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
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? 5J Oilfield Services LLC
? 5J Specialized LLC
? 5J Transportation LLC
? 5J Logistics Services 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
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 site is www.SMGIndustries.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 we sold MG Cleaners LLC ("MG"), an O&G drilling rig cleaning
company. The results of operations of MG are reflected in the Consolidated
Statements of Operations for the year ended December 31, 2020 as "net loss from
discontinued operations".
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 December 31, 2021 and 2020
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 years ended December 31, 2021 and 2020 as "net
loss from discontinued operations".
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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.
All of our 5J subsidiaries are referred to as the 5J Transportation Group.
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, 2021, included in the Company's Form 10-K as
filed with the SEC on April 15, 2022. Of these policies, the following are
considered critical to an understanding of the Company's condensed financial
statements as they require the application of the most difficult, subjective and
complex judgments: (1) Use of Estimates, (2) Share-Based Payment Arrangements,
and (3) Income Taxes. Management will base its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from these estimates under
different assumptions or conditions.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021
The following table sets forth the results of our operations for the three
months ended March 31, 2022 and 2021.
Three months ended March 31,
2022 2021
Sales $ 16,181,053 $ 7,602,328
Cost of goods sold (14,725,105) (8,700,508)
Gross profit (loss) 1,455,948 (1,098,180)
Operating expenses (2,463,881) (1,512,400)
Loss from operations (1,007,933) (2,610,580)
Other expense (2,628,085) (1,197,988)
Loss from continuing operations (3,636,018) (3,808,568)
Income (loss) from discontinued operations 4,888 (56,455)
Net loss $ (3,631,130) $ (3,865,023)Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
The Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
present the assets and liabilities of MG and Trinity as discontinued operations.
The Consolidated Statements of Operations for the quarters ended March 31, 2022
and 2021 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, 2022 and 2021 present operating, investing and financing activities of
MG and Trinity as cash flows from or used in discontinued operations.
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Sales for the quarter ended March 31, 2022 increased to $16,181,053, an increase
of 112.8% from $7,602,328 for the quarter March 31, 2021. The increase in sales
in the first quarter of 2022 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,
over-dimensional infrastructure items and large natural gas compressors. Our
increase in revenues was also attributable to the new contribution of revenues
from our 5J Transportation flatbed and 5J Logistics brokerage division, not
present in the comparable period in 2021 along with the general improvement in
the domestic United States economy from COVID-19 pandemic.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2022, was $14,725,105,
compared to $8,700,508 for the same period of 2021. As a percentage of overall
sales, the cost of goods sold was 91% during the three months ended March 31,
2022, compared to 114.4% for the same fiscal period a year ago. The percentage
increase in cost of goods sold includes $1,357,401 in non-cash depreciation
charges. Additionally, driver payroll and settlements and fuel costs were
$8,836,068 and $1,233,786, respectively. We currently believe the Company will
improve cost of sales as a percentage of sales through increased revenues
covering more fixed costs within cost of sales 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, 2022, was $1,455,948, compared
to a gross loss of $1,098,180 for the same period of 2021. Our gross loss margin
was 9.0% during the three months ended March 31, 2022, compared to -14.4% for
the same fiscal period a year ago. The improvement in gross loss margin is due
to higher volumes of revenues and more favorable pricing as compared to the
first quarter 2021 results.
Operating Expenses
Three months ended March 31,
2022 2021
Operating expenses:
General and administrative $ 2,463,881 $ 1,512,400
Operating expenses $ 2,463,881 $ 1,512,400Our operating expenses for the fiscal period consisted of two components:
general and administrative expenses and research and development expenses. Total
operating expenses were $2,463,881 in the three months ended March 31, 2022,
compared to $1,512,400 in the same period of 2021, representing an increase in
operating expenses of $951,481, or 62.9%, from the three months ended March 31,
2021. The increase in operating expenses was primarily attributable to higher
wage expense from additional managerial personnel added during the period for
our newer divisions of Logistics brokerage and heavy haul division as well as
general corporate expenses.
Loss From Operations
As a result of the preceding, our loss from operations was $1,007,933 during the
three months ended March 31, 2022, compared with $2,610,580 for the same period
of 2021. This $1,602,647, or 61.4%, improvement in our loss from operations was
primarily attributable to gross margin improvement and higher revenues reducing
our gross loss in the first quarter 2022 compared to the year ago period.
Net Loss From Continuing Operations
The result was that our net loss from continuing operations was $3,636,018
during the three months ended March 31, 2022, compared with $3,808,568 for the
same period of 2021. This $172,550, or 4.5%, decrease in our net loss from
continuing operations was primarily attributable to higher operating expenses
and certain non-cash and one time charges partially offset by improved cost of
sales for the first quarter 2022 compared to the comparable period in 2021.
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
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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 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 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.
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
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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 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.
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 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 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.
During the year ended December 31, 2021, we sold an aggregate of $5,287,740
principal amount of convertible promissory notes and issued 7,931,612 shares of
restricted common stock in connection therewith.
We had net working capital deficit of $9,959,137, as of March 31, 2022, compared
to a deficit of $10,295,788 as of December 31, 2021.
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, 2022 and 2021:
Three months ended March 31,
2022 2021
Cash provided by (used in):
Operating activities from continuing operations $ (2,166,931) $ (1,585,823)
Operating activities from discontinued operations
- 530,013
Operating activities (2,166,931) (1,055,810)
Investing activities from continuing operations (37,022) (35,000)
Investing activities from discontinued operations - -
Investing activities (37,022) (35,000)
Financing activities from continuing operations 4,374,485 1,331,787
Financing activities from discontinued operations - (150,173)
Financing activities $ 4,374,485 $ 1,181,614
Operating Activities
Net cash used in operating activities was $2,166,931 for the three months ended
March 31, 2022, an increase of $1,111,121, or 105.2%, from cash used in
operating activities of $1,055,810 during the same period of 2021, including $0
and $530,013 of cash flows provided by discontinued operations, respectively.
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 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.
For the quarter ended March 31, 2021, net cash used in continuing operating
activities of $1,585,823 consisted of net loss from continuing operations of
$3,808,568, plus $1,706,170 of non-cash items, consisting primarily of
depreciation and amortization of
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$1,418,401, amortization of deferred financing costs of $245,722 and
amortization of right of use assets - operating leases of $88,589, less $516,575
changes in operating assets and other operating activities.
Investing Activities
Net cash used in investing activities was $37,022 for the three months ended
March 31, 2022, compared to $35,000 for the three months ended March 31, 2021.
For the three months ended March 31, 2022, net cash used in investing activities
consisted of $37,022 of fixed asset additions. For the quarter ended March 31,
2021, net cash used in investing activities consisted of $35,000 paid to the
buyer of MG Cleaners.
Financing Activities
Net cash provided by financing activities was $4,374,485 for the three months
ended March 31, 2022, compared to $1,181,614 for the three months ended
March 31, 2021, including $0 and $150,173 of cash used in related to
discontinued operations, respectively.
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.
For the three months ended March 31, 2021, net cash provided by financing
activities consisted of net proceeds from notes payable of $1,874,002 and
proceeds from convertible notes payable of $150,000, offset by payments on notes
payable of $338,001 and net payments on secured lines of credit of $354,214.
Off-Balance-Sheet Transactions
As of March 31, 2022, the Company has an open letter of credit in the amount of
$414,638 as collateral for its insurance policy.
Contractual Commitments
None
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