SMG Industries Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from ______________ to ______________

Commission File Number 000-54391

periods beginning after December

SMG INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

(713) 821-3153

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically 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).   x   Yes     ¨    No

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

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

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

The number of shares of Common Stock, par value $0.001 per share, outstanding as of November 13, 2020 was 19,767,034.

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

SMG INDUSTRIES INC.

Table of Contents

SMG INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

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

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended September 30, 2020 and 2019

(unaudited)

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

SMG INDUSTRIES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

For the three and nine months ended September 30, 2020 and 2019

(unaudited)

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

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

For the nine months ended September 30, 2020 and 2019

(unaudited)

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

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 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 today is a growth-oriented transportation services and industrial services business that operates throughout the domestic Southwest United States. Through its wholly-owned operating subsidiaries, the Company offers heavy haul, super heavy haul logistics services as well as industrial cleaning products and equipment along with construction equipment services to more than 200 customers.

On June 3, 2019, we entered into an Agreement and Plan of Share Exchange dated as of such date (with Trinity Services LLC, a Louisiana limited liability company (“Trinity”) and the sole member of Trinity (the “Trinity Member”). We completed the closing of the acquisition of Trinity on June 26, 2019. Trinity Services LLC provides lease roads, location and pad development using construction equipment to build drilling pad locations and well site services using a work over rig to perform services on existing wells. SMG Industries, Inc. headquartered in Houston, Texas has facilities in Palestine, Floresville, Waskom, Carthage, Odessa and Alice, Texas.

On February 27, 2020, we entered into Membership Interest Purchase Agreements for the acquisition of all of the membership interests of each of 5J Oilfield Services LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas limited liability company (“5J Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as the “5J Entities”). 5J Oilfield and 5J Trucking services the drilling rig transportation and midstream heavy haul logistics market segments. 5J’s business includes transporting midstream compressors, production equipment and infrastructure components such as cement bridge beams with a fleet of more than 100 trucks, 200 trailers and 12 cranes. MG Cleaners LLC., serves the drilling market segment with proprietary branded products including detergents, surfactants and degreasers (such as Miracle Blue^®) as well as equipment and service crews that perform on-site repairs, maintenance and drilling rig wash services.

On June 18, 2020, we formed 5J Specialized LLC (“5J Specialized”), which we are the sole member. 5J Specialized was formed as a limited liability company under the State of Texas by the filing of its Articles of Organization with the Secretary of State.  5J Specialized, was established for our expansion into the super heavy haul niche of the Transportation Services market segment.

In March 2020 the World Health Organization declared COVID-19 a pandemic. We are still assessing the impact COVID-19 may have on our business, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.  The extent to which the COVID-19 pandemic and global efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic.

The accompanying unaudited interim financial statements of SMG Industries Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 2019 and 2018 with are included on a Form 10-K filed on May 29, 2020. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for years ended December 31, 2019 and 2018 have been omitted.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basic and Diluted Net Loss per Share

The Company presents both basic and diluted net loss per share on the face of the 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, and using the treasury-stock method. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For the nine months ended September 30, 2020, 2,800,000 of stock options, 1,763,335 of warrants, 4,000,000 shares issuable from Series A Preferred Stock, 4,806,388 shares issuable from Series B Preferred Stock and 19,442,950 shares issuable from convertible notes were considered for their dilutive effects but were considered anti-dilutive due to the Company’s net loss. For the nine months ended September 30, 2019, 820,000 of stock options, 895,001 of warrants, 4,000,000 shares issuable from Series A Preferred Stock and 600,000 shares issuable from convertible notes were considered for their dilutive effects but concluded to be anti-dilutive.

Recent Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

NOTE 3 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and, no adjustments to the financial statements have been made to account for this uncertainty. The Company concluded that the uncertainty surrounding the COVID-19 global pandemic, its negative working capital and negative cash flows from operating are conditions that raised substantial doubt about the Company’s ability to continue as a going concern. The Company plans to continue to generate additional revenue (and improve cash flows from operations) partly related to the Company’s acquisition of an additional operating company in 2020 and partly related to the Company cross-selling additional sales initiatives already implemented with the acquisition’s additional customer base. The Company believes that loans obtained under the Paycheck Protection Program in 2020 will be forgiven in accordance with the terms of the program.

NOTE 4 – REVENUE

Disaggregation of revenue

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

Customer Concentration and Credit Risk

During the nine months ended September 30, 2020, no customers exceeded 10% of revenues.  During the nine months ended September 30, 2019, three of our customers accounted for approximately 38% of our total gross revenues, with customers each accounting for 16%, 12% and 10% respectively. No other customers exceeded 10% of revenues during the nine months ended September 30, 2019.

One customer accounted for approximately 13% of accounts receivable at September 30, 2020, and three customers accounted for approximately 48% of accounts receivable at December 31, 2019. Only one customer exceeded 10% of accounts receivable as of September 30, 2020 and three customers exceeded 10% of accounts receivable as of December 31, 2019. The Company believes it will continue to reduce the customer concentration risks by engaging new customers and by increasing activity with existing, less active customers and relatively smaller, newer customer relationships. While the Company continues to acquire new customers in an effort to grow and reduce its customer concentration risks, management believes these risks will continue for the foreseeable future.

NOTE 5 - INVENTORY

At September 30, 2020 and December 31, 2019, inventory consisted of the following components:

NOTE 6 – LONG-LIVED ASSETS

Property and equipment at September 30, 2020 and December 31, 2019 consisted of the following:

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $3,722,307 and $317,036, respectively.

Intangible assets

Intangible assets as of September 30, 2020 are related to the acquisition of the RigHands™ assets and the acquisition of tradenames of Momentum Water Transfer Services LLC.

Intangible assets at September 30, 2020 and December 31, 2019 consisted of the following:

Amortization expense for the nine months ended September 30, 2020 and 2019 was $7,497 and $21,748, respectively. Future amortization of the intangible assets for the years ended December 31, 2020, 2021, 2022, 2023, 2024 and beyond are $10,000, $10,000, $10,000, $10,000, $10,000 and $73,745, respectively.

NOTE 7 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses as of September 30, 2020 and December 31, 2019 included the following:

NOTE 8 – NOTES PAYABLE

Notes payable included the following:

On February 2, 2017, we refinanced two truck notes existing with a community bank for one new note of $53,610. The term was principal and interest payments monthly over 42 months with an interest rate of 6%. The note is secured by certain trucks and equipment of the Company. The refinanced amount is identical to the remaining principal balance under the previous loan thus no gain or loss has been recognized.

On January 2, 2018, we financed a truck with a note to a bank. The $41,481 note has an interest rate of 6.29% and payments of principal and interest are paid monthly. The note is secured by the truck purchased. This note matures in January 2023.

On December 7, 2018, the Company issued and sold secured promissory notes in the aggregate principal amount of $300,000 to three separate purchasers. In addition to the issuance of the Notes an aggregate of 500,000 warrants (“Warrants”) were issued to the purchasers of the Notes. The Warrants are exercisable for a period of five years and are exercisable at $0.40 per share. Interest on the Notes shall be paid to the purchasers at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Note is one year after the issuance date. These notes are all currently past due. The Notes are secured by all of the assets of the Company and the assets of MWTS, subject to prior liens and security interests. The warrants were valued at $203,337 and recorded as a discount to the notes payable. The discount will be amortized over the life of the notes payable.

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

On January 11, 2019 the Company issued a 10% note in the amount of $100,000 to a shareholder with ownership interest of 13.9%. The note matured on December 7, 2019 and is secured by a junior lien against the Company assets. In April 2019, the Company issued 511,370 shares of its restricted common stock with a fair value of $203,525 to settle this $100,000 note payable and $2,274 of accrued interest in full. The transaction resulted in a loss on settlement of $101,251.

In May 2019, the Company issued a secured promissory note in the amount of $100,000 with a maturity date of July 1, 2019 to an individual investor. The Company issued a five-year warrant to purchase 100,000 shares of the Company’s common stock at a fixed price of $0.30. The warrants were valued $44,091 and recorded as a debt discount that was fully amortized as of December 31, 2019. On June 18, 2019, the Company issued 150,000 warrants with an exercise price of $0.30 and a term of ten years in exchange for an extension of the maturity date of the note through September 30, 2019. The warrants were valued at $67,223 and will be amortized over the extension period of the note. On October 1, 2019, the Company issued 120,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through March 30, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued at $14,330 and which was amortized over the extension period of the note.

In June 2019, the Company issued a 10% secured promissory note in the amount of $80,000 to an individual investor. The Company issued a ten-year warrant to purchase 120,000 shares of the Company’s common stock at a fixed price of $0.30 per share. The warrants were valued at $53,780 and recorded as a debt discount. As of September 30, 2019, $53,780 was amortized leaving a discount balance of $0. On October 2, 2019, the Company issued 100,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through March 30, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued at $11,942 and was amortized over the extension period of the note.

On July 26, 2019, the Company paid a vendor payable that totaled $247,637, by issuing a secured promissory note in the name of its frac water company Jake Oilfield Solutions LLC for $123,819. The interest rate was 7% with principal and interest due at maturity July 25, 2020. The remaining balance of $123,818 was converted into 353,766 shares of SMG’s restricted common stock in July 2019. This note is currently past due.

On September 20, 2019, the Company issued a $200,000 12% promissory note. The note is due and payable in three monthly installments, the first two installments are interest only and the third and final installment for the balance of the principal and accrued interest. Note was refinanced in January 2020.

On October 4, 2019, we sold for $30,000 property categorized on our balance sheet as an asset held for sale. This vacant property acquired by MG Cleaners years earlier is located in Carthage, Texas and not a part of our current operations. The original MG Cleaners seller note was secured by this property and received the proceeds of this sale of approximately $30,000. The seller note had a balance of $147,608 at the time of the sale of property. The remainder of the note was retired and paid in full by issuing 400,000 restricted shares of our common stock. See Note 8 – Stockholders’ Deficit.

On December 12, 2019, the Company issued a $50,000 12% secured promissory note. The note is due and payable in monthly installments of the principal and accrued interest with the first payment of $25,000 due on or before December 19, 2019. The remaining balance shall be paid in $5,000 monthly installments until maturity on June 3, 2020. On December 12, 2019, the Company issued 75,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through June 3, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued at $17,947 which was amortized over the extension period of the note.

On January 23, 2020, the Trinity Services issued a secured promissory note for $1,272,780, which includes precomputed interest of $210,018. The note is due and payable in thirty-six monthly installments of $35,355 commencing on March 25, 2020 and the final installment is due on February 25, 2023. The note is secured by machinery and equipment owned by SMG.

On February 27, 2020, the 5J Entities entered into a Master Lease Agreement with Utica Leaseco LLC (“Utica”) pursuant to which Utica refinanced substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 which amount was financed based on 75% of the net forced liquidation value of the equipment. Pursuant to the terms of the Utica Financing, the 5J Entities will pay a monthly fee to Utica for a period of 51 months, with a cash payment due at the end of the lease term in the amount of $831,880. The 5J Entities own all of the assets financed pursuant to the Utica Financing, subject to Utica’s security interest in all of the equipment of the 5J Entities pursuant to the terms of the security agreement. Each of the Company and Matthew Flemming, its CEO, have entered into guaranty agreements with Utica, whereby they have guaranteed all of the obligations of the 5J Entities under the Utica Master Lease Agreement, pursuant to the guaranty.

On May 19, 2020 the Company entered into its first amendment to Lease Documents with Utica, whereby for a six month period effective April 27, 2020 the Company’s payments were amended to $150,000 per month.

On August 31, 2020 the Company entered into its second amendment to Lease Documents with Utica, whereby for a two month period effective October 27, 2020 the Company’s payments were amended to $150,000 per month. Starting December 27, 2020, at the end of the modification period, the Company’s payment will resume at $379,400 through the maturity date of May 27, 2024. This amendment was accounted for as a modification of the debt.    The Utica financing has an effective interest rate of approximately 18.6% following the amendments discussed above.

On May 27, 2020, our wholly-owned subsidiaries, Trinity Services, LLC and MG Cleaners, LLC each executed notes with the SBA for $150,000 in connection with the SBA’s economic injury disaster loan (“EIDL”) program. The notes have a thirty year term, an annual interest rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the note. The notes grant the SBA a general security interest in Trinity Services’ and MG Cleaners’ collateral and has no penalty of prepayment.

On June 17, 2020, our wholly-owned subsidiary, Momentum Water Transfer Services LLC, executed a note with the SBA for $90,000 in connection with the SBA’s EIDL program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $439 are due monthly beginning twelve months from the date of the Note. The Note grants the SBA a general security interest in Momentum’s collateral and has no penalty of prepayment.

On July 20, 2020, the 5J Specialized, LLC issued a secured promissory note for $1,641,060, which includes precomputed interest of $287,560. 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. The note is secured by machinery and equipment owned by SMG.

On August 30, 2020, SMG, executed a note with the SBA for $150,000 in connection with the SBA’s EIDL program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the note. The note grants the SBA a general security interest in SMG’s collateral and has no penalty of prepayment.

On September 2, 2020, our wholly-owned subsidiary, 5J Trucking, LLC, executed a note with the SBA for $150,000 in connection with the SBA’s EIDL program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the note. The note grants the SBA a general security interest in 5J Trucking, LLC’s collateral and has no penalty of prepayment.

Notes Payable – Unsecured

On October 1, 2019, we entered into a second amendment to an unsecured promissory note to extend the maturity of the secured note held by a stockholder to June 30, 2020 and capitalizing the accrued interest of $4,559 where the total principal of the promissory note is now $44,559. All other terms of the note remained. In connection with this amendment, we issued a new common stock purchase warrant for 40,000 shares, with a ten-year term and a fixed exercise price of $0.15 per share and customary other provisions. The warrants were valued at $4,777 and which was amortized over the extension period of the note. This note is currently past due.

Notes Payable (Related Party)

During the nine months ended September 30, 2020, Stephen Christian advanced $10,400 to the Company, paid expenses on behalf of the Company of $25,279 and was repaid $35,777 by the Company. As of September 30, 2020 and December 31, 2019, $0 and $98 remained outstanding, respectively, with no specific repayment terms or stated interest rate.

Accounts Receivable Financing Facility (Secured Line of Credit)

On June 19, 2019, each of MG Cleaners LLC (“MG”), Trinity Services LLC (“Trinity”) and Jake Oilfield Solutions LLC (“Jake”), each of which is a wholly-owned subsidiary of the Company, entered into separate revolving accounts receivable financing facilities (collectively the “AR Facility”) with Catalyst Finance L.P. (“Catalyst”). The AR Facility was funded on June 27, 2019. The new AR Facility with Catalyst was used to pay off the Crestmark facility in full. The AR Facility provides for the Company, through MG, Trinity and Jake, to have access to up to 90% of the net amount of eligible receivables (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of MG, Trinity and Jake to Catalyst and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 2.25% in excess of the prime rate reported by the Wall Street Journal per annum, plus a financing fee equal to 0.20% of the receivable balance every 15 days, with a maximum cumulative rate of 1.6%.   There are no origination fees, monitoring or early termination fees. The AR Facility can be terminated by the Company with thirty days written notice. The Company is a guarantor of the financing facility and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility.

On June 27, 2019, an accounts receivable financing company funding a total of $1,317,304 pursuant to the AR facility. Of the amounts funded $500,000 was paid directly to the seller of Trinity, $43,219 was used to pay off notes payable of MG Cleaners, $714,239 was used to pay off the Crestmark liability and the remaining $59,846 was deposited to the Company’s bank account.

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 nine months ended September 30, 2020, $69,907 of debt discount was amortized to interest expense.

The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 85% 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 balances under the above lines of credit was $3,498,592 and $845,036 as of September 30, 2020 and December 31, 2019, respectively.

In April 2020, 5J Oilfield Services LLC was informed by Hancock Whitney Bank, its lender, that they received approval from the U.S. Small Business Administration (“SBA”) to fund 5J’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, 5J has entered into a two-year promissory note. Per the terms of the PPP Loan, 5J will return $10,000 of the SBA advance and receive net cash proceeds of $3,138,100 from  the Hancock Whitney Bank. In accordance with the requirements of the CARES Act, 5J intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on August 22, 2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.

In April and May 2020, SMG., Trinity, Jake and MG, (collectively the “Companies”) were informed by their lender, Prosperity Bank (the “Bank”), that the Bank received approval from the U.S. Small Business Administration (“SBA”) to fund the Companies’ request for loans under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loans, the Companies have entered into two-year promissory notes. Per the terms of the PPP Loans, SMG received total proceeds of $72,500, Trinity received total proceeds of $195,000, Jake received total proceeds of $21,200 and MG received total proceeds of $190,000 from the Bank. In accordance with the requirements of the CARES Act, the Companies intend to use the proceeds from the PPP Loans primarily for payroll costs. The PPP Loans are scheduled to mature on August 20, 2022 for SMG, August 28, 2020 for Trinity and September 1, 2022 for Jake and MG. The loans have a 1.00% interest rate and are subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.

Convertible Notes Payable

On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation, which has an equity ownership of 13.9% 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 matures on February 27, 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 nine months ended September 30, 2020, $81,625 of debt discount was amortized to interest expense. The Amerisource Stretch Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty.

On September 28, 2018, the Company entered into a secured note purchase agreement with an individual investor for the purchase and sale of a convertible promissory note (“Convertible Note”) in the principal amount of $250,000. The Convertible Note is convertible at any time after the date of issuance into shares of the Company’s common stock at a conversion price of $0.50 per share. Interest on the Note shall be paid to the investor at a rate of 8.5% per annum, paid on a quarterly basis, and the maturity date of the Convertible Note is two years after the issuance date. The Convertible Note is secured by all of the assets of the Company, subject to prior liens and security interests. The Company evaluated the Convertible Note and determined is a conventional convertible instrument. As a result, a beneficial conversion feature was calculated as $100,000 at the time of issuance and recorded as a discount. During the nine months ended September 30, 2020, $39,075 of the discount was fully amortized. On February 27, 2020, the principal amount of $250,000 was converted into the Amerisource Stretch Note and is convertible into the Company’s common stock at a fixed exercise price of $0.25 per share anytime while the note is outstanding.

In April 2019, the Company issued a convertible promissory note in the amount of $50,000 to an individual investor. The note bears an interest rate of 8.50 %, payable in cash quarterly, matures in two years and is convertible at any time into shares of the Company’s common stock at a fixed conversion price of $0.50 (fifty cents) per share.

In August and September 2020, the Company entered into secured note purchase agreements with seven individual investors for the purchase and sale of convertible promissory notes (“Convertible Notes”) in the principal amount of $1,294,000. The Convertible Notes are convertible at any time after the date of issuance into shares of the Company’s common stock at a conversion price of $0.10 per share. Interest on the Convertible Notes shall be paid to the investors at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Convertible Notes is two years after the issuance date. The Convertible Notes are secured by all of the assets of the Company, subject to prior liens and security interests. The Company also issued a total of 1,941,000 shares of common stock to the investors, including 1,011,000 to related parties. The Company recognized a debt discount of $895,967 which is equivalent to the relative fair value of the 1,941,000 common shares and the beneficial conversion feature on the Convertible Notes. During the nine months ended September 30, 2020, $43,427 of the discount was amortized. Of the $1,294,000 principal amount, $944,000 of the convertible notes are held by investors who are considered related parties, primarily existing debt holders.  None of the common shares were physically issued to investors as of September 30, 2020. The common shares were issued to the investors by the transfer agent in November 2020.

As of September 30, 2020, the convertible notes, net balance was $1,753,593 which includes related party balances of $1,703,593 and current portion of convertible notes of $50,000. As of December 31, 2019, the convertible notes balance was $260,926.

Future maturities of debt as of September 30, 2020 are as follows:

NOTE 9 – STOCKHOLDERS’ DEFICIT

During the nine months ended September 30, 2020, the Company issued 2,498,736 shares of the common stock to the noteholders in connection with the sale of the Amerisource Stretch Note. Amerisource serves as agent for the note holders, owns approximately 13.5% of common shares and has an officer on the Board of Directors of the Company.

In July 2020, the Company issued 445,926 shares of its common stock for the settlement of $15,000 of accounts payable and $29,593  of accrued interest. The fair value of the common stock issued was $66,000  resulting in a loss on settlement of $21,407.

Preferred Stock – Series A Convertible Preferred stock

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

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

At any time from issuance, the stated value of each outstanding share of Series A Preferred Stock, plus accrued dividends thereon, shall be convertible (in whole or in part), at the option of the Holder into shares of the Company’s Common Stock at a fixed conversion price of $0.50 per share on the date on which the Holder notices a conversion. As of September 30, 2020, the Company has accrued $82,658 for the Series A preferred stock dividend included in accrued expenses and other liabilities.

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

On July 20, 2020, in connection with the sole holder of the Series A Convertible Preferred stock signing a personal guarantee on a 5J equipment note, the Company agreed and filed an amendment the Series A certificate of designation and terms to increase the coupon rate from 3% to 5% for the remainder of the term and to extend the term prior to non redeemable conversion from June 4, 2020 to July 20, 2021.

On August 5, 2020, the following terms of the Series A Preferred Stock were amended:

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

Preferred Stock – Series B Convertible Preferred stock

On February 20, 2020 the company filed a Certificate of Designation of Preferences, Rights and Limitations of 5% Series “B” Convertible Preferred Stock to create a new class of stock in connection with its pending acquisition. This Series B Convertible Preferred stock has designated 6,000 shares, has a stated value of $1,000 per share and was delivered to the seller of 5J Entities at closing.

The Series B Preferred Stock shall, with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of the Corporation, rank senior to all classes of Common Stock and to each other class of Capital Stock of the Corporation or series of Preferred Stock of the Corporation existing or hereafter created. The Series B Preferred Stock shall pay a five percent (5%) annual dividend on the outstanding Series B Preferred Stock, all of which shall be accrued until the Series B Preferred Stock has been converted.

At any time from issuance, the stated value of each outstanding share of Series B Preferred Stock, plus accrued dividends thereon, shall be convertible (in whole or in part), at the option of the Holder into shares of the Company’s Common Stock at a fixed conversion price of $1.25 per share on the date on which the Holder notices a conversion. As of September 30, 2020, the Company has accrued $177,123 for the Series B preferred stock dividend included in accrued expenses and other liabilities.

All outstanding shares of Series B Preferred Stock, and accrued Dividends thereon, shall automatically convert into shares of the Corporation’s Common Stock on the date that is thirty-six (36) months after the date of the issuance

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

NOTE 10 – STOCK OPTIONS AND WARRANTS

Summary stock option information is as follows:

On February 28, 2020, the Company issued 2,025,000 common stock options to 5J and SMG employees. The options vest equally over a three-year period starting on February 28, 2021. The Company valued the stock options using the Black-Scholes model with the following key assumptions: Stock price, $0.168 , Exercise price, $0.30, Term 5 years, Volatility 222.83%, Discount rate, 0.89%. 

The weighted average remaining contractual life is approximately 2.49 years for stock options outstanding on September 30, 2020. At September 30, 2020 there was no intrinsic value to the outstanding stock options.

During the nine months ended September 30, 2020 and 2019, the Company recognized $72,136 and $147,431 of stock-based compensation, respectively, related to outstanding stock options. At September 30, 2020, the Company had $272,041 of unrecognized expenses related to options.

Summary Stock warrant information is as follows:

In March 2020, the Company granted 333,334 warrants to two debt holders with a ten-year term and an exercise price of $0.20. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.18, Exercise price, $0.20, Term 10 years, Volatility 183.29%, Discount rate, 0.74%. During the nine ended September 30, 2020, the fair value of $59,439 was recoded as a notes payable discount and will be amortized over the life of the notes payable.

The weighted average remaining contractual life is approximately 6.35 years for stock warrants outstanding on September 30, 2020. At September 30, 2020 there was no intrinsic value of outstanding stock warrants.

NOTE 11 – ACQUISITION

5J Entities

On February 27, 2020 we entered into Membership Interest Purchase Agreements for the acquisition of all of the membership interests of each of 5J Oilfield Services LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas limited liability company (“5J Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as the “5J Entities”) (the “Transaction”). The total purchase price for the 5J Entities was $27.3 million. Due to the recent timing of the acquisition, the Company is currently in the process of determining the fair value of the net assets acquired and liabilities assumed.

Pursuant to the terms of the 5J Oilfield Membership Interest Purchase Agreement (“5J Oilfield Agreement”), we acquired 100% of the issued and outstanding membership interests from the sole member of 5J Oilfield (“5J Oilfield Member”), pursuant to which 5J Oilfield has become a wholly-owned subsidiary of SMG. Pursuant to the terms of the 5J Oilfield Agreement, we have: (i) paid the 5J Oilfield Member $6,840,000 in cash; (ii) issued 6,000 shares of our 5% Series B Convertible Preferred Stock (“Preferred Stock”), stated value $1,000 per share; (iii) assumed or refinanced the obligation for truck notes owed by 5J and its affiliates in the principal amount of $1,034,000 and paid off a community line of credit balance as of closing in the amount of $5.86 million; and (iv) caused 5J Oilfield to issue a note (“Seller Note”) to the 5J Oilfield Member in the principal amount of $2,000,000 (“5J Oilfield Purchase Price”).

The Preferred Stock issued in connection with the acquisition of the 5J Entities is convertible at $1.25 per share at any time after its issuance and shall automatically convert into shares of the Company’s common stock, par value $.001 per share, three years from the date of issuance. The Company shall pay a quarterly dividend of 5% per annum to the holder of the Preferred Stock, subject to certain conditions related to the EBITDA of the 5J Entities. In the event that the consolidated quarterly EBITDA of the 5J Entities is not in excess of the aggregate fixed monthly payments made to Amerisource (defined below) and Utica (defined below), the 5J Oilfield Member will have the option of accruing the dividend, or converting such amount due into shares of the Company’s common stock at the market price at such time. The holder of the Preferred Stock shall vote on all matters presented to the Company’s common stockholders on an as converted basis. All of the shares of Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Transaction are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder.

The acquisition of the 5J Entities is being accounted for as a business combination under ASC 805. The Company is continuing to gather evidence to evaluate what identifiable intangible assets were acquired, such as a customer list, and the fair value of each, and expects to finalize the fair value of the acquired assets within one year of the acquisition date. The following information summarizes the provisional purchase consideration and preliminary allocation of the fair values assigned to the assets at the purchase date:

The Company’s consolidated revenue for the three and nine months ended September 30, 2020 were $6,810,714 and $18,670,321 and with consolidated net loss for the three and nine months ended September 30, 2020 of $3,435,575 and $6,757,652 related to the operations of 5J Entities since the acquisition date.

Trinity Services LLC

On June 3, 2019 we entered into an Agreement and Plan of Share Exchange dated as of such date (the “Trinity Exchange Agreement”) with Trinity Services LLC, a Louisiana limited liability company (“Trinity”) and the sole member of Trinity (the “Trinity Member”). The acquisition of Trinity closed on June 26, 2019 (“Closing Date”). On the Closing Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and outstanding membership interests of Trinity (“Trinity Membership Interests”) from the Trinity Member pursuant to which Trinity will become our wholly owned subsidiary (“Trinity Acquisition”). In accordance with the terms of the Trinity Exchange Agreement, and in connection with the completion of the Acquisition, on the Closing Date we will: (i) issue 2,000 shares of our 3% Series A Secured Convertible Preferred Stock (“Preferred Stock”), stated value $1,000 per share, (ii) pay $500,000 in cash to the Trinity Member, and (iii) assume approximately $850,000 in notes related to equipment owned by Trinity (“Purchase Price”).

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

All of the shares of Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value of $2,000,000. The fair value of the Preferred Stock was based on the Black-Scholes model with the following key assumptions ranging from: Stock price $0.50, Exercise price $0.42, Term 3 years, Volatility 36% and Discount rate of 1.7%.

The acquisition of Trinity is being accounted for as a business combination under ASC 805. The following information summarizes the final purchase consideration and allocation of the fair values assigned to the assets at the purchase date:

The Company’s consolidated revenue for the three and nine months ended September 30, 2020 were $388,170 and $1,625,778 with consolidated net loss for the three and nine months ended September 30, 2020 of $242,903 and $607,361 related to the operations of Trinity since the acquisition date.

Unaudited Pro Forma Financial Information

The following table sets forth the pro-forma consolidated results of operations for the three and nine months ended Sept 30, 2020 and 2019 as if the 5J Acquisition and Trinity acquisition occurred on January 1, 2019. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisitions had taken place on the dates noted above, or of results that may occur in the future.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Employment Agreements

On October 31, 2017, and made effective as of September 20, 2017, the Company entered into an employment agreement with Stephen Christian, the former Managing Member, and current President, of our subsidiary MG and EVP of SMG. The term is for three years with a monthly salary of $8,333 for the first six months of the effective date and $10,000 a month thereafter. Other terms include payment of Mr. Christian’s health care insurance, use of a company truck and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Christian six months’ severance pay. In May 2019, the Company adjusted the pay to $14,167 per month.

On October 31, 2017, and made effective October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief Executive Officer. The term is for three years with a monthly salary of $15,000 for the period. The terms of the agreement also include providing health care, auto allowance of $750 per month if a car is not provided by the Company, and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Flemming six months’ severance pay. At the 5J closing, in connection with Mr. Flemming’s absolute requirement to personally guarantee the Utica debt of the acquisition, the Board of directors granted Mr. Flemming a $5,000 per month guarantee fee to be paid monthly until the guarantee was eliminated. Mr. Flemming waived that fee during through September 30, 2020.

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 13 – LEASES

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

The components of lease cost for operating and finance leases for the three and nine months ended September 30, 2020 and 2019 were as follows:

Supplemental cash flow information related to leases was as follows:

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at September 30, 2020:

The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.

The following table provides the maturities of lease liabilities at September 30, 2020:

At September 30, 2020 the Company had no additional leases which had not yet commenced.

The Company acquired six operating leases for equipment, office and warehouse space as part of the 5J Acquisition and recognized a right of use asset and operating lease liability of $1,510,897 as part of the purchase price accounting. The remaining terms of the acquired leases range from 36 and 60 months.

NOTE 14 – RELATED PARTY TRANSACTIONS

James Frye, who currently serves as President of our 5J subsidiary, and owns our $6 million Series B Convertible Preferred Stock, also owns or has control over 5J Properties LLC, an entity that is the lessor to three leases with the Company. These three leases located in Palestine, 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.

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. 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. The Company shall pay to Consultant an amount and in a form to be mutually agreed by both parties.

During the three months ended September 30, 2020, the company entered into new convertible notes payable with related parties totaling approximately $944,000 in principal. See Note 8.

NOTE 15 – SUBSEQUENT EVENTS

In October 2020, the Company awarded a total of 205,000 common stock options to certain employees to purchase common stock at an exercise price of $0.30 per share for a period of six years, vesting annually over three years.

On October 20, 2020 the Company expanded the Board of Directors by filling a vacant seat and adding two seats including installing Messer’s Brady Crosswell, Todd Riedel and James E. Frye Jr to the board.

On November 10, 2020, the Company filed an amendment to its certificate of incorporation with the Secretary of State of the State of Delaware, increasing its authorized number of shares of common stock to 250,000,000 in connection with our Definitive 14C information statement filed with the SEC on September 28, 2020, pursuant to which a majority of our stockholders entitled to vote thereon approved such action.

On November 12, 2020, the Company physically issued the 1,941,000 common shares to the investors of the August and September 2020 convertible notes, pursuant to the terms of the note agreements. These shares were shown as issued and outstanding as of September 30, 2020.

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

Cautionary Note Regarding Forward-Looking Statements

Unless otherwise indicated, the terms “SMG Industries,” “SMG,” the “Company,” “we,” “us,” and “our” refer to SMG Industries Inc., and our wholly-owned subsidiaries 5J Oilfield Services, LLC, 5J Trucking, LLC, 5J Specialized LLC, MG Cleaners LLC, Momentum Water Transfer Services LLC, Jake Oilfield Solutions LLC, and Trinity Services LLC..  In this Quarterly Report on Form 10-Q, we may make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

The statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms.  These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of SMG Industries Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. There are a number of factors that could negatively affect our business and the value of our securities, including, but not limited to, fluctuations in the market price of our common stock; changes in our plans, strategies and intentions; changes in market valuations associated with our cash flows and operating results; the impact of significant acquisitions, dispositions and other similar transactions; our ability to attract and retain key employees; changes in financial estimates or recommendations by securities analysts; asset impairments; decreased liquidity in the capital markets; and changes in interest rates. Such factors could materially affect our Company's future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to our Company. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues that we might face.  We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission (“SEC”) that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business including the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Overview

We are a growth-oriented transportation and industrial services company in the domestic United States.  Our strategy is a ‘buy & build’ growth strategy of consolidating middle market companies and generating organic growth post-acquisition when possible from removing business constraints and strategic cross-selling of products and services across market segments benefiting us with higher utilization and customers with more efficient costs.

Our two focused market segments are served via the following wholly-owned operating subsidiaries:

Transportation Services:

Industrial Services:

These two focused market segments provide a range of logistics and industrial services including:

We are headquartered in Houston, Texas with facilities in Odessa, Floresville, Palestine, Carthage, and Waskom, Texas. Our web site is www.SMGIndustries.com,

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

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

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

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

On June 27, 2019, we acquired one hundred percent of the issued and outstanding membership interests (“Trinity Membership Interests”) of Trinity Services LLC, a Louisiana limited liability company (“Trinity”) pursuant to which Trinity became our wholly-owned subsidiary (the “Trinity Acquisition”). In connection with the Trinity Acquisition, we issued 2,000 shares of our Series A Convertible Preferred Stock, with a stated value of $1,000 per share, to the sole member of Trinity. The Series A Convertible Preferred Stock is convertible at a price of $0.50 per share and is convertible into an aggregate of 4,000,000 shares of the Company’s common stock.

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”), each a Texas limited liability company. The aggregate purchase price of 5J was $27.3 million, consisting of a combination of cash, notes, Series B Convertible Preferred Stock and the assumption and refinance of debt.

In July 2020 , through our newly-formed subsidiary, 5J Specialized LLC, establish for our super heavy haul business, we acquired a 2013 Goldhofer modular multi-axle trailer and a 2016 Goldhofer multi-trailer for approximately $1.350 million in connection with our expansion into the super heavy haul niche of the Transportation Services market segment.

In March 2020 the World Health Organization declared COVID-19 a pandemic. We are still assessing the impact COVID-19 may have on our business, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.  The extent to which the COVID-19 pandemic and global efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic.

Recent Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

Critical Accounting Policies and Estimates

The preparation for financial statements and related disclosures in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For a description of our significant accounting policies, see the Company’s audited financial statements for the year ended December 31, 2019, included in the Company’s Form 10-K/A as filed with the SEC on June 8, 2020. Of these policies, the following are considered critical to an understanding of the Company’s unaudited consolidated financial statements as they require the application of the most difficult, subjective and complex judgments: (1) Use of Estimates, (2) Share-Based Payment Arrangements, (3) Revenue Recognition and (4) Income Taxes. Management will base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

Results of Operations

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Our sales for the three months ended September 30, 2020 were $7,562,148, an increase of approximately 266%, from $2,064,516 for the three months ended September 30, 2019. The increase in revenues for the three months ended September 30, 2020 was primarily attributable to the additional revenues of the 5J acquisition concluded on February 27, 2020, not present in the year ago comparable period.

During the three months ended September 30, 2020, cost of sales increased as a percentage of sales to 126% of revenues, or $9,423,089, compared to 78.5% of revenues or $1,621,841, for the comparable 2019 period. The increase in cost of sales as a percentage of revenues is primarily the result of the increased non-cash deprecation cost added from the asset-heavy 5J acquisition, and the change in sales margin mix, not present in the year ago comparable period.

For the three months ended September 30, 2020, operating expenses were $1,355,523, or 18% of sales, representing an increase of $539,652, from $815,871 or 39.5% of sales for the three months ended September 30, 2019. The increase in operating expenses was related to increases in selling, general and administrative expenses as a percentage of sales during the three months ended September 30, 2020 compared to the three month period ended September 30, 2019 was primarily due to higher sales covering more fixed costs within selling, general and administrative expenses partially offset by higher insurance expenses, professional fees and bad debt expense of $163,035 during the third quarter 2020.

Other expense, net was $1,179,592, an increase of $946,613 for the three months ended September 30, 2020 compared to $232,979 during the three month period ended September 30, 2019. The increase in other expense during the three months ended September 30, 2020 resulted from higher interest expense with our revolving line of credit, equipment leases, notes, funding agreements and convertible notes payable compared to the three months ended September 30, 2019.

During the three months ended September 30, 2020 we incurred a net loss attributable to common shareholders of $4,494,001 or $0.24 per basic and diluted earnings per share. For the three months ended September 30, 2019 we incurred a net loss attributable to common shareholders of $606,175 or $0.04 per basic and diluted earnings per share. The net loss in the three month period ended September 30, 2020 resulted primarily from higher cost of revenues and resulting in a loss from operations as well as higher interest expenses, compared to the three month period ended September 30, 2019. The basic weighted average number of shares of common stock outstanding was 18,585,474 and 14,332,823 for the three months ended September 30, 2020 and 2019, respectively.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Our sales for the nine months ended September 30, 2020 were $21,977,914, an increase of approximately 347%, from $4,911,401 for the nine months ended September 30, 2019. The increase in revenues for the nine months ended September 30, 2020 was primarily attributable to the additional revenues of the 5J acquisition concluded on February 27, 2020, not present in the year ago comparable period.

During the nine months ended September 30, 2020, cost of sales increased as a percentage of sales to 113% of revenues, or $24,744,437, compared to 81.4% of revenues or $3,999,156, for the comparable 2019 period. The increase in cost of sales as a percentage of revenues is primarily the result of the increased non-cash depreciation expense added from the asset heavy 5J acquisition, and change in sales margin mix not present in the year ago comparable period.

For the nine months ended September 30, 2020, operating expenses increased to $5,114,564, or 23.4% of sales, representing an increase of $2,623,247, from $2,491,397 or 50.7% of sales for the nine months ended September 30, 2019. The increase in operating expenses was related to increases in selling, general and administrative expenses as a percentage of sales during the nine months ended September 30, 2020 compared to the nine month period ended September 30, 2019 was primarily due to higher sales covering more fixed costs within selling, general and administrative expenses and higher acquisition costs during the nine month period ended September 30, 2020 of approximately $1,485,829 resulting from the 5J acquisition as well as higher insurance costs, bad debt expense of $262,558 and professional fees.

Other expense, net was $2,753,185, an increase of $2,034,910 for the nine months ended September 30, 2020 compared to $718,275 during the nine month period ended September 30, 2019. The increase in other expense during the nine months ended September 30, 2020 resulted from higher interest expense with our revolving line of credit, equipment lease, funding agreements and notes payable, and higher amortization of debt discount compared to the nine months ended September 30, 2019.

During the nine months ended September 30, 2020 we incurred a net loss attributable to common shareholders of $10,863,313, or $0.63 per basic and diluted earnings per share. For the nine months ended September 30, 2019 we incurred a net loss attributable to common shareholders of $2,297,347 or $0.17 per basic and diluted earnings per share. The net loss in the nine month period ended September 30, 2020 resulted primarily from higher cost of revenues resulting in a loss from operations as well as higher interest expenses, including higher non-cash expenses of depreciation and amortization of debt discounts, compared to the nine month period ended September 30, 2019. The basic weighted average number of shares of common stock outstanding was 17,223,571 and 13,493,944 for the nine months ended September 30, 2020 and 2019, respectively.

Liquidity and Capital Resources

As of September 30, 2020, our total assets were $32,130,051, comprised of $346,559 of cash and cash equivalents, $401,257 in restricted cash, $6,187,737 in accounts receivable, $125,454 in inventory, prepaid and other current assets of $1,405,993, $21,441,324 in net property and equipment, $575,209 in other assets, $1,522,773 in ROU Asset – operating lease, and $123,745 in net intangible assets. This is an increase in total assets of $25,698,667 over the total assets at December 31, 2019 of $6,431,384. As of September 30, 2020, we have a working capital deficit of $9,809,238, compared to a working capital deficit of $4,062,860 at December 31, 2019.

During the nine months ended September 30, 2020, we had cash used in operating activities of $3,587,920 compared to $585,205 of cash used in operating activities for the nine months ended September 30, 2019. The net cash used in operating activities for the nine months ended September 30, 2020 consists primarily of our net loss, changes in accounts payable, and right of use operating lease liabilities, and loss on disposal of assets, partially offset by increases to depreciation and amortization, accounts receivable, accrued expenses and other liabilities, prepaid expenses and other assets, and amortization of deferred financing costs. During the nine months ended September 30, 2019, we had cash used in operating activities of $585,205, the net cash used in operating activities for the nine months ended September 30, 2019 consists primarily of our net loss, right of use operating lease liabilities, deferred revenue and inventory changes, partially offset by increases to accounts payable, depreciation and amortization, stock based compensation, bad debt expense as well as noncash lease expenses, accrued expenses and other liabilities.

During the nine months ended September 30, 2020, we had net cash used in investing activities of $6,470,247 from cash paid for the acquisition of 5J of $6,320,168, $194,079 of cash paid for purchase of property and equipment and $44,000 in cash proceeds from the sale of property and equipment during the period. During the nine months ended September 30, 2019, we had net cash used in investing activities of $612,819 from cash paid for the acquisition of Trinity Services and cash paid for the purchase of equipment during the period.

Net cash provided by financing activities was $10,775,629 for the nine months ended September 30, 2020, compared to net cash provided by financing activities of $1,209,769 for the nine months ended September 30, 2019. Our net cash provided by financing activities for the nine months ended September 30, 2020 resulted primarily from the net proceeds from our secured notes payable of $7,531,810, net proceeds from our secured line of credit of $2,798,447, and the proceeds from the issuance of convertible notes payable of $2,644,295, which was partially offset by payments on notes payable and lease finance liabilities of $1,949,988, payments of deferred financing costs of $223,558 and payments on notes payable related party of $35,777. For the nine months ended September 30, 2019, net cash provided by financing activities was $1,209,769. Our net cash provided by financing activities for the nine months ended September 30, 2019 resulted primarily from the net proceeds from our secured line of credit of $711,809, proceeds from sales of our common stock of $359,000, the proceeds from the issuance of notes payable of $480,000, which was partially offset by payments on notes payable of $275,936 and payments on note payable related party of $170,967, and payments on right of use liabilities – finance leases of $48,376.

Our net increase in cash for the nine months ended September 30, 2020 was $717,462, as compared to a net cash increase of $11,745 in the nine months ended September 30, 2019.

At September 30, 2020 and December 31, 2019, we had cash and cash equivalents and restricted cash of $747,816 and $30,354, respectively. Based on the Company’s acquisition of 5J Oilfield Services LLC and 5J Trucking LLC on February 27, 2020, current revenue, and anticipated gross margin improvement from cost cutting measures implemented, along with anticipated new growth from cross selling our customers, we believe cash flow will improve during the remainder of 2020.

We do not believe our cash flows from operations and our current available capital, including the accounts receivable line of credit with an accounts receivable lender established in February 2020 are presently sufficient to sustain our current level of operations for the next twelve months. At September 30, 2020 this line of credit had drawn approximately $3,225,630 of the $10,000,000 of availability. Additionally, we believe we will need to raise additional funds in order to meet the growth, capital expenditures and acquisitions planned for our business through the next twelve months. Currently we are not a party to any binding agreement with respect to potential investments in, or acquisitions of businesses, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

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

Off-Balance-Sheet Transactions

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

Contractual Commitments

None

Item 3.  Qualitative and Quantitative Disclosures about Market Risk.

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

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures: Our management carried out an evaluation of the effectiveness and design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and interim Chief Financial Officer has concluded that, at September 30, 2020, such disclosure controls and procedures were not effective.

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

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting that occurred during the three month period ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

None.

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

Between August 20, 2020 and September 17, 2020, we sold an aggregate of $1,294,000 principal amount of convertible notes to accredited investors pursuant to Section 4(2) of the Securities Act of 1933, as amended. One and one-half shares of our common stock were issued to the purchasers of the convertible notes for each one dollar in principal amount of convertible note purchased by the investors, or an aggregate of 1,941,000 shares of common stock. The proceeds from the sale of the convertible notes were used by the Company for working capital and general corporate purposes.

None.

Not applicable.

On August 3, 2020, R. Michael Villarreal resigned as a member of our board of directors.  Mr. Villareal’s resignation as a member of our board of directors is not a result of any disagreement with the Company as to its operations, policies or practices.  On August 13, 2020, SMG Industries Inc.’s board of directors appointed Mr. Joseph Page to serve as a member of the Company’s board of directors to fill the vacancy created by the resignation of R. Michael Villarreal.  Mr. Page has been appointed to serve until the next election of directors or until his earlier resignation or removal.

Joseph Page was appointed to serve as a member of our board of directors on August 13, 2020.  Since 2016, Mr. Page has been the Chief Administrative Officer, EVP & General Counsel of Amerisource Capital, a US-based financial lending and equity capital company.  Since 2014, Mr. Page has been Of Counsel to the law firm of Selman, Munson & Lerner.  Mr. Page previously served as CEO and serves as a Director of Venntis Technologies, a technology company focused on lighting and touch integration solutions for the horticultural, appliance and auto industries, since 2014.  Mr. Page also served as CAO, interim CEO and a Director of Synagro Technologies, a private equity backed waste-to-energy company from 2009-2014. Mr. Page also sits on the non-profit boards of HiSPrint Ministries, Tres Dias and Ft. Bend Texans Sports associations.  Mr. Page graduated from The University of Texas with a Bachelor’s of Science in Molecular Biology. Mr. Page received his Doctorate of Jurisprudence in 1994 from South Texas College of Law.

In September 2020, the Company’s board of directors executed a unanimous written consent amending the Company’s by-laws to reflect the Company’s correct corporate name.

On October 20, 2020, the Company filed an amendment to its certificate of incorporation increasing the authorized number of shares of its common stock from 25,000,000 to 250,000,000.

On October 20, 2020 the Company expanded the Board of Directors by adding three seats and installed Messer’s Brady Crosswell, Todd Riedel and James E. Frye Jr to the board.

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.