EX-99.3 4 tv529035_ex99-3.htm EXHIBIT 99.3

 

Exhibit 99.3

 

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

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

 

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

 

All of the shares of Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value of $2,000,000. The estimated fair value of the shares was based on an as if converted to common stock basis.

 

The unaudited pro forma combined statement of operations for the three months ended March 31, 2019 combines the Company’s consolidated statement of operations for the three months ended March 31, 2019 with Trinity’s consolidated statement of operations for the three months ended March 31, 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 Trinity’s consolidated statement of operations for the year ended December 31, 2018. These unaudited pro forma combined statements of operations give effect to the Trinity 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 March 31, 2019 combines the Company’s consolidated balance sheet at March 31, 2019 with Trinity’s combined balance sheet at March 31, 2019, giving effect to the Trinity Acquisition as if it had occurred on March 31, 2019.

 

The historical combined statements of operations of Trinity 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 three months ended March 31, 2019, included in the Company’s quarterly report on Form 10-Q for the three months ended March 31, 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 combined financial statements of Trinity as of and for the fiscal years ended December 31, 2018 and 2017; and
·the unaudited combined financial statements of Trinity as of March 31, 2019 and for the three months ended March 31, 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 Trinity 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 Trinity’s management, preliminary valuation studies, due diligence and information presented in the financial statements and accounting records of Trinity. 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 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 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 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 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 Trinity Acquisition. However, such costs could affect the combined company following the Trinity Acquisition in the period the costs are incurred or recorded.

 

   

 

 

SMG Industries Inc.

Unaudited Pro Forma Combined Statement of Operations

For the three months ended March 31, 2019

(unaudited)

 

   SMG   Trinity   Pro Forma
Adjustments
     Pro Forma 
                    
REVENUE TOTAL  $1,752,704   $1,456,864   $-      $3,209,568 
                        
COST OF REVENUE TOTAL   1,480,715    1,227,610    26,898   (a)   2,735,223 
                        
GROSS PROFIT   271,989    229,254    (26,898)      474,345 
                        
Selling, General & Admiinstrative   838,624    204,763    6,000    (b)   1,049,387 
                        
Net Operating Income (Loss)   (566,635)   24,491    (32,898)      (575,042)
                        
Other Income (Expense)                       
Interest Expense   (143,627)   (10,683)   (9,688)   (c)   (163,998)
Other income   -    10,340    -       10,340 
Miscellaneous expense   -    (2,252)   -       (2,252)
                        
Net Income (Loss)  $(710,262)  $21,896   $(42,586)     $(730,952)
                        
Preferred stock dividends   -    -    (15,000)  (d)   (15,000)
                        
Net income (loss) attributable to common shareholders  $(710,262)  $21,896   $(57,586)     $(745,952)
                        
Net income (loss) per common share                       
Basic  $(0.06)   -    -      $(0.06)
Diluted  $(0.06)   -    -      $(0.06)
                        
Weighted Average Shares Outstanding                       
Basic   12,460,520    -    -       12,460,520 
Diluted   12,460,520    -    -       12,460,520 

 

   

 

 

SMG Industries Inc.

Unaudited Pro Forma Combined Statement of Operations

For the year ended December 31, 2018

(unaudited)

 

   SMG   Trinity   Pro Forma
Adjustments
     Pro Forma 
                    
REVENUE TOTAL  $4,422,436   $5,481,779   $-      $9,904,215 
                        
COST OF REVENUE TOTAL   2,769,375    5,118,073    (27,315)   (a)   7,860,133 
                        
GROSS PROFIT   1,653,061    363,706    27,315       2,044,082 
                        
Selling, general & admiinstrative   2,434,819    356,629    24,000    (b)   2,815,448 
Bad debt expense   22,907    -    17,551    (e)   40,458 
Gain on asset disposal   (21,071)   -    -       (21,071)
Acquisition costs   58,905    -    -       58,905 
Total Operating expenses   2,495,560    356,629    41,551       2,893,740 
                        
Net Operating Income (Loss)   (842,499)   7,077    (14,236)      (849,658)
                        
Other Income (Expense)                       
Gain (loss) on settlement of liabilities   9,151    -    -       9,151 
Interest Expense   (310,030)   (32,836)   (38,750)   (c)   (381,616)
bad debt expense   -    (17,551)   17,551    (e)   - 
Other income   -    21,637    -       21,637 
Miscellaneous expense   -    (1,141)   -       (1,141)
                        
Net Loss  $(1,143,378)  $(22,814)  $(35,435)     $(1,201,627)
                        
Preferred stock dividends   -    -    (60,000)   (d)   (60,000)
                        
Net Loss attributable to common shareholders  $(1,143,378)  $(22,814)  $(95,435)     $(1,261,627)
                        
Net Loss per common share                       
Basic  $(0.11)   -    -      $(0.12)
Diluted  $(0.11)   -    -      $(0.12)
                        
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  March 31, 2019

(unaudited)

 

   SMG   Trinity   Pro Forma
Adjustments
(See Note 4)
     Pro Forma 
ASSETS                       
                        
Cash and cash equivalents  $70,432   $95,858   $-    (f, j)  $166,290 
Accounts receivable   927,796    1,377,985    -       2,305,781 
Inventory   128,425    -    -       128,425 
Assets held for sale   42,300    -    -       42,300 
Prepaid expenses and other current assets   81,071    29,463    -       110,534 
Total current assets   1,250,024    1,503,306    -       2,753,330 
                        
Property and equipment, net   2,009,995    3,313,974    (756,441)   (g)   4,567,528 
Other asset   18,920    -    -       18,920 
Right of use assets - operating leases   313,372    -    87,900    (h)   401,272 
Intangible assets   322,406    -    -       322,406 
Goodwill   185,751    -    -      185,751 
                        
Total assets  $4,100,468   $4,817,280   $(668,541)     $8,249,207 
                        
LIABILITIES                       
                        
Accounts payable  $1,586,339   $776,055   $-      $2,362,394 
Accrued expenses and other liabilities   262,540    18,991    -       281,531 
Right of use liabilities - operating leases short term   153,939    -    13,350    (h)   167,289 
Right of use liabilities - finance leases short term   25,495    -    -       25,495 
Deferred revenue   -    -    -       - 
Secured line of credit   655,275    -    -       655,275 
Current portion of note payable - related party   50,642    -    -       50,642 
Current portion of unsecured notes payable net   117,935    22,669    -       140,604 
Notes payable secured, net   392,184    339,880    500,000    (f)   1,232,064 
Total current liabilities   3,244,349    1,157,595    513,350       4,915,294 
                        
Convertible notes payable, net   173,845    -    -       173,845 
Note payable - related party, net of current portion   38,290    -    -       38,290 
Notes payable - secured, net of current portion   936,894    563,244    -       1,500,138 
Right of use liabilities - operating leases, net of current portion   159,433    -    74,550    (h)   233,983 
Right of use liabilities - finance leases, net of current portion   74,869    -    -       74,869 
Total other liabilities   1,383,331    563,244    74,550       2,021,125 
                        
Total liabilities   4,627,680    1,720,839    587,900       6,936,419 
                        
EQUITY                       
Members equity   -    3,096,441    (3,096,441)   (i)   - 
Preferred stock   -    -    2    (j)   2 
Common stock   12,874    -    -       12,874 
Additional paid in capital   1,847,603    -    1,839,998    (j)   3,687,601 
Retained earnings   (2,387,689)   -    -       (2,387,689)
Total equity   (527,212)   3,096,441    (1,256,441)      1,312,788 
                        
Total liabilities and equity  $4,100,468   $4,817,280   $(668,541)     $8,249,207 

 

   

 

 

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

1. Description of the Trinity Acquisition

 

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

 

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

 

All of the shares of Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value of $2,000,000. The estimated fair value of the shares was based on an as if converted to common stock basis.

 

2. Basis of Pro Forma Presentation

 

The unaudited pro forma combined statement of operations for the three months ended March 31, 2019 combines the Company’s consolidated statement of operations for the three months ended March 31, 2019 with Trinity’s consolidated statement of operations for the three months ended March 31, 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 Trinity’s consolidated statement of operations for the year ended December 31, 2018. These unaudited pro forma combined statements of operations give effect to the Trinity 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 March 31, 2019 combines the Company’s consolidated balance sheet at March 31, 2019 with Trinity’s combined balance sheet at March 31, 2019, giving effect to the Trinity Acquisition as if it had occurred on March 31, 2019.

 

3. Preliminary Purchase Price Allocation

 

The purchase price for the Trinity 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 Trinity 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 Trinity 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 Trinity is being accounted for as a business combination under ASC 805. Due to the transaction closing late in the second 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  $500,000 
Preferred stock, Series A issued   1,840,000 
Total preliminary purchase consideration  $2,340,000 
      
Preliminary Purchase Price Allocation     
Cash  $95,858 
Accounts receivable   1,377,985 
Prepaid expenses   29,463 
Property and equipment   2,557,533 
Right of use assets – operating leases   87,900 
Accounts payable and accrued expenses   (795,046)
Right of use assets – operating leases   (87,900)
Notes payable   (925,793)
   $2,340,000 

 

4. Pro Forma Adjustments

 

Pro Forma Adjustments to the Statements of Operations:

 

(a)To adjust depreciation expense for new estimated fair value of property and equipment and revised estimated remaining useful lives.
(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 of the purchase price paid to the sellers of Trinity.
(d)To reflect the effect of preferred dividend for shares issued as consideration for the Trinity Acquisition
(e)To reclassify bad debt expense as part of net operating income to conform to SMG presentation

 

Pro Forma Adjustments to the Balance Sheet:

 

   As of March
31, 2019
 
     
Cash and cash equivalents     
Additional borrowings under secured notes payable (f)  $500,000 
Payment of cash to sellers of Trinity (j)   (500,000)
Total adjustments to cash and cash equivalents  $- 
      
Secured Notes payable (f)  $500,000 

 

(f)To recognize additional borrowings of $500,000 to fund the cash consideration of the purchase price paid to the sellers of Trinity
(g)To adjust property and equipment to the estimate fair value as of the acquisition date
(h)To recognize right of use assets and liabilities for new operating lease entered into concurrent with the Trinity Acquisition.
(i)To eliminate historical members’ equity of Trinity.
(j)To recognize consideration paid to the sellers of Trinity as disclosed in Note 3.