0001104659-20-060051.txt : 20200512 0001104659-20-060051.hdr.sgml : 20200512 20200512134135 ACCESSION NUMBER: 0001104659-20-060051 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20200227 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20200512 DATE AS OF CHANGE: 20200512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMG Industries Inc. CENTRAL INDEX KEY: 0001426506 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 510662991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-54391 FILM NUMBER: 20868453 BUSINESS ADDRESS: STREET 1: 710 N. POST OAK ROAD STREET 2: SUITE 400 CITY: HOUSTON STATE: TX ZIP: 77024 BUSINESS PHONE: 7138213153 MAIL ADDRESS: STREET 1: 710 N. POST OAK ROAD STREET 2: SUITE 400 CITY: HOUSTON STATE: TX ZIP: 77024 FORMER COMPANY: FORMER CONFORMED NAME: SMG Indium Resources Ltd. DATE OF NAME CHANGE: 20080423 FORMER COMPANY: FORMER CONFORMED NAME: Specialty Metals Group Indium Corp. DATE OF NAME CHANGE: 20080207 8-K/A 1 tm2018745d1_8ka.htm FORM 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): May 12, 2020 (February 27, 2020)

SMG INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Delaware	000-54391	51-0662991
(State or other jurisdiction	(Commission	(IRS Employer
of incorporation)	File Number)	Identification No.)

710 N. Post Oak Road, Suite 315
Houston, Texas		77024
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(713-821-3153)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation to the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

EXPLANATORY NOTE

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”).

This Amendment No. 1 on Form 8-K/A is being filed by the Company to amend the Current Report on Form 8-K filed on March 3, 2020 (the “Original Report”), solely to provide the disclosures required by Item 9.01 of the Form 8-K that were not previously filed with the Original Report. Except as provided herein, the disclosures made in the Original Report remain unchanged.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

(a)

Financial Statements of Business Acquired.

The audited financial statements of 5J Oilfield and 5J Trucking for the years ended December 31, 2018 and December 31, 2017 are filed herewith as Exhibit 99.1 and Exhibit 99.2, respectively.

The unaudited financial statements of 5J Oilfield and 5J Trucking for the nine months ended September 30, 2019 and 2018 are filed herewith as Exhibit 99.3 and Exhibit 99.4, respectively.

(b)

Pro Forma Financial Information. The unaudited pro forma combined balance sheet for the Company as of September 30, 2019 and unaudited pro forma combined statement of operations for the Company for the nine months ended September 30, 2019 and for the year ended December 31, 2018, and the notes to the unaudited pro forma combined financial statements, all giving effect to the acquisition by the Company of the 5J Entities are filed herewith as Exhibit 99.5.

(c)	Not Applicable.

(d)

Exhibits.

The Exhibit Index below is incorporated herein by reference.

EXHIBIT INDEX

Exhibit
Number	Exhibit Title

99.1	Audited Financial Statements of 5J Oilfield Services, LLC for the Years Ended December 31, 2018 and 2017.

99.2	Audited Financial Statements of 5J Trucking, LLC for the Years Ended December 31, 2018 and 2017.

99.3	Unaudited Financial Statements of 5J Oilfield Services LLC for the Nine Months Ended September 30, 2019 and 2018.

99.4	Unaudited Financial Statements of 5J Trucking, LLC for the Nine Months Ended September 30, 2019 and 2018.

99.5

Unaudited Pro Forma Combined Balance Sheet of the Company as of September 30, 2019, Unaudited Pro Forma Combined Statements of Operations of the Company for the Nine Months Ended September 30, 2019 and the Year Ended December 31, 2018, and Notes to the Unaudited Pro Forma Combined Financial Statements, all giving effect to the acquisition by the Company of the 5J Entities.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Current Report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: May 12, 2020	SMG Industries Inc.

	By:	/s/ Matthew Flemming
	Name:	Matthew Flemming
	Title:	Chief Executive Officer and President

EX-99.1 2 tm2018745d1_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

5J OILFIELD SERVICES, LLC

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018 AND 2017

CONTENTS

	Page

INDEPENDENT AUDITORS’ REPORT	1-2

FINANCIAL STATEMENTS

Balance Sheets	3

Statements of Income	4

Statements of Members’ Equity	5

Statements of Cash Flows	6-7

Notes to Financial Statements	8-12

INDEPENDENT AUDITORS’ REPORT

To the Members

5J Oilfield Services, LLC

We have audited the accompanying financial statements of 5J Oilfield Services, LLC (the Company), which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of income, members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

-1-

Page 2

To the Members

5J Oilfield Services, LLC

Opinion

In our opinion, the financial statements referred to on page 1 present fairly, in all material respects, the financial position of 5J Oilfield Services, LLC as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ Bolton, Sullivan, Taylor & Weber, L.L.P.

Palestine, Texas

August 29, 2019

-2-

5J OILFIELD SERVICES, LLC

BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

	2018			2017
ASSETS

CURRENT ASSETS
Cash	$	12,697		$	12,697
Certificate of deposit		415,934			345,796
Accounts receivable, net		9,838,703			11,154,967
Notes receivable - current portion		442,674			200,000
Prepaid expenses		310,627			364,634

TOTAL CURRENT ASSETS		11,020,635			12,078,094

PROPERTY AND EQUIPMENT (at cost)
Trucks and trailers		338,885			306,849
Furniture, fixtures and equipment		78,763			78,763
Computer equipment		47,534			42,067
Total property and equipment		465,182			427,679
Less accumulated depreciation		(266,816	)		(267,438	)

TOTAL NET PROPERTY AND EQUIPMENT		198,366			160,241

OTHER ASSETS
Notes receivable, net of current portion		11,737,658			12,187,658
Loan fees, net		-			4,138
Deposits		277,773			277,183

TOTAL OTHER ASSETS		12,015,431			12,468,979

TOTAL ASSETS	$	23,234,432		$	24,707,314

LIABILITIES AND MEMBERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	1,857,083		$	1,934,374
Accrued expenses		2,297,863			2,277,268
Escrow deposits		188,500			153,250
State income taxes payable		29,850			21,500
Payroll liabilities		6,402			27,679
Credit line payable		3,496,466			6,406,871

TOTAL CURRENT LIABILITIES		7,876,164			10,820,942

MEMBERS' EQUITY		15,358,268			13,886,372

TOTAL LIABILITIES AND MEMBERS' EQUITY	$	23,234,432		$	24,707,314

The accompanying notes are an integral part of these financial statements.

-3-

5J OILFIELD SERVICES, LLC

STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017

OPERATING REVENUES	$	67,299,934		$	48,178,635

OPERATING EXPENSES
Linehaul expenses		38,271,422			28,948,032
Reimbursed expenses		13,518,190			9,286,286
Payroll, terminal fees and efficiency bonuses		6,616,149			4,227,630

TOTAL OPERATING EXPENSES		58,405,761			42,461,948

GROSS PROFIT		8,894,173			5,716,687

GENERAL AND ADMINISTRATIVE		6,003,679			4,590,893

INCOME (LOSS) FROM OPERATIONS		2,890,494			1,125,794

OTHER INCOME (EXPENSE)
Gain (loss) on sale of fixed assets		22,132			15,436
Interest income		253,890			255,513
Interest expense		(314,534	)		(253,489	)

NET OTHER INCOME (EXPENSE)		(38,512	)		17,460

INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES		2,851,982			1,143,254

STATE INCOME TAX (EXPENSE) BENEFIT		(27,277	)		(18,978	)

NET INCOME (LOSS)	$	2,824,705		$	1,124,276

The accompanying notes are an integral part of these financial statements.

-4-

5J OILFIELD SERVICES, LLC

STATEMENTS OF MEMBERS' EQUITY

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017

MEMBERS' EQUITY AT BEGINNING OF YEAR	$	13,886,372		$	12,762,096

Net income		2,824,705			1,124,276

Contributions (distributions) to members		(1,352,809	)		-

MEMBERS' EQUITY AT END OF YEAR	$	15,358,268		$	13,886,372

The accompanying notes are an integral part of these financial statements.

-5-

5J OILFIELD SERVICES, LLC

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES

Net income	$	2,824,705		$	1,124,276

Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation		54,249			59,739
Amortization		4,138			10,673
Bad debt expense		957,853			365,589
Gain on sale of fixed assets		(22,132	)		(15,436	)
Decrease (Increase) in accounts receivable		358,411			(6,392,352	)
Decrease (Increase) in loan fees		-			(7,189	)
Decrease (Increase) in prepaid expenses		54,007			(84,270	)
Decrease (Increase) in deposits		(590	)		80,000
(Decrease) Increase in accounts payable		(77,291	)		616,940
(Decrease) Increase in accrued expenses		28,945			1,207,295
(Decrease) Increase in escrow deposits		35,250			41,000
(Decrease) Increase in payroll liabilities		(21,277	)		3,950

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		4,196,268			(2,989,785	)

CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (Increase) in certificate of deposit		(70,138	)		256,262
Decrease (Increase) in notes receivable		207,326			200,000
Purchases of property and equipment		(122,592	)		(66,705	)
Proceeds from disposal of equipment		52,350			-

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		66,946			389,557

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit line payable		29,820,675			21,002,908
Reduction in credit line payable		(32,731,080	)		(18,402,642	)
Member contributions (distributions)		(1,352,809	)		-

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(4,263,214	)		2,600,266

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		-			38

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		12,697			12,659

CASH AND CASH EQUIVALENTS (OVERDRAFT) AT END OF YEAR	$	12,697		$	12,697

The accompanying notes are an integral part of these financial statements.

-6-

5J OILFIELD SERVICES, LLC

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018		2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest	$	320,802	$	243,593
State income taxes	$	18,927	$	9,002

The accompanying notes are an integral part of these financial statements.

-7-

5J OILFIELD SERVICES, LLC

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018 AND 2017

ORGANIZATION

5J Oilfield Services, LLC (the Company) is a limited liability company organized under the laws of the State of Texas on November 25, 2009 and headquartered in Palestine, Texas.

NATURE OF OPERATIONS

The Company is a contract carrier specializing in the transportation and logistical needs of the oil and gas industry. Services provided include rig mobilization, heavy hauling, compressor and production hauling and hot shot services. A substantial part of these services are provided by 5J Trucking, LLC, a related party.

SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies is presented to assist in the understanding of the Company’s financial statements. The financial statements and notes are representations of the Company’s management who is responsible for the integrity and objectivity of the financial statements.

Use of Estimates. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification. Certain accounts relating to the prior year have been reclassified to conform to the 2018 presentation.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable and notes receivable. Amounts on deposit at a single financial institution regularly exceed the federally insured limits. As of December 31, 2018, the Company had $175,601 on deposit in excess of federally insured limits. As of December 31, 2017, the Company had $105,796 on deposit exceeding federally insured limits.

Concentration of credit risk with respect to accounts receivable and notes receivable are derived from granting credit to its customers located throughout the United States.

Accounts Receivable. Accounts receivable are recorded net of the allowance for doubtful accounts of $1,362,630 at December 31, 2018 and $713,619 at December 31, 2017. The allowance for doubtful accounts is based on historical experience and an evaluation of the outstanding receivables at year end. Bad debt expense for the years ended December 31, 2018 and 2017, was $957,853 and $365,589, respectively.

-8-

SIGNIFICANT ACCOUNTING POLICIES (concluded)

Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over periods ranging from five to seven years for each asset.

Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and betterments are capitalized.

When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the results of operations. Depreciation expense for 2018 and 2017, was $54,249 and $59,739, respectively.

Cash and Cash Equivalents. For purposes of the statement of cash flows, the Company considers all demand deposits, money market funds, cash on hand and highly liquid investments with original maturity dates of less than three months to be cash equivalents.

Certificate of Deposit. Certificate of deposit (“CDs”) represents CDs with initial maturities of greater than three months but less than one year. They are recorded at the face value plus accrued interest, which approximates fair value.

Income Taxes. The Company is a disregarded entity for federal income tax purposes. Therefore, no provision for federal income tax has been included in the financial statements.

The Company is subject to various state income taxes. A state income tax (benefit) provision of $27,277 and $18,978 has been recorded for the years ended December 31, 2018 and 2017, respectively.

For federal and state income tax purposes, the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

Members’ Liability. As a limited liability company, each member’s liability is limited to amounts reflected in their respective member equity accounts in accordance with the Operating Agreement.

Subsequent Events. The Company is required to comply with various covenants as listed in the Credit Line Payable Loan Agreement with VeraBank. The Company was not in compliance with the debt service coverage ratio requirements as of June 30, 2019, but the creditor has granted an exception and waived its rights to apply any of the remedies listed in the loan agreement at this time.

Management has evaluated subsequent events through August 29, 2019, the date the financial statements were available to be issued.

RETIREMENT PLAN

The Company has a 401(k) plan which covers eligible employees. Participating employees may elect to contribute on a tax deferred basis, a portion of their compensation, in accordance with Section 401(k) of the Internal Revenue Code.

-9-

NOTES RECEIVABLE

Notes receivable consist of the following at December 31:

	2018			2017
One note for 2018 and 2017 with interest
at 2% from 5J Trucking, LLC, unsecured.	$	12,137,658		$	12,387,658

Other notes with interest at 5% to 8%,
secured by equipment.		42,674			-

		12,180,332			12,387,658

Less current portion		(442,674	)		(200,000	)

Notes receivable - less current portion	$	11,737,658		$	12,187,658

COMMITMENTS AND CONTINGENCIES

The Company has guaranteed several of 5J Trucking, LLC and Certified Crane & Rigging Services, LLC’s notes payable. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. However, if the Company were required to honor the guarantees, it would be entitled to property owned by the related entity that collateralizes the loans. As of December 31, 2018, the related parties are current with their debt payments. See table below for relevant details of each obligation:

		Year Final	Balance at		Maximum Potential
Party	Due to	Payment Due	12/31/18		of Future Payments
5J Trucking	Equify	2019	$	181,620	$	184,091
5J Trucking	VeraBank	2022		900,000		1,014,346
5J Trucking	Mercedes-Benz	2023		1,288,963		1,467,560
5J Trucking	Mercedes-Benz	2023		334,047		385,996
5J Trucking	De Lage Landen	2024		2,991,144		3,433,418
Certified Crane	Equify	2022		2,941,079		3,307,947
Certified Crane	Equify	2022		2,476,773		2,807,002

The Company has guaranteed a Line of Credit for Certified Crane and Rigging Services, LLC with a balance of $1,312,552 as of December 31, 2018. The line of credit matures on February 16, 2020, and has a maximum borrowing amount of $2,020,000. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. As of December 31, 2018, the related party is current with its debt payments.

The Company is contingently liable in respect to lawsuits and other claims arising from the ordinary course of its operations. The Company believes that either there are meritorious defenses to substantially all such actions or that any liability that may finally be determined, net of insurance, should not have a material effect on the Company’s financial position.

-10-

CREDIT LINE PAYABLE

The Company increased their line of credit from $6,000,000 to $8,000,000 on October 4, 2017. Interest is equal to the Prime Rate plus 1.00%, but a minimum rate of 5.25% per annum. Accrued interest is payable monthly. Outstanding principal and any accrued interest are payable in full at maturity on October 4, 2019. The credit line is secured by all assets of the Company. The line of credit is also secured by personal guarantees of the members and 5J Trucking, LLC.

Interest expense on the lines of credit for the years ended December 31, 2018 and 2017, was $314,534 and $253,489, respectively.

The Company is required to comply with various covenants as listed in the Credit Line Payable Loan Agreement with VeraBank. The Company was in compliance with the debt service coverage ratio requirements as of December 31, 2018.

RELATED PARTY TRANSACTIONS

During 2018 and 2017, the Company had transactions with 5J Trucking, LLC (Trucking), 5J Properties, LLC (Properties), Certified Crane & Rigging Services, LLC (Certified Crane), Schwab Trucking, LLC (Schwab), and 903 Industries related through common ownership and management. The following is a description of the transactions with these entities for the years ended December 31, 2018 and 2017:

5J Trucking, LLC

The Company rents a majority of its trucks and substantially all of its cranes and other equipment from Trucking under cancelable five year leases. The leases provide that Trucking will receive from the Company rent for the use of the equipment equivalent to a percentage of the revenue generated by the equipment. In addition:

Trucking will reimburse the Company for wages paid to operators and others involved in the operation of the equipment.

Trucking will pay to the Company a percentage of the gross wages to cover payroll taxes and operation and administrative expenses.

Trucking will reimburse the Company for various expenses paid by the Company on behalf of Trucking.

The Company pays Trucking for the use of its terminal facilities and commissions related to job performance.

Accounts receivable includes $0 and $1,208 due from Trucking as of December 31, 2018 and 2017, respectively.

Accounts payable and accrued expenses include $346,331 and $340,098 due to Trucking as of December 31, 2018 and 2017, respectively.

Notes receivable include $12,137,658 and $12,387,658 due from Trucking as of December 31, 2018 and 2017, respectively. Interest income earned on the note was $250,260 in 2018 and $253,342 in 2017. See Notes Receivable on page ten for more details.

The Company reported $24,862,942 in 2018 and $20,665,691 in 2017 of expenses from Trucking.

-11-

RELATED PARTY TRANSACTIONS (concluded)

The Company’s transactions with other related parties are summarized below:

	2018		2017
Accounts receivable due from Certified Crane	$	680,569	$	313,606
(included in allowance for doubtful accounts)
Accounts receivable due from Schwab		25,270		23,948

Accounts payable due to Properties		13,500		3,000
Accounts payable due to Certified Crane		355,675		84,920

Operating revenue from Certified Crane		513,828		128,665

Contract service expense to Certified Crane		1,853,791		957,003
Linehaul expense to Schwab		212,974		177,847
Linehaul expense to 903 Industries		44,388		27,589
Rental expense to Properties		18,000		18,000

Bad debt expense from Certified Crane		368,991		313,606
(included in General and Administrative expense)

-12-

EX-99.2 3 tm2018745d1_ex99-2.htm EXHIBIT 99.2

Exhibit 99.2

5J TRUCKING, LLC

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018 AND 2017

CONTENTS

	Page

INDEPENDENT AUDITORS’ REPORT	1-2

FINANCIAL STATEMENTS

Balance Sheets	3-4

Statements of Income	5

Statements of Members’ Equity	6

Statements of Cash Flows	7-8

Notes to Financial Statements	9-14

INDEPENDENT AUDITORS’ REPORT

To the Members

5J Trucking, LLC

We have audited the accompanying financial statements of 5J Trucking, LLC (the Company), which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of income, members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Auditors’ Responsibility

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

-1-

Page 2

To the Members

5J Trucking, LLC

Opinion

In our opinion, the financial statements referred to on page 1 present fairly, in all material respects, the financial position of 5J Trucking, LLC as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ Bolton, Sullivan, Taylor & Weber, L.L.P.

Palestine, Texas

July 5, 2019

-2-

5J TRUCKING, LLC

BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

	2018			2017
ASSETS

CURRENT ASSETS
Cash	$	187,098		$	193,758
Accounts receivable
Trade, net		52,616			18,115
Related party		348,501			351,097
Notes receivable - current portion		423,277			50,855
Prepaid expenses		278,447			263,653

TOTAL CURRENT ASSETS		1,289,939			877,478

PROPERTY AND EQUIPMENT (at cost)
Buildings		715,921			715,921
Cranes		10,536,569			10,822,280
Trucks, trailers and winches		33,099,446			31,261,224
Machinery and equipment		4,246,967			4,701,085

Total property and equipment		48,598,903			47,500,510
Less accumulated depreciation		(31,827,065	)		(33,402,710	)

TOTAL NET PROPERTY AND EQUIPMENT		16,771,838			14,097,800

OTHER ASSETS
Notes receivable, net of current portion		669,478			83,059

TOTAL OTHER ASSETS		669,478			83,059

TOTAL ASSETS	$	18,731,255		$	15,058,337

The accompanying notes are an integral part of these financial statements.

-3-

5J TRUCKING, LLC

BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

	2018			2017
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable	$	694,835		$	659,436
Accrued expenses		74,958			85,707
State income taxes payable		140,500			105,000
Current portion of long-term debt		3,707,721			3,810,698

TOTAL CURRENT LIABILITIES		4,618,014			4,660,841

LONG-TERM DEBT, net of current portion		19,901,173			17,827,568

TOTAL LIABILITIES		24,519,187			22,488,409

MEMBERS' EQUITY (DEFICIT)		(5,787,932	)		(7,430,072	)


TOTAL LIABILITIES AND MEMBERS' EQUITY (DEFICIT)	$	18,731,255		$	15,058,337

The accompanying notes are an integral part of these financial statements.

-4-

5J TRUCKING, LLC

STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017

OPERATING REVENUES	$	25,919,903		$	21,512,855

OPERATING EXPENSES
Commissions and contract services		80,059			57,326
Depreciation		3,671,684			3,417,887
Equipment expenses		516,060			410,275
Insurance		1,367,962			1,240,222
Licenses and permits		2,142,414			1,639,160
Miscellaneous		31,100			20,209
Rent		144,000			205,000
Repairs		76,252			53,683
Payroll and benefits		9,023,088			7,243,831
Rigging supplies		246,640			135,834
Safety expenses		24,039			13,453
Taxes		206,226			202,400
Travel		803,447			781,605
Trucking expenses		4,842,777			4,290,289
Vehicle expenses		87,324			90,283
Shop expenses		141,505			103,659

TOTAL OPERATING EXPENSES		23,404,577			19,905,116

GROSS PROFIT (LOSS)		2,515,326			1,607,739

GENERAL AND ADMINISTRATIVE		569,167			1,020,834

INCOME (LOSS) FROM OPERATIONS		1,946,159			586,905

OTHER INCOME (EXPENSE)
Gain on sale of fixed assets		2,294,386			264,280
Other income		64,662			781
Interest expense		(743,820	)		(618,880	)

NET OTHER INCOME (EXPENSE)		1,615,228			(353,819	)

INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES		3,561,387			233,086

STATE INCOME TAX EXPENSE		(132,597	)		(96,326	)

NET INCOME (LOSS)	$	3,428,790		$	136,760

The accompanying notes are an integral part of these financial statements.

-5-

5J TRUCKING, LLC

STATEMENTS OF MEMBERS' EQUITY

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017

MEMBERS' EQUITY (DEFICIT) AT BEGINNING OF YEAR	$	(7,430,072	)	$	(7,902,832	)

Net income (loss)		3,428,790			136,760

Contributions (Distributions) from/to Members		(1,786,650	)		336,000

MEMBERS' EQUITY (DEFICIT) AT END OF YEAR	$	(5,787,932	)	$	(7,430,072	)

The accompanying notes are an integral part of these financial statements.

-6-

5J TRUCKING, LLC

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)	$	3,428,790		$	136,760

Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation		3,671,684			3,417,887
Amortization		-			12,136
Gain on sale of fixed assets		(1,427,171	)		(264,280	)
Gain on distribution of property		(867,215	)		-
Bad debt expense		161,598			666,302
Decrease (Increase) in accounts receivable		(471,653	)		(610,993	)
Decrease (Increase) in prepaid expenses		(14,794	)		115,064
(Decrease) Increase in accounts payable		18,925			(42,073	)
(Decrease) Increase in accrued expenses		24,751			102,914

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		4,524,915			3,533,717

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment		(1,200,854	)		(603,982	)
Proceeds from disposal of equipment		460,752			237,435
Payments received from equipment sold on contract		439,159			16,586

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		(300,943	)		(349,961	)

CASH FLOWS FROM FINANCING ACTIVITIES

Reduction in long-term debt		(3,889,632	)		(3,260,658	)
Member contributions (distributions)		(341,000	)		336,000

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(4,230,632	)		(2,924,658	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(6,660	)		259,098

CASH (OVERDRAFT) AND CASH EQUIVALENTS AT
BEGINNING OF YEAR		193,758			(65,340	)

CASH (OVERDRAFT) AND CASH EQUIVALENTS AT END OF YEAR	$	187,098		$	193,758

The accompanying notes are an integral part of these financial statements.

-7-

5J TRUCKING, LLC

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest	$	743,820		$	606,744
State income taxes		97,097			46,326

Noncash investing and financing transactions:
Acquisition of property and equipment:
Cost of property and equipment		7,077,588			7,237,255
Property and equipment loans		(5,876,734	)		(6,633,273	)

Cash down payments	$	1,200,854		$	603,982

Sale of property and equipment:
Equipment sold on contract	$	1,398,000		$	230,500

Property distributions:
Fair value of property distributed		1,175,000			-
Cost basis		(307,785	)		-

Gain on distribution	$	867,215		$	-

The accompanying notes are an integral part of these financial statements.

-8-

5J TRUCKING, LLC

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018 AND 2017

ORGANIZATION

5J Trucking, LLC (the Company) is a limited liability company organized under the laws of the State of Texas on January 20, 2004, and headquartered in Palestine, Texas.

NATURE OF OPERATIONS

The Company provides rig mobilization, heavy hauling, compressor and production hauling and hotshot services to the oil and gas industry. Substantially all of these services are provided through 5J Oilfield Services, LLC, a related party.

SIGNIFICANT ACCOUNTING POLICIES

Reclassification. Certain accounts relating to the prior year have been reclassified to conform to the 2018 presentation.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. As of December 31, 2018 and December 31, 2017, the Company had no deposits in excess of federally insured limits at financial institutions. Substantially all (86%) of accounts receivable at December 31, 2018 and (92%) at December 31, 2017 was due from 5J Oilfield Services, LLC. Credit risk with respect to the accounts receivable is derived from 5J Oilfield Services, LLC granting credit to customers located throughout the United States.

Accounts Receivable. Accounts receivable are recorded net of the allowance for doubtful accounts of $618,864 at December 31, 2018 and $457,600 at December 31, 2017. The allowance for doubtful accounts is based on historical experience and an evaluation of the outstanding receivables at year end. Bad debt expense for the years ended December 31, 2018 and 2017, was $161,598 and $666,302, respectively.

-9-

SIGNIFICANT ACCOUNTING POLICIES (concluded)

Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful life of each class as follows:

	Buildings	7-39 years
	Cranes	10 years
	Trucks, trailers and winches	7 years
	Machinery and equipment	5-7 years

Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and betterments are capitalized.

When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the results of operations.

Depreciation expense for 2018 and 2017, was $3,671,684 and $3,417,887, respectively.

Cash and Cash Equivalents. For purposes of the statement of cash flows, the Company considers all demand deposits, money market funds and cash on hand to be cash equivalents.

Income Taxes. The Company is a disregarded entity for Federal income tax purposes. Therefore, no provision for Federal income tax has been included in the financial statements.

The Company is subject to various state income taxes and a state income tax provision of $132,597 and $96,326, has been recorded for the years ended December 31, 2018 and 2017, respectively.

For federal and state income tax purposes, the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

Members’ Liability. As a limited liability company, each member’s liability is limited to amounts reflected in their respective member equity accounts in accordance with the Operating Agreement.

Subsequent Events. Management has evaluated subsequent events through July 5, 2019, the date the financial statements were available to be issued.

-10-

LONG-TERM DEBT -less current portion

Long-term debt at December 31, 2018 and 2017 consists of the following :

		Date of	Maturity	Interest	Original		Payment	Balance		2018		2018		Balance		2019
Notes Payable	Collateral	Inception	Date	Rate	Amount		Method	12/31/2017		Additions		Reductions		12/31/2018		Prin. Due
Citizens National Bank	2014 Kobelco Crane	Dec-14	Nov-18	4.90%		700,000	Monthly		187,163		-		187,163		-		-
Equity	various equipment	Aug-15	Jun-18	8.21%		7,269,913	Monthly		1,027,027		-		1,027,027		-		-
Equity	(4) Manitowoc Cranes	Aug-15	Mar-19	6.00%		1.353,514	Monthly		733,951		-		552,331		181,620		181,620
5J Oilfield Services, LLC	Miscellaneous Loan Fd Cash Ace.	Dec-13	Jun-26	2.00%		13,887,658	Quarterly		12,387,658		-		250,000		12,137,658		400,000
Citizens National Bank	2017 Holden & 2007 Aspen Trailers	Nov- 16	Nov-19	5.00%		92,100	Monthly		60,424		-		30,836		29,588		29,588
Scott Financial	2014 Kobelco Crane	Apr-16	Apr-20	5.75%		516,127	Monthly		334,567		-		137,796		196,771		145,974
Scott Financial	2006 Manitowoc Crane	Apr-16	Jan-20	5.75%		335,246	Monthly		195,418		-		90,808		104,610		96,206
Scott Financial	2013 Kobelco Crane	Apr-16	Apr-20	5.75%		531,500	Monthly		344,533		-		141,979		202,554		150,323
ALLY	2017 GMC Truck	Mar-17	Mar-20	4.69%		28,443	Monthly		21,688		-		9,383		12,305		9,833
ALLY	2017 GMC Truck	Mar-17	Mar-20	4.76%		30,368	Monthly		23,162		-		10,017		13,145		10,504
ALLY	2017 GMC Truck	Apr-17	Apr-20	4.59%		33,665	Monthly		26,564		-		11,066		15,498		11,585
ALLY	2017 GMC Truck	Apr-17	Apr-20	4.59%		42,762	Monthly		33,742		-		14,057		19,685		14,716
ALLY	2017 GMC Truck	Jun-17	Jun-20	4.59%		26,148	Monthly		22,719		-		8,497		14,222		8,895
ALLY	2017 GMC Truck	Jul-17	Jul-20	3.39%		18,380	Monthly		15,933		-		6,013		9,920		6,220
A LLY	2017 Chevrolet Truck	Sep-17	Sep-20	4.40%		30,996	Monthly		28,56 1		-		10,011		18,550		10,461
ALLY	2018 Chevrolet Truck	Oct-1 7	Oct-20	4.59%		29,318	Monthly		27,790		-		9,421		18,369		9,862
Citizens National Bank	13 Trailers	Aug-17	Aug-22	5.50%		448,000	Monthly		416,508		-		80,376		336,132		84,615
Scott Financial	Kobelco Crane	Aug-17	Aug-21	5.75%		550,500	Monthly		500,033		-		131,173		368,860		136,647
Scott Financial	2017 Kobelco Crane	Dec-17	Dec-22	5.75%		784,877	Monthly		784,877		-		139,357		645,520		147,623
Triumph	9 Trucks and 3 Trailers	Oct-17	Oct-20	5.50%		1,162,749	Monthly		1,018,881		-		368,540		650,341		389,625
De Lage Landen	2017 Grove Crane	Dec-17	Jan-24	5.48%		3,447,067	Monthly		3,447,067		-		455,923		2,991,144		524,904
Citizens Bank of Crockett	2 Trailers	Jan-18	Jan-21	6.5% floating		144,810	Monthly		-		144,810		41,145		103,665		47,888
Mercedes-Benz	1 Western Star Truck	Feb-18	Jul-21	6.15%		100,000	Monthly		-		100,000		22,061		77,939		27,625
Citizens National Bank	2 Kenworths	Jun-18	May-22	5.75%		319,120	Monthly		-		319,120		36,079		283,041		75,338
Citizens National Bank	2 Trailers	Jul-18	Jul-22	5.49%		368,000	Monthly		-		368,000		34,754		333,246		86,719
Mercedes-Benz	8 Western Star Trucks	Aug- 18	Sep-23	5.50%		1,344,961	Monthly		-		1,344,961		55,998		1,288,963		244,171
Volvo Financial	4 Volvo Trucks	Oct-18	Oct-22	5.50%		596,565	Monthly		-		596,565		22,331		574,234		138,358
Volvo Financial	2 Volvo Trucks	Dec-18	Nov-22	5.50%		309,993	Monthly		-		309,993		5,789		304,204		71,567
Mercedes-Benz	2 Western Star Trucks	Dec-18	Dec-23	5.84%		334,047	Monthly		-		334,047		-		334,047		58,771
Triumph	5 Kenworth Trucks	Nov-18	Jan-22	6.00%		1,000,750	Monthly		-		1,000,750		-		1,000,750		280,792
Citizens National Bank	2018 Cat Crane	Dec-18	Dec-22	6.00%		900,000	Monthly		-		900,000		-		900,000		205,641
Volvo Financial	3 Volvo Trucks	Dec-18	Dec-22	5.50%		442,313	Monthly		-		442,313		-		442,313		101,650

	Totals				$	37,179,890		$	21,638,266	$	5,860,559	$	3,889,931	$	23,608,894	$	3,707,721

					Total Long-Term Debt							$	23,608,894
					Less current portion							$	3,707,721
					Total Long-Term Debt, net of current portion							$	19,901,173

Maturities of long-term debt in each of the next five years are as follows :

December 31,2019	$	3,707,721
December 31,2020		3,815,387
December 31,2021		4,417,512
December 31,2022		3,928,609
December 31,2023		2,957,173
Thereafter	$	4,782,492
	$	23,608,894

Total interest expense for the years ended December 31, 20 18 and 2017, was $743,820 and $618,880, respectively.

-11-

COMMITMENTS AND CONTINGENCIES

The Company has guaranteed 5J Oilfield Services, LLC’s Line of Credit with VeraBank with a balance of $3,064,696 as of December 31, 2018. The line of credit matures on October 4, 2019, and has a maximum borrowing amount of $8,000,000. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. As of December 31, 2018, the related party is current with its debt payments.

The Company has guaranteed two of Certified Crane and Rigging Services, LLC’s notes payable due to Equify Financial, LLC with balances of $2,941,079 and $2,476,773 as of December 31, 2018. Payments on the debts are due monthly with final payments due during the year ending December 31, 2022. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. At December 31, 2018, including accrued interest, the maximum potential amount of future payments under the guarantees would be $6,114,949. As of December 31, 2018, the related party is current with its debt payments.

The Company has also guaranteed a Line of Credit for Certified Crane and Rigging Services, LLC with a balance of $1,312,552 as of December 31, 2018. The line of credit matures on February 16, 2020, and has a maximum borrowing amount of $2,020,000. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. As of December 31, 2018, the related party is current with its debt payments.

RELATED PARTY TRANSACTIONS

During 2018 and 2017, the Company had transactions with 5J Oilfield Services, LLC (Oilfield Services), 5J Properties, LLC (Properties), Certified Crane and Rigging Services, LLC (Certified Crane), 903 Industries, and Schwab Trucking, LLC (Schwab) related through common ownership and management. The Company rents a crane to Certified Crane under a cancelable five year lease. The lease requires Certified Crane to pay the Company rent for the use of the equipment. The following is a description of the transactions with these entities for the years ended December 31, 2018 and 2017:

5J Oilfield Services, LLC

The Company rents a substantial portion of its trucks, cranes and other equipment to Oilfield Services under cancelable five year leases. The leases require Oilfield Services to pay the Company rent for the use of the equipment, equivalent to a percentage of the revenue generated by the equipment. In addition, the rent will be reduced by:

the gross amount paid by or on behalf of Oilfield Services to any driver of the leased equipment for wages

a percentage of the driver’s gross wages to cover payroll taxes and operations and administrative expenses

other miscellaneous expenses such as driver physicals, drug and alcohol screens, fines, etc.

-12-

RELATED PARTY TRANSACTIONS (concluded)

5J Oilfield Services, LLC (concluded)

The Company also receives revenue from Oilfield Services for the use of its terminal facilities and from commissions related to job performance.

Accounts receivable includes $346,331 and $340,098 due from Oilfield Services as of December 31, 2018 and 2017, respectively.

Accounts payable includes $0 and $1,208 due to Oilfield Services as of December 31, 2018 and 2017, respectively.

Long-Term Debt includes $12,137,658 and $12,387,658 due to Oilfield Services as of December 31, 2018 and 2017, respectively. Interest expenses incurred on the debt was $250,260 in 2018 and $253,342 in 2017. See the long-term debt information on page 11 for more details.

The Company reported gross revenue of $24,862,942 reduced by $10,985,253 of expenses during 2018 and gross revenue of $20,665,691 reduced by $8,878,796 of expenses during 2017 from Oilfield Services.

The Company’s transactions with other related parties are summarized below:

	2018		2017
Accounts Receivable due from Certified Crane	$	-	$	4,454
Accounts Receivable due from Schwab		2,170		6,544

Accounts Payable due to Properties		17,000		17,000

Operating Revenue from Certified Crane		780,392		651,291
Operating Revenue from Schwab		81,286		85,294
Operating Revenue from 903 Industries		27,932		11,654

Contract service expense to Certified Crane		-		9,126
Rental expense to 5J Properties		102,000		102,000
Truck expense to 903 Industries		4,198		2,122

Bad Debt expense from Certified Crane		156,810		685,147
(included in General and Administrative expense)

Gain on sale of fixed assets from Certified Crane		867,215		-

-13-

NOTES RECEIVABLE

Notes receivable consisted of the following at December 31:

	2018			2017
Matthew Solt, with interest at 8%	$	165,643		$	-
Antero M. Zulueta, with interest at 8%		160,645			-
A-Starr Logistics, LLC, with interest at 8.5%		148,861			-
Banks Heavy Haul, with interest at 8%		131,811			-
Boyd Farner Jr., with interest at 8%		93,651			-
PCN Transportation, with interest at 7.5%		86,407			121,893
2J Trucking, LLC, with interest at 8%		78,263			-
PCN Transportation, with interest at 8%		59,448			-
Donna K. Slinker, with interest at 7.5%		58,250			-
Danny DelAngel, with interest at 8%		55,833			-
William Corley, with interest at 7.5%		53,943			-
Dean Cole, with no interest		-			6,702
Urbano Elizando, with no interest		-			5,319
		1,092,755			133,914
Less current portion		(423,277	)		(50,855	)

Notes receivable - less current portion	$	669,478		$	83,059

All Notes Receivable are secured by equipment.

-14-

EX-99.3 4 tm2018745d1_ex99-3.htm EXHIBIT 99.3

Exhibit 99.3

5J OILFIELD SERVICES, LLC

UNAUDITED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

CONTENTS

	Page

UNAUDITED FINANCIAL STATEMENTS

Balance Sheets		1

Statements of Operations		2

Statements of Members’ Equity		3

Statements of Cash Flows		4

Notes to Unaudited Financial Statements		5-9

5J OILFIELD SERVICES, LLC
BALANCE SHEETS
(UNAUDITED)

		September 30,			December 31,
		2019			2018
ASSETS
CURRENT ASSETS
Cash	$	12,697		$	12,697
Certificate of deposit		393,577			415,934
Accounts receivable, net		8,892,823			9,838,703
Notes receivable - current portion		400,000			442,674
Prepaid expenses		201,129			310,627
TOTAL CURRENT ASSETS		9,900,226			11,020,635

PROPERTY AND EQUIPMENT (at cost)
Trucks and trailers		338,885			338,885
Furniture, fixtures and equipment		78,763			78,763
Computer equipment		47,534			47,534
Total property and equipment		465,182			465,182
Less accumulated depreciation		(309,341	)		(266,816	)
TOTAL NET PROPERTY AND EQUIPMENT		155,841			198,366

OTHER ASSETS
Notes receivable, net of current portion		11,537,658			11,737,658
Deposits		111,870			277,773
TOTAL OTHER ASSETS		11,649,528			12,015,431
TOTAL ASSETS	$	21,705,595		$	23,234,432

LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,672,986		$	1,857,083
Accrued expenses		2,030,424			2,297,863
Escrow deposits		199,000			188,500
State income taxes payable		22,838			29,850
Payroll liabilities		-			6,402
Credit line payable		6,267,431			3,496,466
TOTAL CURRENT LIABILITIES		10,192,679			7,876,164

MEMBERS' EQUITY		11,512,916			15,358,268
TOTAL LIABILITIES AND MEMBERS' EQUITY	$	21,705,595		$	23,234,432

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

5J OILFIELD SERVICES, LLC
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)

	For the Nine Months Ended September 30,
	2019			2018
OPERATING REVENUES	$	43,050,908		$	49,753,862

OPERATING EXPENSES		44,066,828			45,108,936

GROSS PROFIT (LOSS)		(1,015,920	)		4,644,926

GENERAL AND ADMINISTRATIVE		2,541,475			2,428,862

INCOME (LOSS) FROM OPERATIONS		(3,557,395	)		2,216,064

OTHER INCOME (EXPENSE)
Gain on sale of fixed assets		-			22,132
Interest income		186,367			189,060
Interest expense		(251,486	)		(239,229	)

NET OTHER INCOME (EXPENSE)		(65,119	)		(28,037	)

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES		(3,622,514	)		2,188,027

STATE INCOME TAX EXPENSE		(22,838	)		(26,442	)

NET INCOME ( LOSS)	$	(3,645,352	)	$	2,161,585

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

5J OILFIELD SERVICES, LLC
STATEMENTS OF MEMBERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)

		2019			2018
MEMBERS' EQUITY AT BEGINNING OF PERIOD		15,358,268			13,886,372

Net income (loss)		(3,645,352	)		2,161,585

Distributions to members		(200,000	)		(150,000	)

MEMBERS' EQUITY AT END OF PERIOD	$	11,512,916		$	15,897,957

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

5J OILFIELD SERVICES, LLC
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)

		2019			2018
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)	$	(3,645,352	)	$	2,161,585
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		42,525			46,944
Amortization of loan costs		-			3,595
Bad debt expense		1,004,324			815,000
Gain on sale of fixed assets		-			(22,132	)
Decrease (Increase) in accounts receivable		(58,444	)		(4,120,334	)
Decrease (Increase) in prepaid expenses		109,498			(26,518	)
Decrease (Increase) in deposits		165,903			(521	)
(Decrease) Increase in accounts payable		(185,802	)		85,748
(Decrease) Increase in accrued expenses		(267,439	)		728,798
(Decrease) Increase in escrow deposits		10,500			36,750
(Decrease) Increase in State income taxes payable		(7,012	)		5,500
(Decrease) Increase in payroll liabilities		(6,402	)		(63,262	)

NET CASH PROVIDED (USED) BY OPERATING ACTIVITES		(2,837,701	)		(348,847	)

CASH FLOW FROM INVESTING ACTIVITIES
Decrease (Increase) in certificate of deposit		22,357			(67,806	)
Decrease (Increase) in notes receivable		242,674			120,341
Purchases of property and equipment		-			(45,349	)
Proceeds from disposal of equipment		-			52,350

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		265,031			59,536

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit line payable		23,440,699			23,015,683
Reduction in credit line payable		(20,668,029	)		(22,576,372	)
Member distributions		(200,000	)		(150,000	)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		2,572,670			289,311

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		-			-

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		12,697			12,697

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,697		$	12,697

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest	$	219,486		$	219,868
State income taxes	$	-		$	-

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

5J OILFIELD SERVICES, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

ORGANIZATION

5J Oilfield Services, LLC (the Company) is a limited liability company organized under the laws of the State of Texas on November 25, 2009 and headquartered in Palestine, Texas.

NATURE OF OPERATIONS

SIGNIFICANT ACCOUNTING POLICIES

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable and notes receivable. Amounts on deposit at a single financial institution regularly exceed the federally insured limits. As of September 30, 2019, the Company had $153,577 on deposit in excess of federally insured limits. As of December 31, 2018, the Company had $175,601 on deposit exceeding federally insured limits.

Concentration of credit risk with respect to accounts receivable and notes receivable are derived from granting credit to its customers located throughout the United States.

Accounts Receivable. Accounts receivable are recorded net of the allowance for doubtful accounts of $2,298,510 and $1,362,630 at September 30, 2019 and December 31, 2018, respectively. The allowance for doubtful accounts is based on historical experience and an evaluation of the outstanding receivables at year end. Bad debt expense for the nine months ended September 30, 2019 and 2018 was $1,004,324 and $815,000, respectively.

Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over periods ranging from five to seven years for each asset.

Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and betterments are capitalized.

When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the results of operations. Depreciation expense for the nine months ended September 30, 2019 and 2018, was $42,525, respectively.

Income Taxes. The Company is a disregarded entity for federal income tax purposes. Therefore, no provision for federal income tax has been included in the financial statements.

The Company is subject to various state income taxes. A state income tax (benefit) provision of $22,838 and $26,442 has been recorded for the nine months ended September 30, 2019 and 2018, respectively.

For federal and state income tax purposes, the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

Members’ Liability. As a limited liability company, each member’s liability is limited to amounts reflected in their respective member equity accounts in accordance with the Operating Agreement.

Subsequent Events. The Company is required to comply with various covenants as listed in the Credit Line Payable Loan Agreement with VeraBank. The Company was not in compliance with the debt service coverage ratio requirements as of September 30, 2019, but the creditor has granted an exception and waived its rights to apply any of the remedies listed in the loan agreement at this time. The Company regained compliance in November 2019

Management has evaluated subsequent events through May 8, 2020, the date the financial statements were available to be issued.

RETIREMENT PLAN

NOTES RECEIVABLE

Notes receivable consist of the following at September 30, 2019 and December 31, 2018:

	September 30,			December 31,
	2019			2018
One note with interest at 3% from 5J Trucking, LLC, unsecured	$	11,937,658		$	12,137,658
Other notes with interest at 5% to 8%, secured by equipment		-			42,674

Notes receivable		11,937,658			12,180,332
Less current portion		(400,000	)		(442,674	)

Notes receivable - less current portion	$	11,537,658		$	11,737,658

COMMITMENTS AND CONTINGENCIES

The Company has guaranteed several of 5J Trucking, LLC and Certified Crane & Rigging Services, LLC’s notes payable. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. However, if the Company were required to honor the guarantees, it would be entitled to property owned by the related entity that collateralizes the loans. As of September 30, 2019, the related parties are current with their debt payments. See table below for relevant details of each obligation:

Party	Due to	Year Final Payment Due		Balance at 9/30/19		Maximum Potential of Future Payments
5J Trucking	Equity		2019	$	-	$	-
5J Trucking	VeraBank		2022		746,929		820,710
5J Trucking	Mercedes-Benz		2023		1,107,135		1,235,840
5J Trucking	Mercedes-Benz		2023		290,485		328,096
5J Trucking	De Lage Landen		2024		2,555,697		2,870,367
Certified Crane	Equify		2022		2,336,368		2,570,055
Certified Crane	Equify		2022		2,003,788		2,239,988

The Company has guaranteed a Line of Credit for Certified Crane and Rigging Services, LLC with a balance of $1,469,040 as of September 30, 2019. The line of credit matures on February 16, 2020, and has a maximum borrowing amount of $2,020,000. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. As of September 30, 2019, the related party is current with its debt payments.

CREDIT LINE PAYABLE

The Company increased their line of credit from $6,000,000 to $8,000,000 on October 4, 2017. Interest is equal to the Prime Rate plus 1.00%, but a minimum rate of 5.25% per annum. Accrued interest is payable monthly. Outstanding principal and any accrued interest was originally payable in full at maturity on October 4, 2019. The credit line is secured by all assets of the Company. The line of credit is also secured by personal guarantees of the members and 5J Trucking, LLC.

Interest expense on the lines of credit for the nine months ended September 30, 2019 and 2018, was $251,486 and $239,229, respectively.

The Company is required to comply with various covenants as listed in the Credit Line Payable Loan Agreement with VeraBank. The Company was not in compliance with the debt service coverage ratio requirements as of September 30, 2019 but regained compliance in November 2019. The lender extended the maturity date to January 4, 2020, and again until March 4, 2020. The line of credit balance was settled as part of the acquisition of the Company by SMG Industries Inc. See “Subsequent Events” below.

RELATED PARTY TRANSACTIONS

During 2019 and 2018, the Company had transactions with 5J Trucking, LLC (Trucking), 5J Properties, LLC (Properties), Certified Crane & Rigging Services, LLC (Certified Crane), Schwab Trucking, LLC (Schwab), and 903 Industries related through common ownership and management. The following is a description of the transactions with these entities for the nine months ended September 30, 2019 and 2018:

5J Trucking, LLC

Trucking will reimburse the Company for wages paid to operators and others involved in the operation of the equipment.

Trucking will pay to the Company a percentage of the gross wages to cover payroll taxes and operation and administrative expenses.

Trucking will reimburse the Company for various expenses paid by the Company on behalf of Trucking.

The Company pays Trucking for the use of its terminal facilities and commissions related to job performance.

Accounts payable and accrued expenses include $425,121 and $346,331 due to Trucking as of September 30, 2019 and December 31, 2018, respectively.

Notes receivable include $11,937,658 and $12,137,658 due from Trucking as of September 30, 2019 and December 31, 2018, respectively. Interest income earned on the note was $183,829 and $188,539 during the nine months ended September 30, 2019 and 2018, respectively. See Notes Receivable for more details.

The Company reported $18,518,179 and $18,364,569 during the nine months ended September 30, 2019 and 2018, respectively, of expenses from Trucking.

The Company’s transactions with other related parties are summarized below:

	September 30,		December 31,
	2019		2018
Accounts receivable due from Certified Crane (included in allowance for doubtful accounts)	$	1,468,923	$	313,606
Accounts receviiable due from Schwab		40,258		23,948

Accounts payable due to Properties		-		13,500
Accounts payable due to Certified Crane		1,017,730		355,675


	September 30,		September 30,
	2019		2018
Operating revenue from Certified Crane	$	125,902	$	427,728
Contract service expense to Certified Crane		1,215,073		1,512,336
Linehaul expense to Schwab		124,642		169,476
Linehaul expense to 903 Industries		20,759		33,716
Rental expense to Properties		18,000		18,000
Bad debt expense from Certified Crane (included in General and Administrative expense)		509,324		424,894

SUBSEQUENT EVENTS

On February 27, 2020, SMG Industries, Inc. (“SMG”) purchased 100% of the outstanding membership interests of the Company and 5J Trucking for total consideration of $16,000,000, including notes payable of $3,000,000 and preferred stock issued by SMG with a face value of $6,000,000. The transaction closed on February 27, 2020, at which time each 5J company became a wholly-owned subsidiaries of SMG.

EX-99.4 5 tm2018745d1_ex99-4.htm EXHIBIT 99.4

Exhibit 99.4

5J TRUCKING, LLC

UNAUDITED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

CONTENTS

	Page

UNAUDITED FINANCIAL STATEMENTS

Balance Sheets	1

Statements of Operations	2

Statements of Members’ Deficit	3

Statements of Cash Flows	4

Notes to Unaudited Financial Statements	5-9

5J TRUCKING, LLC

BALANCE SHEETS

(UNAUDITED)

	September 30,			December 31,
	2019			2018
ASSETS

CURRENT ASSETS
Cash	$	-		$	187,098
Accounts receivable
Trade		-			52,616
Related party		441,889			348,501
Notes receivable - current portion		423,277			423,277
Prepaid expenses		289,705			278,447
TOTAL CURRENT ASSETS		1,154,871			1,289,939

PROPERTY AND EQUIPMENT (at cost)
Buildings		715,921			715,921
Cranes		10,536,569			10,536,569
Trucks, trailers and winches		33,173,251			33,099,446
Machinery and equipment		4,246,967			4,246,967
Total property and equipment		48,672,708			48,598,903
Less accumulated depreciation		(33,753,205	)		(31,827,065	)

TOTAL NET PROPERTY AND EQUIPMENT		14,919,503			16,771,838

OTHER ASSETS
Notes receivable		684,932			669,478
TOTAL OTHER ASSETS		684,932			669,478
TOTAL ASSETS	$	16,759,306		$	18,731,255

LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES
Accounts payable	$	730,368		$	694,835
Bank Overdraft		40,074			-
Accrued expenses		43,771			74,958
State income taxes payable		103,375			140,500
Current portion of long-term debt		3,525,238			3,707,721
TOTAL CURRENT LIABILITIES		4,442,826			4,618,014

LONG-TERM DEBT, net of current portion		17,609,930			19,901,173

TOTAL LIABILITIES		22,052,756			24,519,187

MEMBERS' DEFICIT		(5,293,450	)		(5,787,932	)
TOTAL LIABILITIES AND MEMBERS' DEFICIT	$	16,759,306		$	18,731,255

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

5J TRUCKING, LLC

STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

	For the Nine Months Ended
	September 30,
	2019			2018
OPERATING REVENUES	$	19,299,200		$	19,146,258

OPERATING EXPENSES		17,505,115			17,264,934

GROSS PROFIT		1,794,085			1,881,324

GENERAL AND ADMINISTRATIVE		1,079,351			681,970

INCOME FROM OPERATIONS		714,734			1,199,354

OTHER INCOME (EXPENSE)
Gain on sale of fixed assets		490,848			2,409,043
Interest income		55,151			45,065
Interest expense		(662,876	)		(550,523	)

NET OTHER INCOME (EXPENSE)		(116,877	)		1,903,585

INCOME BEFORE PROVISION FOR INCOME TAXES		597,857			3,102,939

STATE INCOME TAX EXPENSE		103,375			92,000

NET INCOME	$	494,482		$	3,010,939

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

5J TRUCKING, LLC

STATEMENTS OF MEMBERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

	2019			2018
MEMBERS' EQUITY AT BEGINNING OF PERIOD	$	(5,787,932	)	$	(7,430,072	)

Net income		494,482			3,010,939

Contributions (distributions) to members		-			(1,260,000	)

MEMBERS' EQUITY AT END OF PERIOD	$	(5,293,450	)	$	(5,679,133	)

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

5J TRUCKING, LLC

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

	2019			2018
CASH FLOW FROM OPERATING ACTIVITIES
Net income	$	494,482		$	3,010,939
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		2,767,007			3,022,445
Gain on sale of fixed assets		(490,848	)		(1,546,828	)
Gain on distribution of property		-			(862,215	)
Bad debt expense		554,777			200,334
Decrease (Increase) in accounts receivable		(595,549	)		(322,076	)
Decrease (Increase) in prepaid expenses		(11,258	)		(7,059	)
(Decrease) Increase in accounts payable		35,533			(119,863	)
(Decrease) Increase in bank overdraft		40,074			-
(Decrease) Increase in accrued expenses		(31,187	)		(66,949	)
(Decrease) Increase in state income taxes payable		(37,125	)		(13,000	)

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		2,725,906			3,295,728

CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment		(552,738	)		(779,953	)
Proceeds from disposal of equipment		-			276,051
Payments received from equipment sold on contract		453,478			313,970

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		(99,260	)		(189,932	)

CASH FLOWS FROM FINANCING ACTIVITIES
Reduction in long-term debt		(2,813,744	)		(3,058,032	)
Member contributions (distributions)		-			(5,000	)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(2,813,744	)		(3,063,032	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(187,098	)		42,764

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		187,098			193,758

CASH AND CASH EQUIVALENTS (OVERDRAFT) AT END OF PERIOD	$	-		$	236,522

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest	$	856,634		$	743,820
State income taxes	$	140,500		$	105,000

Noncash investing and financing transactions:
Acquisition of property and equipment:
Cost of property and equipment		340,018			2,356,891
Property and equipment loans		(340,018	)		(2,276,891	)
Cash down payments	$	-		$	80,000

Sale of property and equipment:
Equipment sold on contract	$	632,767		$	1,353,000

Property distributions:
Fair value of property distributed	$	-		$	1,170,000
Cost basis		-			(307,785	)
Gain on distribution	$	-		$	862,215

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

5J TRUCKING, LLC

NOTES TO UNAUDITED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

ORGANIZATION

5J Trucking, LLC (the Company) is a limited liability company organized under the laws of the State of Texas on January 20, 2004, and headquartered in Palestine, Texas.

NATURE OF OPERATIONS

SIGNIFICANT ACCOUNTING POLICIES

Concentration of Credit Risk. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. As of September 30, 2019 and December 31, 2018, the Company had no deposits in excess of federally insured limits at financial institutions. Substantially all (96%) of accounts receivable at September 30, 2019 and (86%) at December 31, 2018 was due from 5J Oilfield Services, LLC. Credit risk with respect to the accounts receivable is derived from 5J Oilfield Services, LLC granting credit to customers located throughout the United States.

Accounts Receivable. Accounts receivable are recorded net of the allowance for doubtful accounts of $1,175,005 at September 30, 2019 and $618,864 at December 31, 2018. The allowance for doubtful accounts is based on historical experience and an evaluation of the outstanding receivables at year end. Bad debt expense for the nine months ended September 30, 2019 and 2018, was $554,777 and $200,334, respectively.

Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful life of each class as follows:

Buildings	7-39 years
Cranes	10 years
Trucks, trailers and winches	7 years
Machinery and equipment	5-7 years

Maintenance and repairs are charged to expense as incurred and expenditures for major renewals and betterments are capitalized.

When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the results of operations.

Depreciation expense for the nine months ended September 30, 2019 and 2018, was $2,767,007 and $3,022,445, respectively.

Cash and Cash Equivalents. For purposes of the statement of cash flows, the Company considers all demand deposits, money market funds and cash on hand to be cash equivalents.

Income Taxes. The Company is a disregarded entity for Federal income tax purposes. Therefore, no provision for Federal income tax has been included in the financial statements.

The Company is subject to various state income taxes and a state income tax provision of $103,375 and $92,000, has been recorded for the nine months ended September 30, 2019 and 2018, respectively.

For federal and state income tax purposes, the tax returns essentially remain open for possible examination for a period of three years after the respective filing deadlines of those returns.

Members’ Liability. As a limited liability company, each member’s liability is limited to amounts reflected in their respective member equity accounts in accordance with the Operating Agreement.

Subsequent Events. Management has evaluated subsequent events through May 8, 2020, the date the financial statements were available to be issued.

NOTES PAYABLE

Notes payable as of September 30, 2019 and December 31, 2018 consisted of the following:

		Date of	Maturity	Interest	Original		Monthly		Payment	Balance		2019		2019		Balance
Notes Payable	Collateral	Inception	Date	Rate	Amount		Payment		Method	12/31/2018		Additions		Reductions		9/30/2019
Equify	(4) Manitowoc cranes	Aug-15	Dec-18	6.00%	$	1,353,514		-	Monthly	$	181,620	$	-	$	181,620	$	-
5J Oilfield Services, LLC	Miscellaneous Loan Fd Cash Acc.	Dec-13	Dec-26	2.00%		13,887,658		33,333	Quarterly		12,137,658		-		200,000		11,937,658
Citizens National Bank	2017 Holden & 2007 Aspen trailers	Nov-16	Nov-19	5.00%		92,100		2,763	Monthly		29,588		-		24,158		5,430
Scott Financial	2014 Kobelco Crane	Apr-16	Apr-20	5.75%		516,127		12,798	Monthly		196,771		-		108,649		88,122
Scott Financial	2006 Manitowoc Crane	Apr-16	Jan-20	5.75%		335,246		8,313	Monthly		104,610		-		71,612		32,998
Scott Financial	2013 Kobelco Crane	Apr-16	Apr-20	5.75%		531,500		13,179	Monthly		202,554		-		111,885		90,669
ALLY	2017 GMC Truck	Mar-17	Mar-20	4.69%		28,443		850	Monthly		12,305		-		7,332		4,973
ALLY	2017 GMC Truck	Mar-17	Mar-20	4.76%		30,368		909	Monthly		13,145		-		7,832		5,313
ALLY	2017 GMC Truck	Apr-17	Apr-20	4.59%		33,665		1,005	Monthly		15,498		-		8,640		6,858
ALLY	2017 GMC Truck	Apr-17	Apr-20	4.59%		42,762		1,276	Monthly		19,685		-		10,973		8,712
ALLY	2017 GMC Truck	Jun-17	Jun-20	4.59%		26,148		780	Monthly		14,222		-		6,633		7,589
ALLY	2017 GMC Truck	Jul-17	Jul-20	3.39%		18,380		538	Monthly		9,920		-		4,644		5,276
ALLY	2017 Chevrolet Truck	Sep-17	Sep-20	4.40%		30,996		922	Monthly		18,550		-		7,803		10,747
ALLY	2018 Chevrolet Truck	Oct-17	Oct-20	4.59%		29,318		875	Monthly		18,369		-		7,351		11,018
Citizens National Bank	13 Trailers	Aug-17	Aug-22	5.50%		448,000		8,464	Monthly		336,132		-		63,277		272,855
Scott Financial	Kobelco crane	Aug-17	Aug-21	5.75%		550,500		13,950	Monthly		368,860		-		101,817		267,043
Scott Financial	2017 Kobelco crane	Dec-17	Dec-22	5.75%		784,877		15,113	Monthly		645,520		-		109,816		535,704
Triumph	9 Trucks and 3 Trailers	Oct-17	Oct-20	5.50%		1,162,749		35,207	Monthly		650,341		-		332,864		317,477
De Lage Landen	2017 Grove Crane	Dec-17	Jan-24	5.48%		3,447,067		56,286	Monthly		2,991,144		-		435,447		2,555,697
Citizens Bank of Crockett	2 Trailers	Jan-18	Jan-21	6.5% floating		144,810		4,476	Monthly		103,665		-		35,472		68,193
Mercedes-Benz	1 Western Star truck	Feb-18	Jul-21	6.15%		100,000		2,640	Monthly		77,939		-		20,559		57,380
Citizens National Bank	2 Kenworths	Jun-18	May-22	5.75%		319,120		7,471	Monthly		283,041		-		56,097		226,944
Citizens National Bank	2 Trailers	Jul-18	Jul-22	5.49%		368,000		8,571	Monthly		333,246		-		64,593		268,653
Mercedes-Benz	8 Western Star trucks	Aug-18	Sep-23	5.50%		1,344,961		25,747	Monthly		1,288,963		-		181,828		1,107,135
Volvo Fin	4 Volvo Trucks	Oct-18	Oct-22	5.50%		596,565		13,874	Monthly		574,234		-		103,053		471,181
Volvo Fin	2 Volvo Trucks	Dec-18	Nov-22	5.50%		309,993		7,209	Monthly		304,204		-		53,305		250,899
Mercedes-Benz	2 Western Star trucks	Dec-18	Dec-23	5.84%		334,047		6,433	Monthly		334,047		-		43,563		290,484
Triumph	5 Kenworth Trucks	Nov-18	Jan-22	6.00%		1,000,750		30,770	Monthly		1,000,750		-		200,090		800,660
Citizens National Bank	2018 Cat Crane	Dec-18	Dec-22	6.00%		900,000		21,171	Monthly		900,000		-		153,071		746,929
Volvo Fin	3 Volvo Trucks	Dec-18	Dec-22	5.50%		442,313		10,287	Monthly		442,313		-		75,712		366,601
Mercedes-Benz	2 Western Star trucks	May-19	Apr-24	5.65%		340,018		6,534	Monthly		-		340,018		24,048		315,970

	Totals				$	29,549,995				$	23,608,894	$	340,018	$	2,813,744	$	21,135,168

									Total Long-Term Debt							$	21,135,168
									Less current portion								3,525,238
									Total Long-Term Debt, net of current portion							$	17,609,930

COMMITMENTS AND CONTINGENCIES

The Company has guaranteed 5J Oilfield Services, LLC’s Line of Credit with VeraBank with a balance of $6,254,734 as of September 30, 2019. The line of credit matures on October 4, 2019, and has a maximum borrowing amount of $8,000,000. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. As of September 30, 2019, the related party is current with its debt payments.

The Company has guaranteed two of Certified Crane and Rigging Services, LLC’s notes payable due to Equify Financial, LLC with balances of $2,336,368 and $2,003,788 as of September 30, 2019. Payments on the debts are due monthly with final payments due during the year ending December 31, 2022. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. At September 30, 2019, including accrued interest, the maximum potential amount of future payments under the guarantees would be $4,810,043. As of September 30, 2019, the related party is current with its debt payments.

The Company has also guaranteed a Line of Credit for Certified Crane and Rigging Services, LLC with a balance of $1,469,040 as of September 30, 2019. The line of credit matures on February 16, 2020, and has a maximum borrowing amount of $2,020,000. The Company would be obligated to perform under the guarantee if the related entity failed to pay principal and interest payments to the lender when due. As of September 30, 2019, the related party is current with its debt payments.

RELATED PARTY TRANSACTIONS

During 2019 and 2018, the Company had transactions with 5J Oilfield Services, LLC (Oilfield Services), 5J Properties, LLC (Properties), Certified Crane and Rigging Services, LLC (Certified Crane), 903 Industries, and Schwab Trucking, LLC (Schwab) related through common ownership and management. The Company rents a crane to Certified Crane under a cancelable five year lease. The lease requires Certified Crane to pay the Company rent for the use of the equipment. The following is a description of the transactions with these entities for the nine months ended September 30, 2019 and 2018:

5J Oilfield Services, LLC

the gross amount paid by or on behalf of Oilfield Services to any driver of the leased equipment for wages

a percentage of the driver’s gross wages to cover payroll taxes and operations and administrative expenses

other miscellaneous expenses such as driver physicals, drug and alcohol screens, fines, etc.

The Company also receives revenue from Oilfield Services for the use of its terminal facilities and from commissions related to job performance.

Accounts receivable includes $425,121 and $346,331 due from Oilfield Services as of September 30, 2019 and December 31, 2018, respectively.

Long-Term Debt includes $11,937,658 and $12,137,658 due to Oilfield Services as of September 30, 2019 and December 31, 2018, respectively. Interest expense incurred on the debt was $183,829 and $188,539 during the nine months ended September 30, 2019 and 2018. See the long-term debt information on page 11 for more details.

The Company reported gross revenue of $18,518,179 reduced by $8,413,934 of expenses during the nine months ended September 30, 2019 and gross revenue of $18,364,569 reduced by $8,100,246 of expenses during the nine months ended September 30, 2018 from Oilfield Services.

The Company’s transactions with other related parties are summarized below:

	September 30,		September 30,
	2019		2018
Operating revenue from Certified Crane	$	556,283		589,957
Operating revenue from Schwab		82,946		57,817
Operating revenue from 903 Industries		19,532		26,400

Contract service expense to Certified Crane		-		-
Rental expense to 5J Properties		76,500		76,500
Truck expense to 903 Industries		-		-

Bad debt expense from Certified Crane (included in General and Administrative expense)		556,266		150,000

Gain on distribution of fixed assets to CCR		-		862,215

NOTES RECEIVABLE

Notes receivable consisted of the following at September 20, 2019 and December 31, 2018:

	September 30,			December 31,
	2019			2018
Matthew Solt, with interest at 8%	$	139,245		$	165,643
Antero M. Zulueta, with interest at 8%		-			160,645
A-Starr Logistics, LLC, with interest at 8.5%		116,156			148,861
Banks Heavy Haul, with interest at 8%		108,100			131,811
Boyd Farner Jr., with interest at 8%		-			93,651
PCN Transportation, with interest at 7.5%		51,967			86,407
2J Trucking, LLC, with interest at 8%		-			78,263
PCN Transportation, with interest at 8%		40,928			59,448
Donna K. Slinker, with interest at 7.5%		-			58,250
Danny DelAngel, with interest 8%		-			55,833
William Corley, with interest at 7.5%		-			53,943
William Corley, with interest at 7.5%		150,274			-
Thomas Wright, with interest at 8.5%		119,200			-
Andy Rivers, with interest at 8%		155,703			-
Matthew Solt, with interest at 8.5%		152,482			-
Matthew Solt, with interest at 8.5%		74,154			-

Notes receivable	$	1,108,209		$	1,092,755
Less current portion		(423,277	)		(423,277	)

Notes receivable - non-current portion	$	684,932		$	669,478

SUBSEQUENT EVENTS

EX-99.5 6 tm2018745d1_ex99-5.htm EXHIBIT 99.5

Exhibit 99.5

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

On February 27, 2020 SMG Industries, Inc. (“the Company” or “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 “5J Acquisition”). The total purchase price for the 5J Entities was $27.3 million, including assumed debt.

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 Industries Inc. 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 unaudited pro forma combined statement of operations for the nine months ended September 30, 2019 and the year ended December 31, 2018 combine the historical statements of operations of the 5J Entities and the Company’s consolidated statement of operations, giving effect to the 5J Acquisition as if they had occurred on January 1, 2018, the beginning of SMG’s most recently completed fiscal year. The unaudited pro forma combined balance sheet at September 30, 2019 combines the Company’s consolidated balance sheet at September 30, 2019 with the 5J Entities’ combined balance sheet at September 30, 2019, giving effect to the 5J Acquisition as if it had occurred on September 30, 2019. The unaudited proforma combined statements of operations also include the effect of the Trinity Acquisition, which closed on June 27, 2019. Please refer to the Current Report on Form 8-K/A (“Amendment No. 1”) filed on September 9, 2019 for the information required by Item 9.01 of Form 8-K related to the Trinity Acquisition.

The historical combined statements of operations of 5J have been adjusted to reflect certain reclassifications and other adjustments in order to conform to the Company’s financial statement presentation and accounting policies. The historical consolidated financial statements have been adjusted in the unaudited pro forma combined financial information to give pro forma effect to events that are: (1) directly attributable to the Trinity Acquisition; (2) factually supportable; and (3) with respect to the statement of operations, expected to have a continuing impact on the combined company’s results. The unaudited pro forma combined financial information has been developed from and should be read in conjunction with:

the accompanying notes to the unaudited combined pro forma financial information;

the historical unaudited consolidated financial statements of the Company as of and for the nine months ended September 30, 2019, included in the Company’s quarterly report on Form 10-Q for the nine months ended September 30, 2019;

the historical consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018;

the financial statements of 5J Oilfield Services, LLC as of and for the fiscal years ended December 31, 2018 and 2017;

the financial statements of 5J Trucking, LLC as of and for the fiscal years ended December 31, 2018 and 2017;

the unaudited financial statements of 5J Oilfield Services, LLC as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018; and

the unaudited financial statements of 5J Trucking, LLC as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018.

The unaudited pro forma combined financial information has been prepared using the acquisition method of accounting in accordance with U.S. GAAP with the Company as the acquirer. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values as of the acquisition date with any excess purchase price allocated to goodwill.

The Company has not completed the detailed valuation studies necessary to arrive at the required estimates of the fair value of the consideration transferred, assets acquired, the liabilities assumed and the related allocations of the purchase price in the 5J Acquisition. As a result, the unaudited pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The unaudited pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma combined financial information presented below. The Company has estimated the fair value of assets acquired and liabilities assumed based on discussions with members of 5J’s management, preliminary valuation studies, due diligence and information presented in the financial statements and accounting records of 5J. 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. Any increases or decreases in the fair value of these assets and liabilities upon completion of the final valuations will result in adjustments to the balance sheet and/or statement of operations. The final purchase price and the final purchase price allocation may be different than that reflected in the preliminary purchase price allocation presented herein, and this difference may be material.

Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma combined financial information are described in the accompanying notes. The unaudited pro forma combined financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results and financial position that would have been achieved had the 5J Acquisition and the Trinity Acquisition occurred on the dates indicated. Further, the unaudited pro forma combined financial information does not purport to project the future operating results or financial position of the Company following the 5J Acquisition and the Trinity Acquisition. The unaudited pro forma adjustments represent management’s estimates based on information available as of the date of this unaudited pro forma combined financial information and are subject to change as additional information becomes available and analyses are performed.

The unaudited pro forma combined financial information, although helpful in illustrating the financial characteristics of the Company under one set of assumptions, does not reflect the benefits of cost-saving initiatives (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result as a consequence of the 5J Acquisition and the Trinity Acquisition and, accordingly, does not attempt to predict or suggest future results. The unaudited pro forma combined financial information also excludes the effects of costs associated with any restructuring activities, integration activities or asset dispositions resulting from the 5J Acquisition and the Trinity Acquisition, as they are currently not known, and to the extent they occur, are expected to be non-recurring and were not incurred as of the closing date of the 5J Acquisition and the Trinity Acquisition. However, such costs could affect the combined company following the 5J Acquisition and the Trinity Acquisition in the period the costs are incurred or recorded.

SMG Industries Inc.

Pro Forma Combined Statement of Operations

For the Nine Months Ended September 30, 2019

(unaudited)

	SMG			Trinity			5J Combined			Trinity Pro Forma Adjustments				5J Pro Forma Adjustments				Pro Forma Combined

REVENUE TOTAL	$	4,911,401		$	2,929,661		$	43,831,929		$	-			$	-			$	51,672,991

COST OF REVENUE		3,999,156			2,683,091			43,053,764			16,612		(a)		1,467,080		(e)		51,219,703

GROSS PROFIT		912,245			246,570			778,165			(16,612	)			(1,467,080	)			453,288

Selling, General & Administrative		2,491,317			134,670			3,620,826			12,000		(b)		-				6,258,813

Income (loss) from operations		(1,579,072	)		111,900			(2,842,661	)		(28,612	)			(1,467,080	)			(5,805,525	)

Other Income (Expense)
Interest Income		-			-			57,689			-				-				57,689
Interest Expense		(644,511	)		(37,869	)		(730,533	)		(19,375	)	(c)		(716,250	)	(f)		(2,148,538	)
Loss on settlement of liabilities		(73,764	)		-			-			-				-				(73,764	)
Gain on sale of fixed assets		-			-			490,848			-				-				490,848

Income (Loss) before provision for income taxes		(2,297,347	)		74,031			(3,024,657	)		(47,987	)			(2,183,330	)			(7,479,290	)

State Income tax expense		-			-			(126,213	)		-				-				(126,213	)

Net income (loss)		(2,297,347	)		74,031			(3,150,870	)		(47,987	)			(2,183,330	)			(7,605,503	)

Preferred stock dividends		-			-			-			(30,000		(d)		(300,000	)	(g)		(330,000	)

Net income (loss) attributable to common shareholders	$	(2,297,347	)	$	74,031		$	(3,150,870	)	$	(77,987	)		$	(2,483,330	)		$	(7,935,503	)

Net income (loss) per common share
Basic	$	(0.17	)		-			-			-				-			$	(0.59	)
Diluted	$	(0.17	)		-			-			-				-			$	(0.59	)

Weighted Average Shares Outstanding
Basic		13,493,944			-			-			-				-				13,493,944
Diluted		13,493,944			-			-			-				-				13,493,944

SMG Industries Inc.

Pro Forma Combined Statement of Operations

For the year ended December 31, 2018

(unaudited)

	SMG Industries Inc.			Trinity			5J Combined			Trinity Pro Forma Adjustments				5J Pro Forma Adjustments				Pro Forma Combined

REVENUE TOTAL	$	4,422,436		$	5,481,779		$	68,356,895		$	-			$	-			$	78,261,110

COST OF REVENUE TOTAL		2,769,375			5,118,073			56,947,396			(101,683	)	(a)		1,956,107		(e)		66,689,268

GROSS PROFIT		1,653,061			363,706			11,409,499			101,683				(1,956,107	)			11,571,842

Selling, general & administrative		2,495,560			374,180			6,572,846			24,000		(b)		-				9,466,586

Income (loss) from operations		(842,499	)		(10,474	)		4,836,653			77,683				(1,956,107	)			2,105,256

Other Income (Expense)
Gain (loss) on settlement of liabilities		9,151			-			-			-				-				9,151
Gain on sale of fixed assets		-			-			2,316,518			-				-				2,316,518
Interest Expense, net		(310,030	)		(32,836	)		(804,464	)		(38,750	)	(c)		(955,000	)	(f)		(2,141,080	)
Other income		-			21,637			64,662			-				-				86,299
Miscellaneous expense		-			(1,141	)		-			-				-				(1,141	)

Income (Loss) before provision for income taxes		(1,143,378	)		(22,814	)		6,413,369			38,933				(2,911,107	)			2,375,003

State Income tax expense		-			-			(159,874	)		-				-				(159,874	)

Net Loss		(1,143,378	)		(22,814	)		6,253,495			38,933				(2,911,107	)			2,215,129

Preferred stock dividends		-			-			-			(60,000	)	(d)		(300,000	)	(g)		(360,000	)

Net Loss attributable to common shareholders	$	(1,143,378	)	$	(22,814	)	$	6,253,495		$	(21,067	)		$	(3,211,107	)		$	1,855,129

Net Loss per common share
Basic	$	(0.11	)		-			-			-				-			$	0.18
Diluted	$	(0.11	)		-			-			-				-			$	0.18

Weighted Average Shares Outstanding
Basic		10,364,775			-			-			-				-				10,364,775
Diluted		10,364,775			-			-			-				-				10,364,775

SMG Industries, Inc.

Pro Forma Combined Balance Sheet

As of September 30, 2019

(unaudited)

	SMG			5J Combined		Pro Forma Adjustments (See Note 4)				Pro Forma
ASSETS

Cash and cash equivalents	$	13,353		$	-	$	-		(h k)	$	13,353
Certificates of deposit		-			393,577		-				393,577
Accounts receivable		1,967,075			9,337,074		-				11,304,149
Inventory		149,413			-		-				149,413
Assets held for sale		30,000			-		-				30,000
Notes receivable - current portion		-			423,277		-				423,277
Prepaid expenses and other current assets		136,951			488,472		-				625,423
Total current assets		2,296,792			10,642,400		-				12,939,192

Property and equipment, net		4,342,037			15,075,343		9,780,534		(i)		29,197,914
Notes receivable, net of current portion		-			684,932		-				684,932
Other asset		20,386			111,870		-				132,256
Right of use assets - operating leases		311,473			-		-		(h)		311,473
Intangible assets		307,908			-		-				307,908
Goodwill		185,751			-		-				185,751

Total assets	$	7,464,347		$	26,514,545	$	9,780,534			$	43,759,426

LIABILITIES

Accounts payable	$	1,908,564		$	2,860,796	$	-			$	4,769,360
Accrued expenses and other liabilities		401,317			2,399,408		-				2,800,725
Right of use liabilities - operating leases short term		128,969			-		-				128,969
Right of use liabilities - finance leases short term		62,389			-		-				62,389
Secured line of credit		1,348,916			5,837,365		-				7,186,281
Current portion of note payable - related party		51,932			-		-				51,932
Current portion of unsecured notes payable net		160,375			-		-				160,375
Current portion of secured notes payable net		1,085,994			3,525,238		3,141,794		(h)		7,753,026
Current portion of convertible notes payable net		-			-		450,000		(h)		450,000
Total current liabilities		5,148,456			14,622,807		3,591,794				23,363,057

Convertible notes payable, net		248,306			-		900,000		(h)		1,148,306
Note payable - related party, net of current portion		12,003			-		-				12,003
Notes payable - secured, net of current portion		1,343,140			5,672,272		5,508,206		(h)		12,523,618
Right of use liabilities - operating leases, net of current portion		188,504			-		-				188,504
Right of use liabilities - finance leases, net of current portion		27,403			-		-				27,403
Total other liabilities		1,819,356			5,672,272		6,408,206				13,899,834

Total liabilities		6,967,812			20,295,079		10,000,000				37,262,891

EQUITY
Members equity		-			6,219,466		(6,219,466	)	(i)		-
Preferred stock		2			-		6		(k)		8
Common stock		14,451			-		-				14,451
Additional paid in capital		4,456,856			-		5,999,994		(k)		10,456,850
Accumulated deficit		(3,974,774	)		-		-				(3,974,774	)
Total equity		496,535			6,219,466		(219,466	)			6,496,535

Total liabilities and equity	$	7,464,347		$	26,514,545	$	9,780,534			$	43,759,426

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

1. Description of the 5J Acquisition

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 10% Secured Promissory Note issued to the 5J Oilfield Member as part of the 5J Oilfield Purchase Price has a three-year term and all outstanding principal and accrued interest is due and payable on February 27, 2023. Interest shall be paid monthly commencing in March 2020 and principal payments shall be made on a quarterly basis, commencing at the end of the second quarter ending June 30, 2020. Principal payments shall be made subject to the 5J Entities availability under the Amerisource AR Facility (defined below). This note and the payment thereof shall be secured by all of 5J Oilfield’s accounts receivable, subject to a prior security interest in the Company’s accounts receivable by Amerisource Funding, Inc. Additionally, the Company has agreed to guaranty all of the obligations due under the note. Notwithstanding the foregoing, principal payments under the note will not be made by 5J Oilfield prior to the maturity date if the 5J Oilfield EBITDA for the trailing twelve (12) month period does not equal or exceed a 1-1 ratio to 5J Oilfield’s debt service payments to Amerisource (defined below) and Utica (defined below) pursuant to the terms of each of Amerisource Financing (defined below) and the Utica Financing (defined below).

Pursuant to the terms of the 5J Trucking Membership Interest Purchase Agreement (“5J Trucking Agreement”), we acquired 100% of the issued and outstanding membership interests from the members of 5J Trucking (“5J Trucking Members”), pursuant to which 5J Trucking has become a wholly-owned subsidiary of SMG Industries Inc. Pursuant to the terms of the 5J Trucking Agreement, in exchange for the membership interests, SMGI refinanced the obligation for notes owed by 5J and its affiliates in the principal amount of $5,564,000 (“5J Trucking Purchase Price”).

In connection with the acquisition of the 5J Entities, 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 (“Utica Financing”) which amount was financed based on 75% of the net forced liquidation value of the equipment. The Company used a portion of the proceeds from the Utica Financing to pay the cash portion of the Purchase Price of the 5J Entities.

Pursuant to the terms of the Utica Financing, the 5J Entities will pay a monthly fee of $331,065 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 agreements.

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 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 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.

The Bridge Facility has a term of six (6) months during which the 5J Entities shall make equal monthly payments of principal and interest. In connection with the Bridge Facility, the 5J Entities paid an upfront facility fee of five percent (5%) of the total Bridge Facility amount at closing.

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, 2,400,000 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.

2. Basis of Pro Forma Presentation

The unaudited pro forma combined statement of operations for the nine months ended September 30, 2019 combines the Company’s consolidated statement of operations for the nine months ended September 30, 2019 with the historical statements of operations of the 5J Entities’ consolidated statement of operations for the nine months ended September 30, 2019. The unaudited combined statement of operations for the year ended December 31, 2018 combines the Company’s consolidated statement of operations for the year ended December 31, 2018 with 5J’s consolidated statement of operations for the year ended December 31, 2018. These unaudited pro forma combined statements of operations give effect to the 5J Acquisition as if it had occurred on January 1, 2018, the beginning of SMG’s most recently completed fiscal year. The unaudited pro forma combined balance sheet at September 30, 2019 combines the Company’s consolidated balance sheet at September 30, 2019 with 5J combined balance sheet at September 30, 2019, giving effect to the 5J Acquisition as if it had occurred on September 30, 2019. The unaudited proforma combined statements of operations also included the effect of the Trinity Acquisition, which close on June 27, 2019. There is no proforma balance sheet impact of the Trinity Acquisition as of September 30, 2019.

The following tables present the combined results of the 5J Entities for the periods indicated:

Statement of Operations
Nine Months ended September 30, 2019
	5J OFS			5J Trucking			Eliminations			5J Combined

REVENUE TOTAL	$	43,050,908		$	19,299,200		$	(18,518,179	)	$	43,831,929

COST OF REVENUE		44,066,828			17,505,115			(18,518,179	)		43,053,764

GROSS PROFIT (LOSS)		(1,015,920	)		1,794,085			-			778,165

Selling, General & Administrative		2,541,475			1,079,351			-			3,620,826

Net Operating Income (Loss)		(3,557,395	)		714,734			-			(2,842,661	)

Other Income (Expense)
Interest income		186,367			55,151			(183,829	)		57,689
Interest expense		(251,486	)		(662,876	)		183,829			(730,533	)
Gain on sale of fixed assets		-			490,848			-			490,848

Net Other Income (Expense)		(65,119	)		(116,877	)		-			(181,996	)

Income (loss) before provision for income taxes		(3,622,514	)		597,857			-			(3,024,657	)

State Income tax expense		(22,838	)		(103,375	)		-			(126,213	)

Net income (loss)	$	(3,645,352	)	$	494,482		$	-		$	(3,150,870	)

Statement of Operations
Fiscal year ended December 31, 2018
	5J OFS			5J Trucking			Eliminations			5J Combined

REVENUE TOTAL	$	67,299,934		$	25,919,903		$	(24,862,942	)	$	68,356,895

COST OF REVENUE		58,405,761			23,404,577			(24,862,942	)		56,947,396

GROSS PROFIT		8,894,173			2,515,326			-			11,409,499

Selling, General & Administrative		6,003,679			569,167			-			6,572,846

Net Operating Income		2,890,494			1,946,159			-			4,836,653

Other Income (Expense)
Interest income		253,890			-			(250,260	)		3,630
Interest expense		(314,534	)		(743,820	)		250,260			(808,094	)
Gain on sale of fixed assets		22,132			2,294,386			-			2,316,518
Other income		-			64,662			-			64,662

Net Other Income (Expense)		(38,512	)		1,615,228			-			1,576,716

Income before provision for income taxes		2,851,982			3,561,387			-			6,413,369

State Income tax expense		(27,277	)		(132,597	)		-			(159,874	)

Net income (loss)	$	2,824,705		$	3,428,790		$	-		$	6,253,495

Balance Sheet as of September 30, 2019
	5J OFS			5J Trucking			Eliminations			5J Combined

Cash	$	-		$	-		$	-		$	-
Certificate of deposit		393,577			-			-			393,577
Accounts receivable,
Trade, net		8,859,702			2,362			-			8,862,064
Related party		33,121			441,889			-			475,010
Notes receivable - current portion		400,000			423,277			(400,000	)		423,277
Prepaid expenses		201,129			287,343			-			488,472
Total Current assets		9,887,529			1,154,871			(400,000	)		10,642,400

PROPERTY AND EQUIPMENT (at cost)
Buildings		12,990			715,921			-			728,911
Cranes		-			10,536,569			-			10,536,569
Furnitures, fixtures and equipment		41,323			-			-			41,323
Computer equipment		47,533			-			-			47,533
Trucks, trailers and winches		338,885			33,173,251			-			33,512,136
Machinery and equipment		24,450			4,246,967			-			4,271,417
Total property and equipment		465,181			48,672,708			-			49,137,889
Less accumulated depreciation		(309,341	)		(33,753,205	)		-			(34,062,546	)
TOTAL NET PROPERTY AND EQUIPMENT		155,840			14,919,503			-			15,075,343
OTHER ASSETS
Notes receivable, net of current portion		11,537,658			684,932			(11,537,658	)		684,932
Deposits		111,870			-			-			111,870
TOTAL OTHER ASSETS		11,649,528			684,932			(11,537,658	)		796,802
TOTAL ASSETS	$	21,692,897		$	16,759,306		$	(11,937,658	)	$	26,514,545

CURRENT LIABILITIES
Accounts payable	$	1,672,985		$	730,368		$	-		$	2,403,353
Bank overdraft		417,369			40,074			-			457,443
Accrued expenses		2,030,424			43,771			-			2,074,195
Escrow deposits		199,000			-			-			199,000
State income taxes payable		22,838			103,375			-			126,213
Line of credit		5,837,365			-			-			5,837,365
Current portion of long-term debt		-			3,525,238			-			3,525,238
TOTAL CURRENT LIABILITIES		10,179,981			4,442,826			-			14,622,807
LONG-TERM DEBT, net of current portion		-			17,609,930			(11,937,658	)		5,672,272
TOTAL LIABILITIES		10,179,981			22,052,756			(11,937,658	)		20,295,079
MEMBERS' EQUITY (DEFICIT)		11,512,916			(5,293,450	)		-			6,219,466
TOTAL LIABILITIES AND MEMBERS' EQUITY (DEFICIT)	$	21,692,897		$	16,759,306		$	(11,937,658	)	$	26,514,545

3. Preliminary Purchase Price Allocation

The purchase price for the 5J Acquisition has been allocated to the assets acquired and liabilities assumed for purposes of this pro forma financial information based on their estimated relative fair values. The purchase price allocation herein is preliminary. The final purchase price allocation for the 5J Acquisition will be determined after completion of a thorough analysis to determine the fair value of all assets acquired and liabilities assumed but in no event later than one year following completion of the 5J Acquisition. Accordingly, the final acquisition accounting adjustments could differ materially from the accounting adjustments included in the pro forma financial statements presented herein. Any increase or decrease in the fair value of the assets acquired and liabilities assumed, as compared to the information shown herein, could also change the portion of purchase price allocable to goodwill and could impact the operating results of the Company following the acquisition due to differences in purchase price allocation, depreciation and amortization related to some of these assets and liabilities.

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

Preliminary Purchase Price:
Cash	$	7,000,000
Notes payable		3,000,000
Preferred stock, Series B issued		6,000,000
Total preliminary purchase consideration	$	16,000,000

Preliminary Purchase Price Allocation
Certificate of deposit	$	393,577
Accounts receivable		9,337,074
Notes receivable		1,108,209
Prepaid expenses		488,472
Property and equipment		24,855,877
Other assets		111,870
Accounts payable and accrued liabilities		(5,260,204	)
Line of credit		(5,837,365	)
Notes payable		(9,197,510	)
	$	16,000,000

4. Pro Forma Adjustments

Pro Forma Adjustments to the Statements of Operations:

Trinity Acquisition

(a)

To adjust depreciation expense for new estimated fair value of property and equipment and revised estimated remaining useful lives from the Trinity Acquisition

(b)

To recognize operating lease expense under ASC 842 associated with new lease entered into concurrent with the Trinity Acquisition

(c)

To recognize additional interest expense on additional borrowings of $500,000 to fund the cash consideration for the Trinity Acquisition.

(d)

To reflect the effect of preferred dividend for shares issued as consideration for the Trinity Acquisition

5J Acquisition

(e)

To adjust depreciation expense for new estimated fair value of property and equipment and revised estimated remaining useful lives from the 5J Acquisition

(f)

To recognize additional interest expense on additional borrowings to fund the cash consideration for the 5J Acquisition.

(g)

To reflect the effect of preferred dividend for shares issued as consideration for the 5J Acquisition

Pro Forma Adjustments to the Balance Sheet:

5J Acquisition

	As of September 30, 2019

Cash and cash equivalents
Additional borrowings under secured notes payable (h)	$	3,697,752
Additional Borrowings under Bridge Loan (h)		550,689
Additional borrowings under Term Loan (h)		1,401,559
Additional borrowings under convertible notes payable (h)		1,350,000
Payment of cash to sellers of 5J (j)		(7,000,000	)
Total adjustments to cash and cash equivalents	$	-


Bridge Loan	$	550,689
Current portion of Seller Notes (k)		1,666,667
Current portion of other secured notes payable		924,438
Secured Notes payable, current portion (h)	$	3,141,794


Secured Notes payable, non current portion:
Term Loan, net of current portion	$	1,401,559
Seller Notes, net of current portion (k)		1,333,333
Secured notes payable, net of current portion		2,773,314
Secured Notes payable, net of current portion(h)	$	5,508,206

Convertible notes payable, current portion	$	450,000
Convertible notes payable, net of current portion	$	900,000

(h)

To recognize additional borrowings to fund the cash consideration of the purchase price paid to the sellers of 5J

(i)

To adjust property and equipment to the estimate fair value as of the acquisition date

(j)

To eliminate historical members’ equity of 5J.

(k)

To recognize consideration paid to the sellers of 5J as disclosed in Note 3.

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