidiary and also owns or has control over 5J Properties LLC, an entity that is the lessor to four leases with the Company. These four leases located in Palestine, Pleasanton, West Odessa and Floresville Texas all have similar five-year terms with options for renewal. The current monthly rent for these leases totals approximately $14,250. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. During the three months ended March 31, 2023 and 2022, we purchased $290,730 and $26,300 in rental services and have charged the crane company $3,000 and $25,427 that are included in our revenues, respectively. As of March 31, 2023, the Company owed $853,092 to and was owed $82,780 by the entities controlled by James Frye. As of December 31, 2022, the Company owed $565,603 to and was owed $79,780 by the entities controlled by James Frye.
17
On June 15, 2020, the Company entered into an Interim Management Services Agreement with Apex Heritage Group, Inc. (the “Consultant”), of which Steven H. Madden, a related party, has sole voting and investment control over, and is our current Chief Transition Officer. The Consultant will provide Jeffrey Martini to serve as the Company’s Chief Financial Officer, reporting to both the Company’s Chief Executive Officer and its Board of Directors. In December 2021, the Company issued a convertible promissory note with a principal amount of $250,000 to the Consultant for services as Chief Transition Officer for the period from August 1, 2021 until August 1, 2022. During the three months ended March 31, 2023, the Company issued an additional convertible note payable of $250,000 for services as Chief Transition officer for an additional year.
Effective January 1, 2023, the Company issued an aggregate of 5,205,148 shares of its common stock to various related party holders of the Company’s promissory notes in exchange for the noteholders agreeing to extend the maturity date of an aggregate of $3,470,098 of the Company’s outstanding promissory notes to June 30, 2023. Of the total, 2,686,500 shares were issued to holders of $1,791,000 of convertible promissory notes and 2,518,648 shares were issued to holders of $1,679,098 of unsecured notes payable.
During the three months ended March 31, 2023, the Company entered into unsecured notes with related parties totaling $1,000,000 in principal. See Note 7.
During the three months ended March 31, 2023, the Company entered into new convertible notes payable with related parties totaling approximately $672,164 in principal, including the $250,000 note related to CTO services described above. See Note 7.
18
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. 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 Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form10-Q contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Quarterly Report, and they may also be made a part of this Quarterly Report by reference to other documents filed with the SEC, which is known as “incorporation by reference.”
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. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. 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.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report on Form 10-Q or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference in this Quarterly Report on Form 10-Q, as applicable. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by applicable law. All subsequent forward-looking statements attributable to the Company or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We urge readers to carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business including the risk factors included herein under Item 1A “Risk Factors.” in our Annual Report on Form 10-K.
Overview
We are a growth-oriented transportation services company focused on the domestic logistics market. Our primary business objective is to grow our operations and create value for our stockholders through organic growth and strategic acquisitions. We have implemented a Buy & Build growth strategy of acquiring middle market transportation companies and generating organic growth post-acquisition, when possible, by removing business constraints and strategic cross-selling of services benefiting us with higher equipment utilization and market share. We believe our business focus and equipment fleet position us to be significant participant in the domestic United States infrastructure market.
Our wholly-owned operating subsidiaries are:
| ● | 5J Trucking LLC |
19
| ● | 5J Oilfield Services LLC |
| ● | 5J Specialized LLC |
| ● | 5J Transportation LLC |
| ● | 5J Logistics Services LLC |
| ● | 5J Driveaway LLC |
Together these business units are referred to as the “5J Transportation Group”.
Our operating subsidiaries provide a range of transportation services such as:
| ● | Transporting infrastructure components including bridge beams and power generation transformers |
| ● | Transporting wind energy components |
| ● | Heavy haul of production equipment, heat exchangers, coolers, construction equipment, refinery components |
| ● | Super heavy haul over-dimensional permit-required loads up to 500 thousand pounds for engineered projects |
| ● | Transportation of midstream compressors |
| ● | Flatbed freight |
| ● | Crane services used to set equipment on compressor stations, pipeline infrastructure and load drilling rig components |
| ● | Drilling rig relocation for drilling contractors and oil and gas operators |
| ● | Freight brokerage and driveaway of manufactured trucks and equipment to final customers. |
In connection with our focus to expand our transportation services business and exit certain up-stream oil and gas industrial-related businesses, the financial results of the following business have been classified as discontinued operations on our consolidated financial statements:
| ● | MG Cleaners LLC. The Company sold this business in December 2020 |
| ● | Trinity Services LLC |
We are headquartered in Houston, Texas with facilities in Floresville, Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill, South Carolina. Our web sites are www.SMGIndustries.com and www.5J-Group.com.
Acquisition, divestiture and wind-down of businesses
On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), combined referred to as “5J”. The aggregate purchase price of 5J was $12.7 million, consisting of a combination of cash, notes and Series B Convertible Preferred Stock.
In December 2020, the Company decided to cease the operations of Trinity Services LLC (“Trinity”), an O&G drilling pad dirt construction company. The assets and operations of Trinity are reflected on the March 31, 2023 and December 31, 2022 Consolidated Balance Sheets as “assets or liabilities of discontinued operations” and the results of operations are reflected in the Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022 as “net income (loss) from discontinued operations”.
In the second quarter of 2021 we formed 5J Transportation LLC in connection with leasing the East Houston terminal operations for our flatbed services. In the first quarter of 2021, we formed 5J Brokerage LLC, which was renamed 5J Logistics Services LLC during the fourth quarter of 2021, our transportation brokerage business, in connection with offering those services. In the first quarter of 2023,
20
we formed 5J Driveaway LLC to provide services to truck and equipment manufacturers that need transportation services to deliver vehicles and equipment to their end customers.
All of our 5J subsidiaries are referred to as the “5J Transportation Group”.
Recent Accounting Pronouncements
In June 2016, the 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 (“AFS”) 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 will estimate 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 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 $4,694,664, a decrease in accumulated deficit of $3,486,887 and a reduction of remaining unamortized debt discount of $1,270,777 related to the previously recognized beneficial conversion features on the Company’s convertible debt.
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 consolidated financial statements for the year ended December 31, 2022, included in the Company’s Form 10-K as filed with the SEC on April 17, 2023. We do not consider any of our policies or estimates to be critical. 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 March 31, 2023 Compared to Three Months Ended March 31, 2022
The following table sets forth the results of our operations for the three months ended March 31, 2023 and 2022.
Three months ended March 31, | ||||||
| 2023 |
| 2022 | |||
Sales | $ | 20,869,763 | $ | 16,181,053 | ||
Cost of goods sold |
| (18,240,360) |
| (14,725,105) | ||
Gross profit |
| 2,629,403 |
| 1,455,948 | ||
Operating expenses |
| (3,062,601) |
| (2,463,881) | ||
Loss from operations |
| (433,198) |
| (1,007,933) | ||
Other expense |
| (3,092,007) |
| (2,628,085) | ||
Loss from continuing operations |
| (3,525,205) |
| (3,636,018) | ||
Income (loss) from discontinued operations |
| (1,835) |
| 4,888 | ||
Net loss | $ | (3,527,040) | $ | (3,631,130) | ||
The Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 present the assets and liabilities of MG and Trinity as discontinued operations. The Consolidated Statements of Operations for the quarters ended March 31, 2023 and 2022 present the results of MG and Trinity as Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the quarters ended March 31, 2023 and 2022 present operating, investing and financing activities of MG and Trinity as cash flows from or used in discontinued operations.
Sales for the quarter ended March 31, 2023 increased to $20,869,763, an increase of 29% from $16,181,053 for the quarter ended March 31, 2022. The increase in sales in the first quarter of 2023 was primarily driven by increased revenues in our industrial transportation segment from higher customer activity transporting drilling rigs, and in our heavy haul business transporting bridge beams, and in the company’s super heavy haul business transporting over-dimensional infrastructure items and large natural gas compressors. Our increase in revenues was also attributable to the general improvement in the domestic United States economy from COVID-19 pandemic.
Cost of Revenues
Cost of revenues for the three months ended March 31, 2023, was $18,240,360, compared to $14,725,105 for the same period of 2022. As a percentage of overall sales, the cost of revenues was 87% during the three months ended March 31, 2023, compared to 91% for the same period of 2022. Cost of revenues includes $787,079 and $1,357,401 in non-cash depreciation charges for the three months ended March 31, 2023 and 2022, respectively. The improvement in cost of revenues as a percentage of overall sales is the result of higher revenues and incremental margin improvement in transportation projects covering more fixed costs within cost of revenues. The increase in dollar amount of cost of revenues over the prior year was due to higher direct expenses associated with the increased volume of revenues, including driver payroll and settlements, and increased fuel and freight costs compared to the prior period. We currently believe the Company will continue to improve cost of goods sold as a percentage of sales through increased revenues covering more fixed costs within cost of goods sold and higher utilization of our existing equipment fleet through anticipated future increases in customer demand.
Gross Profit (Loss)
Gross profit for the three months ended March 31, 2023, was $2,629,403, compared to $1,455,948 for the same period of 2022. Our gross profit margin was 13% during the three months ended March 31, 2023, compared to 9% for the same period of 2022. The improvement in gross margin is due to higher revenues as described above and increased customer pricing as compared to the first quarter 2022 results.
22
Operating Expenses
| Three months ended March 31, | |||||
| 2023 |
| 2022 | |||
Operating expenses: |
|
|
| |||
General and administrative | $ | 3,062,601 | $ | 2,463,881 | ||
Operating expenses | $ | 3,062,601 | $ | 2,463,881 | ||
Total operating expenses were $3,062,601 in the three months ended March 31, 2023 or 15% of revenues, compared to $2,463,881, or 15% of revenues, in the same period of 2022, representing an increase in operating expenses of $598,720, or 24%, from the three months ended March 31, 2022. The increase in operating expenses was primarily attributable to higher consulting and audit fees, an increase in non-cash bad debt expense for the current period, and slightly higher labor costs from increased wages and additional personnel added with the growth in the business.
Loss From Operations
As a result of the preceding, our loss from operations was $433,198 during the three months ended March 31, 2023, compared with $1,007,933 for the same period of 2022. This $574,735, or 57%, improvement in our loss from operations was primarily attributable to gross margin improvement and higher revenues in the first quarter 2023 compared to the same period of 2022.
Other Expense
Total other expense was $3,092,007 for the three months ended March 31, 2023 compared to other expense of $2,628,085 for the three months ended March 31, 2022. Interest expense was $2,897,167 and $2,619,037 for the three months ended March 31, 2023 and 2022, respectively, as a result of decreased non-cash amortization of debt costs associated with convertible debt issued in 2022 and 2023 and deferred finance costs resulting from shares issued with convertible debt in the prior period. Additionally, the Company recognized other expense of $204,196 from an insurance audit settlement during the three months ended March 31, 2023.
Net Loss From Continuing Operations
The result was that our net loss from continuing operations was $3,525,205 during the three months ended March 31, 2023, compared with $3,636,018 for the same period of 2022. This $104,090, or 3%, improvement in our net loss from continuing operations was primarily attributable to the Company’s gross margin improvements described above and the reduction in interest expense.
Liquidity and Capital Resources
Our cash flows from operations are primarily funded through our financing activities, including our accounts receivable line of credit facility, notes and loans, stock sales, issuing our stock for services and various leases. Currently, we believe we will need to continue to utilize lines of credit, borrowings, and stock sales to sufficiently sustain our current level of operations for the next 12 months. At present, we believe the industry and general domestic economic activity has realized improvement relative to the period one year ago as commodity prices have risen generating higher customer activity in our industrial division, as well as economic improvement from reduced COVID-19 pandemic prevalence in the markets we operate. These economic improvements, currently anticipated by the Company are partially offset by believed inflationary pressures such as higher fuel prices. We likely will require additional capital to maintain or expand operations. Additionally, we believe any material acquisition of another operating company would require additional outside capital consisting of debt or equity. Failure to secure additional funds could significantly hamper our ongoing operations particularly if a down cycle in our industry continues further. As the business cycle improves, and the pandemic dissipates in the markets we serve, we plan to improve our cash flows provided in operating activities by focusing on increasing sales by increasing utilization of the assets we have acquired and offering higher value services that receive higher gross margins. However, there can be no assurances given of industry improvement, pandemic relief or improved cash flows of our business.
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 financing programs.
On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Logistics Services (formerly 5J Brokerage) and 5J Specialized LLC (the “5J Entities”) entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) in the total amount of $12,740,000. Pursuant to the terms of the Loan Agreement, the
23
5J Entities will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Entities will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company. On March 15, 2022, each of our 5J subsidiaries entered into an agreement with Amerisource pursuant to which Amerisource agreed to increase the loan commitment to the 5J entities from $12,740,000 to $16,740,000. The Company received $4,000,000 of cash proceeds from this agreement.
Pursuant to the terms of the Security Agreement, the 5J Entities granted a security interest in all of their assets to Amerisource as collateral for the repayment of the Amerisource loan.
In connection with the Loan Agreement, the Company, the parent company of each of the 5J Entities, entered into a pledge agreement pursuant to which the Company has granted a security interest in all of its assets to Amerisource and a guaranty agreement pursuant to which the Company has guaranteed the timely payment of all amounts due under the Loan Agreement. The Loan Agreement includes customary covenants, including a negative convent that the 5J Entities may not create or permit for any lien to exist on the collateral nor enter into any new debt agreement.
The proceeds from the issuance of the Note were used to pay down the outstanding balance owed to Utica Leaseco LLC (“Utica”) pursuant to a Second Forbearance Agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on September 7, 2021 (“Forbearance Agreement”). The Utica agreement was paid in full through the Amerisource Loan Agreement in November 2021.
On February 27, 2020, the 5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”). The Company used a portion of the proceeds from the Amerisource Financing to pay the cash portion of the purchase price of the 5J Entities.
The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”).
The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 90% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0%) of the then maximum account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0%) of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing.
On January 19, 2023, the Company and Amerisource entered into an agreement to provide the Company with an additional $1,000,000 advance amount on the existing AR Facility (the “Overadvance”). The Overadvance will have monthly payments of principal and interest beginning February 1, 2023, bear interest at 12% per year, and mature on September 7, 2026.
The Amerisource Equipment Loan in the amount of $1,401,559 is secured by certain equipment pledged as collateral, has a term of thirty-six (36) months during which the 5J Entities shall make equal monthly payments of principal and interest, bears an interest rate of prime rate plus five and one-quarter percent (5.25%) and an origination fee equal to one and one-half percent (1.5%) of the loan amount.
24
On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Note”) to Amerisource (“Amerisource Loan Agreement”). The Amerisource Note matures on June 30, 2023 and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s common stock were issued to the noteholder in connection with the sale of the Amerisource Note. The Amerisource Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty. The Company and Amerisource entered into an amendment to the Amerisource Loan Agreement on March 31, 2023, pursuant to which they agreed to extend the maturity date of the note to June 30, 2023.
On January 27, 2023, the Company issued four new promissory notes in the principal amount of $1,000,000. The new promissory notes mature on June 30, 2023 and bear interest at 12%.
During the first quarter of 2023, we issued a convertible note for $250,000 as non-cash compensation for one year to our Chief Transition Officer and Director. Additionally, during the first quarter of 2023 we issued two convertible notes to the same insider for cash invested of $385,000 on March 21, 2023 and $37,164 on March 22, 2023 under the terms of our existing convertible note offering. The cash was used for our working capital.
We had a net working capital deficit of $21,837,329, as of March 31, 2023, compared to a deficit of $19,090,891 as of December 31, 2022.
Cash Flows
The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2023 and 2022:
Three months ended March 31, | ||||||
| 2023 |
| 2022 | |||
Cash provided by (used in): |
|
|
|
| ||
Operating activities from continuing operations | $ | 906,218 | $ | (2,166,931) | ||
Operating activities from discontinued operations |
| (28,100) |
| — | ||
Operating activities |
| 878,118 |
| (2,166,931) | ||
Investing activities from continuing operations |
| (4,689) |
| (37,022) | ||
Investing activities from discontinued operations |
| — |
| — | ||
Investing activities |
| (4,689) |
| (37,022) | ||
Financing activities from continuing operations |
| (687,059) |
| 4,374,485 | ||
Financing activities from discontinued operations |
| — |
| — | ||
Financing activities | $ | (687,059) | $ | 4,374,485 | ||
Operating Activities
Net cash provided by operating activities was $878,118 for the three months ended March 31, 2023, compared to cash used in operating activities of $2,166,931 during the same period of 2022, including $28,100 and $0 of cash flows used in discontinued operations, respectively.
For the three months ended March 31, 2023, net cash provided by continuing operating activities of $906,218 consisted of net loss of $3,525,205, which included non-cash costs of depreciation and amortization of $787,079, amortization of deferred financing costs of $326,372, shares issued for debt extension of $1,180,618, bad debt expense of $402,160 and amortization of right of use assets of $119,453. Changes in working capital accounts included changes in prepaid expenses and other current assets of $862,472, accrued expenses and other liabilities of $602,257, and accounts payable of $736,483, accounts payable related party of $287,489, partially offset by changes in accounts receivable of $782,246.
For the three months ended March 31, 2022, net cash used in continuing operating activities of $2,166,931 consisted of net loss of $3,636,018, which included non-cash costs of depreciation and amortization of $1,357,401, amortization of deferred financing costs
25
of $1,497,032 and bad debt expense of $153,801. Changes in working capital accounts included changes in accounts receivable of $1,023,905, other assets of $598,625 and accounts payable of $1,656,889, partially offset by changes in prepaid expenses and other current assets of $1,484,614.
Investing Activities
Net cash used in investing activities was $4,689 for the three months ended March 31, 2023, compared to net cash used in investing activities of $37,022 for the three months ended March 31, 2022.
For the three months ended March 31, 2023, net cash provided by investing activities consisted of $1,500 of cash proceeds from disposal of property and equipment and $6,189 cash paid for fixed asset additions. For the three months ended March 31, 2022, net cash used in investing activities consisted of $37,022 of fixed asset additions.
Financing Activities
Net cash used in financing activities was $687,059 for the three months ended March 31, 2023, compared to cash provided of $4,374,485 for the three months ended March 31, 2022.
For the three months ended March 31, 2023, net cash used in financing activities consisted of $2,000,000 in proceeds from secured notes and the AR Facility Overadvance, proceeds from convertible notes payable of $421,946 offset by repayment of notes payable of $2,156,338 and net payments on secured line of credit of $952,667.
For the three months ended March 31, 2022, net cash provided by financing activities consisted of proceeds from notes payable of $5,229,098, net proceeds from secured line of credit of $180,830, partially offset by repayment of notes payable of $1,035,443.
Off-Balance-Sheet Transactions
As of March 31, 2023, the Company has cash collateral deposit in the amount of $1,105,818 as collateral for its insurance policy.
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 Chief Financial Officer has concluded that, at March 31, 2023, 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 Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
26
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 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 March 31, 2023 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 quarter ended March 31, 2023, the Company issued an aggregate of 6,558,987 shares of its common stock (“Shares”) in connection with the issuance to multiple note holders in exchange for the extension of the maturity dates of their notes. The Shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
Exhibit No. |
| Description of Document | |
* | |||
|
| ||
* | |||
|
| ||
* | |||
|
| ||
* | |||
|
| ||
101. | INS | XBRL Instance Document - the instance document does not appear in the Interative Data File because its XBRL tags are embedded within the Inline XBRL document. | |
|
| ||
101. | SCH | XBRL Taxonomy Extension Schema Document | |
|
| ||
101. | CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
|
| ||
101. | DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
|
| ||
101. | LAB | XBRL Taxonomy Extension Label Linkbase Document | |
|
| ||
101. | PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
Exhibit 104 | Cover page Interative Data File - The cover page interactive date file does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL 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) | ||
May 15, 2023 | /s/ Matthew C. Flemming | |
Date | Matthew C. Flemming | |
| Interim Chief Executive Officer and Interim Chief Financial | |
| (Principal Executive Officer and Principal Financial Officer) |
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