UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


	☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


	☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 000-54391

~~periods beginning after December~~

SMG INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



Delaware	51-0662991
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

~~10626 Sheldon Road~~20475 State Hwy 249, Suite 450
Houston, Texas	~~77044~~77070
(Address of Principal Executive Offices)	(Zip Code)

(713) 955-3497

(Registrant’s telephone number, including area code)

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

~~710 N. Post Oak Road, Suite 315, Houston,~~ ~~Texas~~

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ☐ No

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


Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☒	Smaller reporting company ☒

	Emerging growth company ☐

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

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

The number of shares of Common Stock, par value $0.001 per share, outstanding as of ~~November~~ 12~~, 2021,~~August 15, 2022, was ~~31,737,174.~~

35,124,810.

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


Title of each class	Ticker symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Table of Contents

SMG INDUSTRIES, INC.

Table of Contents

		Page
Part I	Financial Information

Item 1.	Financial Statements

	Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020 (Unaudited)~~	2

	~~Consolidated Statements of Operations for the Three and Nine Months Ended September 30,~~ 2021 ~~and 2020~~ (Unaudited)	3

	Consolidated Statements of ~~Changes in Stockholders’ Deficit~~Operations for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	4

	Consolidated Statements of ~~Cash Flows~~Changes in Stockholders’ Deficit for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited)	6

	Notes to Unaudited Consolidated Financial Statements	67

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2118

Item 3.	Qualitative and Quantitative Disclosures about Market Risk	2526

Item 4.	Controls and Procedures	2526

Part II	Other Information

Item 1.	Legal Proceedings	2627
Item 1A.	Risk Factors	2627
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2627
Item 3.	Defaults upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
	Signatures	29

Table of Contents

SMG INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

~~(unaudited)~~(Unaudited)


	September 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	225,139	$	263,814	$	1,667,245	$	257,768
Restricted cash		717,165		715,274		920,013		858,408
Accounts receivable, net of allowance for doubtful accounts of $796,784 and $691,098 as of September 30, 2021 and December 31, 2020, respectively		11,269,533		4,920,967
Accounts receivable, net of allowance for doubtful accounts of $1,243,088 and $1,041,387 as of June 30, 2022 and December 31, 2021, respectively						11,730,088		11,703,347
Prepaid expenses and other current assets		2,991,762		1,409,996		2,506,679		2,162,238
Current assets of discontinued operations		17,435		437,787		17,435		17,446

Total current assets		15,221,034		7,747,838		16,841,460		14,999,207

Property and equipment, net of accumulated depreciation of $10,136,891 and $5,991,572 as of September 30, 2021 and December 31, 2020, respectively		11,953,176		16,337,914
Property and equipment, net of accumulated depreciation of $13,929,165 and $11,262,193 as of June 30, 2022 and December 31, 2021, respectively						8,202,766		10,463,352
Right of use assets - operating lease		3,310,099		1,270,989		965,757		3,312,710
Other assets		840,947		499,707		434,824		448,887
Other assets of discontinued operations, net		1,500		1,568,700		1,500		1,500

Total assets	$	31,326,756	$	27,425,148	$	26,446,307	$	29,225,656

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	4,491,278	$	3,171,086	$	2,565,808	$	3,958,515
Accounts payable – related party		275,569		205,444		188,555		94,602
Accrued expenses and other liabilities		4,603,280		2,373,057		4,097,202		4,055,113
Current portion of Right of use liabilities - operating leases		1,054,836		575,517
Deferred revenue		30,000		30,000
Right of use liabilities - operating leases short term						568,800		816,671
Secured line of credit		7,005,211		4,046,256		8,964,841		9,468,759
Current portion of unsecured notes payable		2,425,258		2,187,436		3,009,169		1,168,420
Current portion of secured notes payable, net		7,914,180		4,010,627		3,531,599		3,527,960
Current portion of convertible note, net		—		50,000		4,409,199		1,616,672
Current liabilities of discontinued operations		1,102,308		2,243,037		436,074		588,283

Total current liabilities		28,901,920		18,892,460		27,771,247		25,294,995

Long term liabilities:
Convertible note payable, net		3,495,262		2,417,335		1,515,638		2,620,145
Notes payable - unsecured, net of current portion		1,351,640		1,040,223
Notes payable - secured, net of current portion		9,433,339		14,038,409		18,706,646		14,535,751
Right of use liabilities - operating leases, net of current portion		2,568,072		846,212		509,425		2,545,950
Long term liabilities of discontinued operations		178,129		1,008,362		319,164		381,746

Total liabilities		45,928,362		38,243,001		48,822,120		45,378,587

Commitments and contingencies

Stockholders’ deficit
Preferred stock 1,000,000 shares authorized:
Series A preferred stock - $0.001 par value; 2,000 shares authorized; 2,000 shares issued and outstanding at September 30, 2021 and December 31, 2020		2		2
Series B convertible preferred stock - $0.001 par value; 6,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		0		0
Common stock - $0.001 par value; 250,000,000 shares authorized; 25,725,310 and 19,446,258 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		25,726		19,447
Series A preferred stock - $0.001 par value; 2,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 31, 2021						—		—
Series B convertible preferred stock - $0.001 par value; 6,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively						0		0
Common stock - $0.001 par value; 250,000,000 shares authorized; 35,124,810 and 33,731,162 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively						35,125		33,732
Additional paid in capital		15,059,907		10,978,254		17,273,004		16,845,873
Accumulated deficit		(29,687,241)		(21,815,556)		(39,683,942)		(33,032,536)

Total stockholders’ deficit		(14,601,606)		(10,817,853)		(22,375,813)		(16,152,931)

Total liabilities and stockholders’ deficit	$	31,326,756	$	27,425,148	$	26,446,307	$	29,225,656

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

Table of Contents

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the ~~three~~Three and ~~nine months~~Six Months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

~~(unaudited)~~(Unaudited)


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30, 2021		September 30, 2020			September 30, 2021		September 30, 2020	June 30, 2022		June 30, 2021			June 30, 2022		June 30, 2021
REVENUES	$	14,772,939	$	6,810,714	$	34,618,358	$	18,670,321	$	18,076,897	$	12,243,091	$	34,257,950	$	19,845,419

COST OF REVENUES		15,292,090		8,674,357		36,947,626		21,825,811		16,935,840		12,955,028		31,660,945		21,655,536

GROSS LOSS		(519,151)		(1,863,643)		(2,329,268)		(3,155,490)
GROSS PROFIT (LOSS)										1,141,057		(711,937)		2,597,005		(1,810,117)

OPERATING EXPENSES:
Selling, general and administrative		1,455,253		1,000,032		4,584,854		2,554,107		2,287,965		1,617,201		4,751,846		3,129,601
Acquisition Cost		—		—		—		1,485,829

Total operating expenses		1,455,253		1,000,032		4,584,854		4,039,936		2,287,965		1,617,201		4,751,846		3,129,601

LOSS FROM CONTINUING OPERATIONS		(1,974,404)		(2,863,675)		(6,914,122)		(7,195,426)
LOSS FROM OPERATIONS										(1,146,908)		(2,329,138)		(2,154,841)		(4,939,718)

OTHER INCOME (EXPENSE)
Interest expense, net		(2,059,908)		(1,087,535)		(4,630,685)		(2,563,606)		(2,178,694)		(1,321,988)		(4,797,731)		(2,570,777)
Gain on PPP loan forgiveness		105,000		—		3,253,100		—
Other income (expense), net		348		(159)		19,889		74,587
Loss on settlement of notes payable		0		(14,204)		0		(14,204)
Gain (loss) on sale of assets		—		(10,229)		114,926		—
Gain on PPP Loan Forgiveness										—		3,148,100		—		3,148,100
Other income										9,048		18,902		—		19,541
Gain on disposal of assets										334,404		64,764		334,404		114,926

Total other income (expense)		(1,954,560)		(1,112,127)		(1,242,770)		(2,503,223)		(1,835,242)		1,909,778		(4,463,327)		711,790

NET LOSS FROM CONTINUING OPERATIONS		(3,928,964)		(3,975,802)		(8,156,892)		(9,698,649)		(2,982,150)		(419,360)		(6,618,168)		(4,227,928)

Income (loss) from discontinued operations		316,926		(420,254)		360,207		(935,623)		(38,126)		99,736		(33,238)		43,281
NET LOSS		(3,612,038)		(4,396,056)		(7,796,685)		(10,634,272)		(3,020,276)		(319,624)		(6,651,406)		(4,184,647)

Preferred stock dividends		(25,000)		(97,945)		(75,000)		(229,041)		—		(25,000)		—		(50,000)

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(3,637,038)	$	(4,494,001)	$	(7,871,685)	$	(10,863,313)	$	(3,020,276)	$	(344,624)	$	(6,651,406)	$	(4,234,647)

Net loss per common share
Continuing operations	$	(0.17)	$	(0.22)	$	(0.39)	$	(0.58)	$	(0.08)	$	(0.02)	$	(0.19)	$	(0.21)
Discontinued operations	$	0.01	$	(0.02)	$	0.02	$	(0.05)	$	(0.00)	$	0.00	$	(0.00)	$	0.00
Net loss attributable to common shareholders	$	(0.16)	$	(0.24)	$	(0.37)	$	(0.63)	$	(0.08)	$	(0.02)	$	(0.19)	$	(0.21)

Weighted average common shares outstanding
Basic		23,214,370		17,380,108		21,234,310		17,223,571		35,124,810		20,958,782		34,722,766		20,235,320
Diluted		23,214,370		17,380,108		21,234,310		17,223,571		35,124,810		20,958,782		34,722,766		20,235,320

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

Table of Contents

SMG INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the ~~three and nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

~~(unaudited)~~(Unaudited)


	Series A				Series B								Additional							Series A			Series B								Additional
	Preferred Stock				Preferred Stock				Common Stock				Paid In			Accumulated				Preferred Stock			Preferred Stock				Common Stock				Paid In		Accumulated
																				Shares	Value		Shares		Value		Shares		Value		Capital		Deficit		Total

Balances at December 31, 2021																				0	$	0		0	$	0		33,731,162	$	33,732	$	16,845,873	$	(33,032,536)	$	(16,152,931)
Shares issued for deferred financing costs																				—		—		—		—		1,393,648		1,393		396,380		—		397,773
Share based compensation																				—		—		—		—		—		—		15,605		—		15,605
Net loss																				—		—		—		—		—		—		—		(3,631,130)		(3,631,130)

Balances at March 31, 2022																				—		—		—		—		35,124,810		35,125		17,257,858		(36,663,666)		(19,370,683)
Share based compensation																				—		—		—		—		—		—		15,146		—		15,146
Net loss																				—		—		—		—		—		—		—		(3,020,276)		(3,020,276)

Balances at June 30, 2022																				—	$	—		—	$	—	$	35,124,810	$	35,125	$	17,273,004	$	(39,683,942)	$	(22,375,813)
	Shares		Value		Shares		Value		Shares		Value		Capital			Deficit		Total
Balances at December 31, 2020		2,000	$	2		0	$	0		19,446,258	$	19,447	$	10,978,254		$	(21,815,556)	$	(10,817,853)	2,000	$	2		—	$	—		19,446,258	$	19,447	$	10,978,254	$	(21,815,556)	$	(10,817,853)

Share based compensation		0		0		0		0		0		0		17,973			0		17,973	—		—		—		—		—		—		17,973		—		17,973
Shares issued with debt and beneficial conversion feature on convertible notes		—		—		—		—		393,107		393		174,658			—		175,051	—		—		—		—		393,107		393		174,658		—		175,051
Preferred stock dividends		0		0		0		0		0		0		0			(25,000)		(25,000)	—		—		—		—		—		—		—		(25,000)		(25,000)
Net loss		—		—		—		—		—		—		—			(3,865,023)		(3,865,023)	—		—		—		—		—		—		—		(3,865,023)		(3,865,023)

Balances at March 31, 2021		2,000		2		—		—		19,839,365		19,840		11,170,885			(25,705,579)		(14,514,852)	2,000		2		—		—		19,839,365		19,840		11,170,885		(25,705,579)		(14,514,852)

Shares issued with debt and beneficial conversion feature on convertible notes																				—		—		—		—		2,026,587		2,027		1,286,805		—		1,288,832
Share based compensation		—		—		—		—		—		—		15,892			—		15,892	—		—		—		—		—		—		15,892		—		15,892
Shares issued with debt and beneficial conversion feature on convertible notes		—		—		—		—		2,026,587		2,027		1,286,805			—		1,288,832
Preferred stock dividends		—		—		—		—		—		—		—			(25,000)		(25,000)	—		—		—		—		—		—		—		(25,000)		(25,000)
Net loss		—		—		—		—		—		—		—			(319,624)		(319,624)	—		—		—		—		—		—		—		(319,624)		(319,624)

Balances at June 30, 2021		2,000		2		0		0		21,865,952		21,867		12,473,582			(26,050,203)		(13,554,752)	2,000	$	2		—	$	—	$	21,865,952	$	21,867	$	12,473,582	$	(26,050,203)	$	(13,554,752)

Share based compensation		—		—		—		—		—		—		17,279			—		17,279
Shares issued with debt and beneficial conversion feature on convertible notes		—		—		—		—		3,859,358		3,859		2,569,046			—		2,572,905
Preferred stock dividends		—		—		—		—		—		—		—			(25,000)		(25,000)
Net loss		—		—		—		—		—		—		—			(3,612,038)		(3,612,038)

Balances at September 30, 2021		2,000	$	2		—	$	—		25,725,310	$	25,726	$	15,059,907		$	(29,687,241)	$	(14,601,606)

Balances at December 31, 2019		2,000		2		—		—		14,881,372		14,881		4,756,194			(5,692,525)		(921,448)

Shares issued for business acquisitions		—		—		6,000		6		—		—		4,377,994	��		—		4,378,000
Shares issued for deferred financing cost		—		—		—		—		2,498,736		2,499		417,289			—		419,788
Share based compensation		—		—		—		—		—		—		2,895			—		2,895
Warrant issued for notes payable - debt discount		—		—		—		—		—		—		59,439			—		59,439
Preferred stock dividends		—		—		—		—		—		—		—			(42,123)		(42,123)
Net loss		—		—		—		—		—		—		—			(2,979,231)		(2,979,231)

Balances at March 31, 2020		2,000		2		6,000		6		17,380,108		17,380		9,613,811			(8,713,879)		917,320

Share based compensation		—		—		—		—		—		—		2,895			—		2,895
Preferred stock dividends		—		—		—		—		—		—		—			(88,973)		(88,973)
Net loss		—		—		—		—		—		—		—			(3,258,985)		(3,258,985)

Balances at June 30, 2020		2,000		2		6,000		6		17,380,108		17,380		9,616,706			(12,061,837)		(2,427,743)

Shares issued to settle liabilities		—		—		—		—		445,926		446		65,554			—		66,000
Share based compensation		—		—		—		—		—		—		66,346			—		66,346
Shares issued with debt and beneficial conversion feature on convertible notes		—		—		—		—		1,941,000		1,941		894,026			—		895,967
Preferred stock dividends		—		—		—		—		—		—		—			(97,945)		(97,945)
Net loss		—		—		—		—		—		—		—			(4,396,056)		(4,396,056)

Balances at September 30, 2020		2,000	$	2		6,000	$	6		19,767,034	$	19,767	$	10,642,632		$	(16,555,838)	$	(5,893,431)

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

Table of Contents

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

~~(unaudited)~~(Unaudited)


	Nine months ended		Nine months ended
	September 30,		September 30,		June 30,		June 30,
	2021		2020		2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8,156,892)	$	(9,698,649)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Net loss from continuing operations					$	(6,618,168)	$	(4,227,928)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation		51,144		72,136		30,751		33,865
Depreciation and amortization		4,074,738		3,434,164
Depreciation						2,754,891		2,737,505
Amortization of deferred financing costs		1,096,867		375,680		2,387,577		566,039
Amortization of right of use assets - operating leases		439,398		200,039		226,072		209,753
Bad debt expense		159,612		247,558
Bad debt (recovery) expense						211,984		(9,980)
Gain on PPP loan forgiveness		(3,253,100)		—		—		(3,148,100)
Loss on settlement of liabilities		—		21,407
(Gain) loss on sale of assets		(114,926)		(47,052)
Gain on disposal of assets						(334,404)		(114,926)
Changes in:
Accounts receivable		(6,508,178)		2,530,715		(238,725)		(4,348,033)
Prepaid expenses and other current assets		2,193,864		858,112		1,890,998		1,142,846
Other assets		(306,029)		(560,131)		(233,955)		(794,792)
Accounts payable		2,454,235		(2,852,030)		(1,392,707)		973,704
Accounts payable - related party		105,125		—		93,953		58,516
Accrued expenses and other liabilities		2,155,223		2,278,250		42,089		2,253,118
Right of use operating lease liabilities		(277,329)		(47,038)		(23,593)		(110,282)
Net cash used in operating activities from continuing operations		(5,886,248)		(3,186,839)		(1,203,237)		(4,778,695)
Net cash provided by (used in) operating activities from discontinued operations		568,518		(466,153)
Net cash provided by operating activities from discontinued operations						—		608,519
Net cash used in operating activities		(5,317,730)		(3,652,992)		(1,203,237)		(4,170,176)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of 5J Entities, net		—		(6,320,168)
Cash paid for disposal of MG Cleaners, LLC		(35,000)		—		—		(35,000)
Cash proceeds from disposal of property and equipment						329,271		—
Cash paid for purchase of property and equipment		(97,026)		(174,004)		(60,250)		(97,026)
Net cash used in investing activities from continuing operations		(132,026)		(6,494,172)
Net cash used in investing activities		(132,026)		(6,494,172)
Net cash provided by (used in) investing activities from continuing operations						269,021		(132,026)
Net cash provided by (used in) investing activities						269,021		(132,026)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing costs		(20,623)		(239,558)
Proceeds from secured line of credit, net		2,880,180		3,256,101
Proceeds (payments) on secured line of credit, net						(532,346)		1,819,234
Proceeds from notes payable		8,274,002		5,574,048		5,229,098		1,874,002
Payments on notes payable		(8,698,655)		(1,100,704)		(2,291,454)		(830,234)
Payments on convertible notes payable		(50,000)		—
Proceeds from convertible notes payable		3,255,000		2,644,295		—		1,405,000
Net cash provided by financing activities from continuing operations		5,639,904		10,134,182		2,405,298		4,268,002
Net cash (used in) provided by financing activities from discontinued operations		(226,932)		666,150
Net cash provided by (used in) financing activities from discontinued operations						—		(226,932)
Net cash provided by financing activities		5,412,972		10,800,332		2,405,298		4,041,070

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(36,784)		653,168		1,471,082		(261,132)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period		979,088		29,568		1,116,176		979,088

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	942,304	$	682,736	$	2,587,258	$	717,956

Supplemental disclosures:
Cash paid for income taxes	$	—	$	—	$	—	$	—
Cash paid for interest	$	3,508,529	$	1,445,639	$	2,344,883	$	1,285,489

Noncash investing and financing activities
Non-cash consideration paid for business acquisition	$	—	$	4,378,000
Non-cash increase in secured notes payable related to acquisition	$	—	$	5,840,622
Note payable for property and equipment	$	—	$	1,414,021
Settlement of accounts payable and accrued interest with common stock issuance	$	—	$	66,000
Financing of prepaid insurance premiums	$	3,253,678	$	331,065
Debt discount from issuance of common stock warrants	$	—	$	59,439
Prepaid expenses financed with note payable					$	1,960,439	$	1,239,367
Preferred stock dividend	$	75,000	$	229,041	$	—	$	50,000
Expenses paid by related party	$	—	$	25,279
Non-cash increase in secured notes payable for settlement of accounts payable	$	203,009	$	—
Shares issued for deferred financing costs	$	—	$	419,788	$	397,773	$	—
Note receivable for property and equipment	$	521,952	$	—	$	275,000	$	608,786
Common shares issued and beneficial conversion feature on convertible notes payable	$	4,036,788	$	895,967
Beneficial conversion feature on convertible notes payable					$	—	$	1,463,883
Non-cash increase in secured notes payable for settlement of accounts payable					$	—	$	196,188
Equipment financed with note payable					$	843,844	$	—
Right of use assets and operating lease obligation recognized	$	2,478,508	$	—	$	—	$	2,478,508
Convertible notes payable issued to settle accounts payable	$	931,034	$	—	$	—	$	208,129

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

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SMG INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~(unaudited)~~(Unaudited)

NOTE 1 — BACKGROUND AND BASIS OF PRESENTATION

SMG Industries Inc. (“we”, “our”, the ~~“Company,”~~“Company” or “SMG”) is a corporation established pursuant to the laws of the State of Delaware on January 7, 2008. The Company’s original business was the acquisition and stockpile of a rare metal known as Indium used in cell phones and other industrial applications. The Company eventually sold its stockpile and distributed most of the proceeds to its stockholders via special dividends and share repurchases.

~~We are~~The Company today is a growth-oriented ~~Transportation Services~~midstream, logistics and oilfield services company ~~focused on~~that operates throughout the domestic ~~logistics~~Southwest United States. Through its wholly-owned operating subsidiaries, the Company offers an expanding suite of products and services across the oilfield market segments of drilling, completions and ~~are~~production.

SMG is headquartered in Houston, Texas with facilities in Odessa, Floresville, Henderson, ~~Odessa,~~Victoria and Palestine, ~~Houston,~~Texas, and ~~Victoria, Texas.~~Fort Mill, South Carolina.

In March 2020 the World Health Organization declared COVID-19 a pandemic. Throughout 2020 and into 2021 and through 2022, many variants of the virus arose. ~~We are still assessing~~To date, the ~~impact~~Company’s financial results and operations have not been materially adversely impacted by the COVID-19 and related variants (together, “COVID-19”) may have on our business, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.pandemic. The extent to which the COVID-19 pandemic and global efforts to contain its spread will impact our operations going forward will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic.

The accompanying unaudited interim consolidated financial statements of SMG have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, ~~2020~~2021 and ~~2019~~2020 in the Form 10-K filed on April ~~19, 2021.~~15, 2022. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosures contained in the Form 10-K have been omitted.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company prepares its consolidated financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly subsidiaries, 5J Trucking LLC, 5J Oilfield Services LLC, 5J Specialized LLC, 5J Transportation LLC and 5J Brokerage LLC (together referred to as “5J”), Momentum Water Transfer Services, LLC (“MWTS”), Jake Oilfield Solutions LLC (“Jake”)~~, MG Cleaners LLC (“MG”)~~ and Trinity Services LLC (“Trinity”), all of which have quarter ends of ~~September~~June 30 and fiscal year end of December 31. All intercompany accounts, balances and transactions have been eliminated in the consolidation.

~~Acquisition Accounting~~

The Company’s acquisitions are accounted for using the purchase acquisition method of accounting whereby purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on fair value. The consolidated financial statements for the fiscal years presented include the results of operations for the 5J Entities and Trinity acquisitions from the date of acquisition.

Fair Value of Financial Instruments

The carrying value of short-term instruments, including cash, accounts payable and accrued expenses, and short-term notes approximate fair value due to the relatively short period to maturity for these instruments. The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates.

~~Table of Contents~~

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:

Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets

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Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3: inputs to the valuation methodology are unobservable and significant to the fair value

The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.

Discontinued Operations

In December 2020 we sold MG and decided to cease the operations of Trinity. An entity that is disposed of by sale or ceasing of operations is reported as discontinued operations if the transaction represents a strategic shift that will have a major effect on an entity’s operations and financial results. As such, MG and Trinity are reported as discontinued operations.

Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities of discontinued operations in the Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The results of discontinued operations are aggregated and presented separately in the Consolidated Statements of Operations as net income (loss) from discontinued operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. The cash flows of the discontinued operations are reflected as cash flows of discontinued operations within the Company’s Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

Amounts presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical basis of assets, liabilities, results of operations, and cash flows of MG and Trinity. The discontinued operations exclude general corporate allocations.

Basic and Diluted Net Loss per Share

The Company presents both basic and diluted net loss per share on the face of the statements of operations. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock method for stock options and warrant and the “if converted” method for convertible notes payable and preferred stock. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For the three and ~~nine~~six months ended ~~September~~June 30, 2022, 1,525,000 of stock options, 1,763,335 of warrants and 79,467,400 shares issuable from convertible notes were considered for their dilutive effects. For the three and six months ended June 30, 2021, 1,700,000 of stock options, 1,763,335 of warrants, 4,000,000 shares issuable from Series A Preferred Stock and 68,450,340 shares issuable from convertible notes were considered for their dilutive effects. For the three and nine months ended September 30, 2020, 2,800,000 of stock options, 1,763,335 of warrants, 4,000,000 shares issuable from Series A Preferred Stock, 4,806,388 shares issuable from Series B Preferred Stock and 19,442,95042,961,290 shares issuable from convertible notes were considered for their dilutive effects. As a result of the Company’s net losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, all potentially dilutive instruments were excluded as their effect would have been anti-dilutive.

Reclassification

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

Recent Accounting Pronouncements

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

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NOTE 3 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, no adjustments to the consolidated financial statements have been made to account for this uncertainty. The Company concluded that the uncertainty surrounding the COVID-19 global pandemic, its negative working capital, and negative cash flows from operations are conditions that raised substantial doubt about the Company’s ability to continue as a going concern. The Company plans to continue to generate additional revenue (and improve cash flows from operations) in connection with its anticipated growth related to the Company’s February 2020 acquisition of 5J and its expanded revenue lines in heavy haul, super heavy haul, drilling rig mobilization, commodity freight, and brokerage services. ~~The Company notes that loans obtained under the Paycheck Protection Program in 2020 and 2021 have been forgiven in accordance with the terms~~

Table of the program. During the nine months ended September 30, 2021, a total of $3,253,100 in principal plus $36,201 of accrued interest on PPP loans was forgiven in full. An additional $328,018 of principal plus $2,351 of accrued interest related to PPP loans from discontinued operations were also forgiven during the nine months ended September 30, 2021.Contents

NOTE 4 – REVENUE

Disaggregation of revenue

All of the Company’s revenue from continuing operations is currently generated from services. As such no further disaggregation of revenue information is provided. All revenues are currently in the southern region of the United States.

Customer Concentration and Credit Risk

During the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020, no~~0 customers exceeded 10% of revenue. NaN customer accounted for 10% of accounts receivable as of ~~September~~June 30, ~~2021,~~2022 and ~~1 customer accounted for 10% of accounts receivable as of~~ December 31, ~~2020.~~2021.

NOTE 5 – PROPERTY AND EQUIPMENT, NET

Property and equipment at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:


	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Equipment	$	7,768,597	$	8,549,824	$	7,805,619	$	7,768,597
Trucks and trailers		11,580,344		11,062,588		11,536,365		11,167,001
Downhole oil tools		659,873		659,873		659,873		659,873
Vehicles		1,538,528		1,550,335		1,538,528		1,538,528
Building		493,529		493,626		493,529		493,529
Furniture, fixtures and other		49,196		13,240		98,017		98,017

Property and equipment, gross		22,090,067		22,329,486		22,131,931		21,725,545

Less: accumulated depreciation		(10,136,891)		(5,991,572)		(13,929,165)		(11,262,193)

Property and equipment, net	$	11,953,176	$	16,337,914	$	8,202,766	$	10,463,352

Depreciation expense for the three months ended ~~September~~June 30, 2022 and 2021 was $1,397,490 and ~~2020 was $1,337,233 and $1,461,979,~~$1,319,104, respectively. Depreciation expense for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 was $2,754,891 and ~~2020 was $4,074,738 and $3,434,164,~~$2,737,505, respectively.

NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 included the following:

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	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Payroll and payroll taxes payable	$	1,104,840	$	490,033	$	1,386,191	$	1,929,414
Sales tax payable		1,627		1,627
State income tax payable		253,860		144,800
Property tax payable		220,000		—
State and local tax payable						495,097		422,781
Interest payable		849,314		839,240		548,221		482,950
Credit cards payable		—		31,422
Accrued operational expenses		1,575,894		664,710		1,546,037		1,006,343
Accrued general and administrative expenses		254,056		79,067		100,300		178,561
Accrued dividend		182,658		107,658
Other		161,031		14,500		21,356		35,064

Total Accrued Expenses and Other Liabilities	$	4,603,280	$	2,373,057	$	4,097,202	$	4,055,113

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NOTE 7 – NOTES PAYABLE

Notes payable included the following as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

September 30,

December 31,

2021

2020
Secured notes payable:





Secured note payable issued January 2, 2018, bearing interest of 6.29% per year. Note was paid off March 16, 2021.

$
0

$
22,293

Secured note payable issued December 7, 2018 to a shareholder who as of September 30, 2021 controls 3.3% of votes, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.

100,000

100,000

Secured note payable issued December 7, 2018 to a shareholder who as of September, 2021 controls 6.0% of votes, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.

100,000

100,000

Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. Note is currently past due. If a default notice is received, the interest rate will be 14%.

100,000

100,000

Secured note payable issued on December 7, 2018 related to the acquisition of MWTS, bearing interest of 6% per year and due in monthly installments of $7,500, with a maturity date of December 8, 2023.

792,470

792,470

Secured note payable issued June 17, 2019 to a shareholder who as of September 30, 2021 controls 6.0% of votes, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. Note was extended to March 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.

100,000

100,000

Secured note payable issued May 1, 2019 to a shareholder who as of September 30, 2021 controls 6.0% of votes, bearing interest of 10% per year, due June 30, 2020. Note is currently past due. If a default notice is received, the interest rate will be 14%.

80,000

80,000

Secured note payable issued December 12, 2019 to a shareholder who as of September 30, 2021 controls approximately 6.0% of votes, bearing interest of 12% per year, due June 3, 2020. During the three months ended September 30, 2021, the note was paid in full.

0

25,000

Secured note payable issued July 26, 2019, bearing interest of 7% per year, due in monthly installments ending July 2020. Note is currently past due. If a default notice is received the interest rate will be 10%. On September 29, 2021 we entered into a settlement agreement for $50,000 in cash which was paid on September 29, 2021.

73,818

123,818

Secured note payable issued February 27, 2020 in connection with the 5J acquisition, bearing interest of 10% per year, due February 1, 2023. controls approximately 4.2% of votes In October 2020, note holder serves as a board member.

2,000,000

2,000,000

Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from 5.32% to 5.5% maturing from January 2023 through March 2023.

372,290

568,589

Secured note payable issued on February 27, 2020, bearing interest of 10.0% per year, due March 1, 2023. The note holder as of September 30, 2021 controls 10.6% of common shares and has an officer on the Board of Directors of the Company.

661,847

1,012,237

Secured Master Lease Agreement refinanced substantially all of the 5J Entities equipment and a guarantee by an officer of the Company in the aggregate amount of $11,950,000 which amount was financed based on 75% of the net forced liquidation value of the equipment. The note matures on May 27, 2024. The effective interest rate on this agreement is approximately 18.7%. Effective September 10, 2021, the monthly payment is $208,000. The Company repaid a total of $5,381,005 and accrued interest of $1,018,995 through the new Amerisource term loan described below. Deferred financing costs associated with this agreement were $276,134 as of September 30, 2021.

5,573,070

11,708,919

Secured promissory notes for Jake, SMG Industries, Inc, and 5J Trucking LLC, with Small Business Administration Economic Injury Disaster Loans, bearing interest 3.75% annually and matures in June, August, and September 2050.

390,000

390,000

Secured promissory note issued on June 20, 2020. The note is due and payable in NaN monthly installments of $45,585 commencing on July 20, 2020 and the final installment is due on July 1, 2023. Deferred financing costs associated with this agreement were $287,560 as of September 30, 2021.

1,180,143

1,570,617

Secured promissory note with Amerisource issued on September 7, 2021 in the amount of $6,400,000, bearing interest at 12%, maturing September 7, 2026. The Company is required to make monthly payments of interest only beginning October 1, 2021, with payments of principal and interest beginning in October 2022. An additional $6,340,000 was paid by Amerisource to Utica to settle the Utica promissory note in full subsequent to September 30, 2021. Unamortized deferred financing costs associated with this agreement were $12,425 as of September 30, 2021.

6,400,000

0

17,923,638

18,693,943
Less discounts and deferred finance costs

(576,119)

(644,907)
Less current maturities

(7,914,180)

(4,010,627)

Long term secured notes payable, net of current maturities and discounts

$
9,433,339

$
14,038,409

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Effective March 9, 2021, the Company entered into a third amendment and surrender agreement with Utica requiring weekly payments of $23,750 until May 28, 2021. Upon the occurrence of an event of default under such amendment, and after the expiration of any cure period related to any such default, the surrender agreement entered into between the parties shall govern the surrender of the ownership and possession of the 5J equipment to Utica, or their designee, pursuant to the terms of the Lease agreement between the parties. The surrender agreement directs any third party in possession of any of such equipment to surrender the equipment in their possession to Utica and for Lessee to comply with any related paperwork requests to transfer ownership of the equipment to Utica. The surrender agreement shall terminate on the earlier to occur of: (i) June 25, 2021, or (ii) the occurrence of an event of default, that is not cured within any applicable cure period. From June 4, 2021 to June 25, 2021 the weekly payments shall increase to $112,000 per week, and thereafter commencing on July 27, 2021 the payments shall be $448,000 per month.


	June 30,		December 31,
	2022		2021
Secured notes payable:

Secured note payable issued December 7, 2018 to a shareholder, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%	$	100,000	$	100,000

Secured note payable issued December 7, 2018 to a shareholder, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.		100,000		100,000

Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. Note is currently past due. If a default notice is received, the interest rate will be 14%.		100,000		100,000

Secured note payable issued on December 7, 2018 related to the acquisition of MWTS, bearing interest of 6% per year and due in monthly installments of $7,500, with a maturity date of December 8, 2023.		792,470		792,470

Secured note payable issued May 1, 2019 to a shareholder, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. Note was extended to March 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.		100,000		100,000

Secured note payable issued June 17, 2019 to a shareholder, bearing interest of 10% per year, due June 30, 2020. Note is currently past due. If a default notice is received, the interest rate will be 14%.		80,000		80,000

Secured note payable with a related party issued February 27, 2020 in connection with the 5J acquisition, bearing interest of 10% per year, due February 1, 2023.		2,000,000		2,000,000

Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from 5.32% to 5.5% maturing from January 2023 through March 2023.		195,435		343,723

Secured note payable with a related party issued on February 27, 2020, bearing interest of 10.0% per year, due March 1, 2023.		311,449		545,050

Secured promissory notes for Jake, SMG Industries, Inc, and 5J Trucking LLC, with Small Business Administration Economic Injury Disaster Loans, bearing interest 3.75% annually and matures in June, August, and September 2050.		390,000		390,000

Secured promissory note issued on June 20, 2020. The note is due and payable in thirty-six monthly installments of $45,585 commencing on July 20, 2020 and the final installment is due on July 1, 2023.		600,680		784,261

Secured promissory note issued on January 27, 2022. The note is due on May 1, 2026 and secured by machinery and equipment owned by the Company. The Company paid an initial installment of $95,025, with monthly payments of approximately $15,275 per month beginning in June 2022 through maturity.		728,211		0

Secured promissory note with Amerisource, a related party, issued on September 7, 2021 in the amount of $12,740,000, bearing interest at 12%, maturing September 7, 2026. The Company is required to make monthly payments of interest only beginning October 1, 2021, with payments of principal and interest beginning in October 2022. On March 15, 2022, the Company entered into an agreement with Amerisource, to amend the Loan Agreement dated September 7, 2021, pursuant to which Amerisource agreed to increase the loan commitment to the Company from $12,740,000 to $16,740,000.		16,740,000		12,740,000
		22,238,245		18,075,504
Less discounts and deferred finance costs		0		(11,793)
Less current maturities		(3,531,599)		(3,527,960)

Long term secured notes payable, net of current maturities and discounts	$	18,706,646	$	14,535,751

~~Effective June 10, 2021,~~On January 27, 2022, the Company ~~entered into~~issued a ~~fourth amendment~~secured promissory note for $843,844, which includes precomputed interest of $147,818. The note is due on May 1, 2026 and ~~surrender agreement~~secured by machinery and equipment owned by the Company. The Company paid an initial installment of $95,025 plus an additional $10,634 payment, with ~~Utica requiring weekly~~monthly payments of $60,000 until July 2, 2021. Upon the occurrence of an event of default under such amendment, and after the expiration of any cure period related to any such default, the surrender agreement entered into between the parties shall govern the surrender of the ownership and possession of the 5J equipment to Utica, or their designee, pursuant to the terms of the Lease agreement between the parties. The surrender agreement directs any third party in possession of any of such equipment to surrender the equipment in their possession to Utica and for Lessee to comply with any related paperwork requests to transfer ownership of the equipment to Utica. The surrender agreement shall terminate on the earlier to occur of: (i) June 25, 2021, or (ii) the occurrence of an event of default, that is not cured within any applicable cure period. From July 9, 2021, until August 27, 2021 the weekly payments shall increase to $104,654 per week, and thereafter commencing on August 27, 2021 the payments shall be between $418,616 and $523,270approximately $15,275 per month beginning in June 2022 through ~~the maturity date.~~maturity.

On ~~August 10, 2021, the Company~~March 15, 2022, each of our 5J subsidiaries entered into an ~~amendment of the forbearance~~ agreement and surrender agreement on June 10, 2021 with Utica and 5J Trucking LLC which provided for weekly payments under the terms of the February 2020 lease for $104,654 until August 31, 2021 and a fixed buy out equal to $12,725,000. After August 31, 2021, the payment schedule returns to its original terms as per the June 10, 2021 amendment.

On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Brokerage and 5J Specialized LLC (the “5J Entities”) entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) ~~in the total amount of $12,740,000. Pursuant~~, our senior lender, to ~~the terms of~~amend the Loan Agreement ~~$6,400,000 was initially funded on~~dated September 7, 2021, and the remaining $6,340,000 is to be funded on or before October 31, 2021. In connection with the Loan Agreement, the 5J Entities issued a commercial promissory note to Amerisource (“Note”) in the initial principal amount of $6,400,000. Pursuant to the terms of the Note, the 5J Entities will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Entities will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company.

Pursuant to the terms of the Security Agreement, the 5J Entities granted a security interest in all of their assets to Amerisource as collateral for the repayment of the Amerisource loan, however, until such time as Utica has been paid in full pursuant to the master lease agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on February 27, 2020, Utica will continue to have a priority security interest in a significant portion of the 5J Entities assets.

~~In connection with the Loan Agreement, the Company, the parent company of each of the 5J Entities, entered into a pledge agreement~~ pursuant to which Amerisource agreed to increase the ~~Company has granted a security interest in all of its assets~~loan commitment to Amerisource and a guaranty agreement pursuant to which the Company has guaranteed the timely payment of all amounts due under the Loan Agreement. The Loan Agreement includes customary covenants, including a negative convent that the 5J ~~Entities may not create or permit for any lien~~entities from $12,740,000 to ~~exist on the collateral nor enter into any new debt~~$16,740,000. The Company received $4,000,000 of cash proceeds from this agreement.

The ~~proceeds from~~Company amortized total debt discount of $11,793 related to secured notes payable during the issuance of the Note were used to pay down $6.4 million of the outstanding balance owed to Utica pursuant to a Second Forbearance Agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on September 7, 2021 (“Forbearance Agreement”). Beginning September 10, 2021, payments to Utica were $52,000 per week. Pursuant to the terms of the Forbearance Agreement, 5J Trucking and 5J Oilfield have the right to prepay the entire remaining balance due to Utica at a reduced amount of $6.34 million on or before November 1, 2021. The Utica agreement was paid in full through the Amerisource Loan Agreement subsequent to Septembersix months ended June 30, ~~2021.~~2022.

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~~On July 12, 2021, the Company paid in full a secured convertible note originally issued April 2019 with a principal balance of $50,000 that matured including all accrued interest for $54,896.~~

~~On July 12, 2021, the Company paid in full a December 12, 2019 promissory note with a principal balance of $25,000 that matured including all accrued interest for $29,973.~~

Notes Payable – Unsecured

September 30,

December 31,

2021

2020
Unsecured promissory note for 5J Oilfield Services LLC with Small Business Administration (“SBA”) Paycheck Protection Program (“PPP1”), bearing interest 1.00% annually and was scheduled to mature in April 2022. The loan was forgiven on June 3, 2021.

$
0

$
3,148,100

Unsecured promissory note for 5J Oilfield Services LLC. Small Business Administration Paycheck Protection Program (“PPP2”), bearing interest 1.00% annually and matures in April 2026.

1,769,002

0

Insurance premium financing note with original principal of $1,310,835, monthly payments of $133,939, with stated interest of 4.76%, maturing on December 1, 2021. In July 2021, additional coverage was added to the policy and the monthly payment increased to $161,076.

473,684

0

Insurance premium financing note with original principal of $1,487,202, monthly payments of $153,537, with stated interest of 6.99%, maturing on May 1, 2022.

1,189,751

0

Insurance premium financing note with original principal of $292,065, monthly payments of $7,793, with stated interest of 5.78%, maturing on February 14, 2022.

146,002

0

Unsecured note payable with a shareholder who as of September 30, 2021 controls 3.3% of votes. Note issued on August 10, 2018 for $40,000, due December 30, 2018 (extended to June 30, 2020) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced and due on demand. Note is currently past due. If a default notice is received, the interest rate will be 15%.

44,559

44,559

Unsecured advances from the sellers of MWTS, non-interest bearing and due on demand

35,000

35,000

Unsecured payable for settlement of lawsuit with principal of $146,188, monthly payments of $6,822 for 24 months, with an interest rate of 6% and a default interest rate of 18%.

118,900

0

Notes payable - unsecured

3,776,898

3,227,659
Less current portion

(2,425,258)

(2,187,436)

Notes payable - unsecured, net of current portion

$
1,351,640

$
1,040,223

On April 22, 2020, 5J Oilfield Services LLC received cash proceeds of $3,148,100 from the Hancock Whitney Bank. In accordance with the requirements of the CARES Act, 5J used the proceeds from the PPP1 Loan primarily for payroll costs. The PPP1 Loan was scheduled to mature on August 22, 2022, had a 1.00% interest rate, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The loan was forgiven on June 3, 2021. The gain on the forgiveness of the loan is included in other income on the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2021.


	June 30,		December 31,
	2022		2021
Insurance premium financing note with original principal of $1,353,151, monthly payments of $138,285, with stated interest of 4.76%, maturing on December 1, 2022.	$	800,012	$	0

Insurance premium financing note with original principal of $1,487,202, monthly payments of $153,537, with stated interest of 6.99%, maturing on May 1, 2022.		0		743,576

Insurance premium financing note with original principal of $292,065, monthly payments of $7,793, with stated interest of 5.78%, maturing on February 14, 2022.		0		58,413

Insurance premium financing note with original principal of $485,830, monthly payments of $49,809, with stated interest of 5.470%, maturing on February 14, 2023		386,176		0

Unsecured note payable with a shareholder. Note issued on August 10, 2018 for $40,000, due December 30, 2018 (extended to June 30, 2020) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced and due on demand. Note is currently past due. If a default notice is received, the interest rate will be 15%.		44,559		44,559

Unsecure advances from the sellers of MWTS, non-interest bearing and due on demand		35,000		35,000

Unsecured payable for settlement of lawsuit with an original settlement of $196,188, monthly payments of $6,822 for 24 months, with an interest rate of 6% and a default interest rate of 18%.		64,324		98,433

Unsecured note payable with a shareholder, a related party. Note issued on December 22, 2021 for $150,000, due January 31, 2022 and 12% interest per year. During the six months ended June 30, 2022, an additional $895,025 was loaned by the shareholder, related party. This note is currently past due.		1,045,025		150,000

Unsecured note payable with a shareholder, a related party. Note issued on December 22, 2021 for $150,000, due January 31, 2022 and 12% interest per year. On January 6, 2022, the shareholder, related party, loaned the Company an additional $100,000. This note is currently past due.		250,000		150,000

Unsecured note payable with a shareholder. Note issued on December 22, 2021 for $150,000, due January 31, 2022 and 12% interest per year. On January 6, 2022, the shareholder, loaned the Company an additional $100,000. This note is currently past due.		250,000		150,000

Unsecured note payable with a shareholder, a related party. Note issued on February 14, 2022 for $134,073, due March 31, 2022 and 12% interest per year. This note is currently past due.		134,073		0

Notes payable - unsecured		3,009,169		1,429,981
Less discounts and deferred finance costs		0		(261,561)
Less current portion		(3,009,169)		(1,168,420)

Notes payable - unsecured, net of current portion	$	0	$	0

On January ~~28,~~6, 2022, Newton Dorsett, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the initial loan to us in December 2021 ~~5J Oilfield Services LLC received proceeds~~ of ~~$1,769,002 under~~$150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate.

On January 6, 2022, Grey Fox Investments which is controlled by Brady Crosswell, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the ~~SBA PPP2 program. On February 3,~~loan to us in December 2021 ~~Jake Oilfield Solutions LLC received proceeds~~ of ~~$35,000 under the SBA PPP2 program. On February 4, 2021, SMG Industries, Inc. received proceeds of $70,000 under the SBA PPP2 program. The Jake Oilfield Solutions LLC~~$150,000, totals $250,000. This bridge note matured on January 31, 2022, and ~~the SMG Industries, Inc. SBA PPP2 loans of $35,000 and $70,000, respectively were forgiven on September 29, 2021. The gain on the forgiveness of the loans are included~~pays a 12% per annum interest rate

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On January 7, 2022, Mr. Madden loaned us $100,000 pursuant to short term bridge note, that along with the initial loan to us in ~~other income~~December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate.

On February 11, 2022, Mr. Madden loaned us $95,025 pursuant to a short term bridge note that matured on March 31, 2022. Mr. Madden also received 142,538 shares issued in the ~~Company’s Consolidated Statements~~first quarter 2022 as an equity incentive in connection with this note.

On February 14, 2022, Mr. Madden loaned us $250,000 pursuant to a short term bridge note that matured on March 31, 2022. Mr. Madden also received 375,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note.

On February 14, 2022, James Frye, a member of ~~Operations for~~our board of directors, loaned us $134,073 pursuant to a short term bridge note that matured on March 31, 2022. Mr. Frye also received 201,110 shares issued in the ~~three and nine~~first quarter 2022 as an equity incentive in connection with this note.

On March 3, 2022, Mr. Madden loaned us $450,000 pursuant to a short term bridge note that matured on March 31, 2022. Mr. Madden also received 675,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note.

The Company amortized total debt discount of $659,335 related to unsecured notes payable during the six months ended ~~September~~June 30, ~~2021. In October 2021, the 5J Oilfield Services LLC PPP2 loan was forgiven in full.~~

The PPP2 loans mature 5 years from the date of the notes and bear interest at 1%. Payments of principal and interest payments begin one year and one month from the dates of the notes and are in 60 equal monthly installments. The loans are subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. In accordance with the requirements of the CARES Act, the Company intends to use the proceeds from the PPP2 Loans primarily for payroll costs.

On April 13, 2021, the Company settled a lawsuit filed against the Company. The Company agreed to pay $196,188 with a $50,000 payment due on May 1, 2021 and NaN consecutive monthly payments of $6,822 beginning on June 1, 2021 and ending on May 1, 2023. As of September 30, 2021, the settlement had an outstanding balance of $118,900.

~~Unsecured Notes Payable – Discontinued Operations~~

On April 28,2020, Trinity, received proceeds of $195,000 under the SBA PPP1 program. In accordance with the requirements of the CARES Act, the Companies used the proceeds from the PPP1 Loan primarily for payroll costs. The loans have a 1.00% interest rate and are subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The PPP Loan was scheduled to mature on, August 28, 2020. The Trinity loan was forgiven February 16, 2021. On February 1, 2021, Trinity, received proceeds of $133,018 under the SBA PPP2 program. The loans have a 1.00% interest rate and are subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act. The PPP Loan was scheduled to mature on, August 1, 2021. An additional $133,018 under the PPP2 program was forgiven in September 2021. The Trinity loans were included in Current Liabilities-Discontinued Operations on the Company’s December 31, 2020 Consolidated Balance Sheet and the gain on the forgiveness of the loan is included in loss from discontinued operations on the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2021.

2022.

Accounts Receivable Financing Facility (Secured Line of Credit)

On February 27, 2020, the 5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”).The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”). The Company recorded deferred financing costs of $223,558 recognized on the date of incurrence as a discount. During the ~~nine~~six months ended ~~September~~June 30, ~~2021, $78,800~~2022, $28,428 of debt discount was amortized to interest expense, and unamortized discount was ~~$46,071~~$0 as of ~~September~~June 30, ~~2021.~~2022. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company.

The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to ~~85%~~90% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving loan balance outstanding, and a one-time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Entities with 60 days written notice. There is an early termination fee equal to 2 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 1 percent (1.0)% of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing.

The balances under the above lines of credit were ~~$7,005,211~~$8,964,841 and ~~$4,046,256~~$9,468,759 as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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Convertible Notes Payable

In April 2019, the Company issued a convertible promissory note in the amount of $50,000 to an individual investor. The note bears an interest rate of 8.50%, payable in cash quarterly, matures in two years and is convertible at any time into shares of the Company’s common stock at a fixed conversion price of $0.50 (fifty cents) per share. During the nine months ended September 30, 2021, the Company repaid the convertible note.

On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation, which has an equity ownership of 13.9% and is considered a related party, for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Stretch Note”). The Amerisource Stretch Note matures on February 27, 2023 and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Stretch Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest isshall be paid on a quarterly basis. The Amerisource Stretch Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty. In addition, 2,498,736 shares of the Company’s common stock with a fair value of $419,788 were issued to the noteholder in connection with the sale of the Amerisource Note. The Company recorded deferred financing costs of $419,788 recognized on the date of incurrence as a discount and will be amortized over the life of the loan. During the ~~nine~~six months ended ~~September~~June 30, ~~2021, $116,608~~2022, $151,590 of debt discount was amortized to interest expense, and there was ~~$186,572~~$0 of unamortized discount as of ~~September~~June 30, ~~2021. The Amerisource Stretch Note may be prepaid at any time by~~2022. As of June 30, 2022 and December 31, 2021, the ~~Company on 10 days-notice to the noteholder without penalty.~~

outstanding principal balance was $1,600,000.

During the year ended December 31, 2020, the Company entered into secured note purchase agreements with 9 individual investors for the purchase and sale of convertible promissory notes (“Convertible Notes”) in the principal amount of $2,019,000. The Convertible Notes are convertible at any time after the date of issuance into shares of the Company’s common stock at a conversion price of $0.10 per share. Interest on the Convertible Notes shall be paid to the investors at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Convertible Notes is two years after the issuance date. The Convertible Notes are secured by all of the assets of the Company, subject to prior liens and security interests. The Company also issued a total of 3,028,500 shares of common stock to the investors. The Company recognized a debt discount of $1,057,710 which is equivalent to the relative fair value of the 3,028,500 common shares and the beneficial conversion feature on the Convertible Notes. During the ninesix months ended ~~September~~June 30, 2021, the Company received $3,255,000 of cash and $931,034 of expenses paid on behalf of the Company in the form of new convertible notes under the terms above from related parties. The lenders received 6,279,052 shares of the Company’s restricted common stock. The Company recognized a debt discount of $4,036,788 based on the relative fair value of these shares and the beneficial conversion feature on the Convertible Notes. During the nine months ended September 30, 2021, $812,0742022, $1,687,804 of debt discount was amortized to interest expense, and there was ~~$4,123,494~~$2,982,493 of unamortized discount as of ~~September~~June 30, ~~2021.~~2022.

Of the ~~$7,805,034~~$8,907,035 principal amount ~~$6,805,034~~outstanding, $7,906,740 of the Convertible Notes are held by investors who are considered related parties, primarily existing debt holders.

As of ~~September~~June 30, 2022, the convertible notes, net balance was $5,924,837 which long term convertible notes payable of $1,515,638 and current portion of convertible notes of $4,409,199. As of December 31, 2021, the convertible notes, net balance was ~~$3,495,262. As of December 31, 2020, the convertible notes net balance was $2,467,335 consisting of~~$4,236,817 which long term convertible notes payable of ~~$2,417,335~~$2,620,145 and current portion of convertible notes of ~~$50,000.~~$1,616,672.

Future maturities of all the Company’s debt as of ~~September~~June 30, ~~2021~~2022 are as follows:


2022	$	17,679,277	$	20,971,063
2023		8,043,586		7,800,193
2024		6,721,208		3,743,557
2025		2,017,117		3,644,580
2026		1,881,278		7,037,016
Thereafter		214,386		210,736
Total	$	36,556,852	$	43,407,145

NOTE 8 – STOCKHOLDERS’ DEFICIT

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company issued a total of ~~5,304,052~~1,393,648 shares of ~~restricted~~ common stock ~~were issued~~ to ~~related parties, and 975,000~~two lenders in connection with unsecured notes payable. These shares ~~were issued to non-related parties pursuant to the convertible notes payable described in Note 7.~~

~~Table of Contents~~

~~The 2,000 Series A non-redeemable convertible preferred stock with~~had a ~~stated~~fair value of $1,000 per share held by an affiliate of the Company matured on July 20, 2021. The Series A Preferred Stock is convertible at a fixed price of $0.50 per share. The Company issued 4,443,292 restricted common shares to the holder$397,773 and ~~family members in October 2021 subsequent to the end of the quarter.~~

were recorded as deferred finance costs.

NOTE 9 – STOCK OPTIONS AND WARRANTS

Summary stock option information is as follows:


		Aggregate				Weighted			Aggregate				Weighted
	Aggregate	Exercise		Exercise		Average		Aggregate	Exercise		Exercise		Average
	Number	Price		Price Range		Exercise Price		Number	Price		Price Range		Exercise Price
Outstanding, December 31, 2020	2,060,000	$	688,750	$	0.24-0.75	$	0.33
Outstanding, December 31, 2021								1,575,000	$	561,250	$	0.25-0.75	$	0.36
Granted	0		0		0		0	0		0		0		0
Exercised	0		0		0		0	0		0		0		0
Cancelled, forfeited or expired	(360,000)		(90,000)	$	0.24-0.30	$	0.25	(50,000)		(15,000)	$	0.30	$	0.30
Outstanding, September 30, 2021	1,700,000	$	598,750	$	0.25-0.75	$	0.35
Exercisable, September 30, 2021	850,000	$	343,750	$	0.25-0.75	$	0.40
Outstanding, June 30, 2022								1,525,000	$	546,250	$	0.25-0.75	$	0.36
Exercisable, June 30, 2022								1,186,111	$	444,583	$	0.25-0.75	$	0.37

The weighted average remaining contractual life is approximately ~~3.01~~2.36 years for stock options outstanding on ~~September~~June 30, ~~2021.~~2022. At ~~September~~June 30, ~~2021~~2022, there was 0 intrinsic value to the outstanding stock options.

Table of Contents

During the nine months ended September 30, 2021 and 2020, the Company recognized $51,144 and $72,136 of stock-based compensation, respectively, related to outstanding stock options. At September 30, 2021, the Company had $101,288 of unrecognized expenses related to options.

Summary Stock warrant information is as follows:


		Aggregate				Weighted			Aggregate				Weighted
	Aggregate	Exercise		Exercise		Average		Aggregate	Exercise		Exercise		Average
	Number	Price		Price Range		Exercise Price		Number	Price		Price Range		Exercise Price
Outstanding, December 31, 2020	1,763,335	$	496,667	$	0.15-$0.75	$	0.28
Outstanding, December 31, 2021								1,763,335	$	496,667	$	0.15-$0.75	$	0.28
Granted	0		0		0		0	0		0		0		0
Exercised	0		0		0		0	0		0		0		0
Cancelled, forfeited or expired	0		0		0		0	0		0		0		0
Outstanding, September 30, 2021	1,763,335	$	496,667	$	0.15 - 0.75	$	0.28
Exercisable, September 30, 2021	1,763,335	$	496,667	$	0.15 - 0.75	$	0.28
Outstanding, June 30, 2022								1,763,335	$	496,667	$	0.15 - 0.75	$	0.28
Exercisable, June 30, 2022								1,763,335	$	496,667	$	0.15 - 0.75	$	0.28

The weighted average remaining contractual life is approximately ~~5.35~~4.60 years for stock warrants outstanding on ~~September~~June 30, ~~2021.~~2022. At ~~September~~June 30, ~~2021~~2022 the outstanding stock warrants had an aggregate intrinsic value of ~~$11,725.~~$16,750.

NOTE 10 – DISPOSITION OF BUSINESSES

Trinity Services LLC

In December 2020, management decided to sell or dissolve Trinity. All assets and liabilities of Trinity are classified as assets and liabilities of discontinued operations and included within net income (loss) from discontinued operations. ~~The Company planned to auction the fixed assets in 2021 and recorded an impairment of $983,660 during the year ended December 31, 2020 to reflect expected proceeds from this auction. The majority~~All of Trinity’s equipment was sold in ~~a May 25,~~the year ended December 31, 2021 at auction through a third party ~~auctioneer for net proceeds after expenses of approximately $1,110,000, and additional equipment was sold for proceeds of $685,000 during the three months ended September 30, 2021.~~auctioneer. All proceeds are being utilized to retire outstanding Trinity debt. The Company recognized a net gain on disposal of the equipment and retirement of the debt of $186,273 and $389,024 included in net income from discontinued operations during the three and nine months ended September 30, 2021, respectively.

The Company’s Consolidated Statements of Operations reflect in discontinued operations Trinity’s revenues and net income from discontinued operations for the three months ended September 30, 2021 of $0 and $316,926, respectively, compared to the three months

~~Table of Contents~~

ended September 30, 2020 of $388,170 and net loss from discontinued operations $242,903, respectively. The Company’s Consolidated Statements of Operations reflect in discontinued operations Trinity’s revenues and net income from discontinued operations for the nine months ended September 30, 2021 of $157,620 and $360,207, respectively, compared to the nine months ended September 30, 2020 of $1,625,778 and net loss from discontinued operations $607,361, respectively. The net losses exclude general corporate allocations.

MG Cleaners LLC

On December 22, 2020, the Company, as the sole member of MG Cleaners LLC (“MG”), entered into a share exchange agreement (“Agreement”) with S&A Christian Investments L.L.C. (“S&A”) pursuant to which the Company transferred all of the membership interests of MG (“MG Interests”) to S&A in exchange for Stephen Christian, the control person of S&A, returning 1,408,276 shares of the Company’s common stock, par value $0.001 per share (“Exchanged Shares”) to the Company for cancellation, additional consideration received by the Company in connection with the transaction included the removal of the Company as a guarantor of certain MG debt. All 750,000 unvested incentive stock options previously granted to Mr. Christian expired at the time of the transaction. Mr. Stephen Christian, the Company’s former Executive Vice President and Secretary, is the control person of S&A. As a result of the terms of the transaction, S&A became the owner of all of the MG Interests. In connection with the sale of MG, ~~Mr. Christian~~Mr.Christian resigned as Executive Vice President and Secretary of the Company. The Company also agreed to pay $150,000 in cash to MG Cleaners, with $75,000 paid in December 2020. The remaining $75,000 was satisfied with a $40,000 sale of equipment and payment of $35,000 to MG Cleaners in February 2021.

The ~~Company’s Consolidated Statements of Operations reflect in discontinued operations 0 revenue or~~ ~~net~~ loss from discontinued operations for the three months ended September 30, 2021 related to MG, compared to the three months ended September 30, 2020 of $363,264 and $177,351, respectively. The Company’s Consolidated Statements of Operations reflect in discontinued operations 0 revenue or ~~net~~ loss revenues and net loss from discontinued operations for the nine months ended September 30, 2021 related to MG, compared to the nine months ended September 30, 2020 of $1,681,815 and $328,262, respectively. The net losses exclude general corporate allocations.

~~The~~ decision to sell Trinity assets and the MG sale agreement qualify as discontinued operations in accordance with U.S. GAAP, as each represents a significant strategic shift of the Company’s operations that will have a major effect on the Company’s operations. As a result, the Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 present the assets and liabilities of Trinity and MG as assets and liabilities of discontinued operations. The Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 present the results of Trinity and MG as Loss from discontinued operations. The Consolidated Statements of Cash Flows for the ~~nine~~six months end ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 present operating, investing, and financing activities of Trinity and MG as cash flows from or used in discontinued operations.

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The balance sheets of Trinity and MG combined are summarized below:


	September 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
Cash and cash equivalents	$	—	$	591	$	—	$	11
Accounts receivable, net		17,011		360,541		17,011		17,011
Prepaid expenses and other current assets		424		76,655		424		424
Current assets of discontinued operations		17,435		437,787		17,435		17,446
Property and equipment, net		—		1,500,000
Other assets		1,500		1,500		1,500		1,500
Right of use assets - operating lease		—		67,200
Other assets of discontinued operations		1,500		1,568,700		1,500		1,500
Total assets of discontinued operations	$	18,935	$	2,006,487	$	18,935	$	18,946
Accounts payable	$	601,371	$	597,266	$	237,375	$	400,659
Accrued expenses and other liabilities		285,940		198,833		198,699		187,624
Right of use liabilities - operating leases short term		—		38,206
Secured line of credit		—		278,301
Current portion of unsecured notes payable		212,595		440,331
Current portion of secured notes payable, net		2,402		690,100
Current liabilities of discontinued operations		1,102,308		2,243,037		436,074		588,283
Notes payable - secured, net of current portion		147,598		855,995		150,000		150,000
Notes payable - unsecured, net of current portion		30,531		101,374		169,164		231,746
Right of use liabilities - operating leases, net of current portion		—		50,993
Long term liabilities of discontinued operations		178,129		1,008,362		319,164		381,746
Total liabilities of discontinued operations	$	1,280,437	$	3,251,399	$	755,238	$	970,029

The statements of operations of Trinity and MG combined are summarized below:


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30,		September 30,		September 30,		September 30,		June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020		2022		2021		2022		2021
Revenues	$	—	$	751,434	$	157,620	$	3,307,593	$	—	$	53,180	$	—	$	157,620
Cost of revenues		(1,972)		(748,732)		(223,659)		(2,918,626)		—		(48,145)		—		(221,687)
Selling, general and administrative		(24,927)		(345,262)		(271,016)		(1,074,628)		—		(104,390)		—		(246,089)
Loss from operations		(26,899)		(342,560)		(337,055)		(685,661)		—		(99,355)		—		(310,156)
Gain on forgiveness of PPP loan and Federal tax credits		177,243		—		373,712		—
Gain on sale of assets		186,273		—		389,024		—
Other income (expense)		(11,467)		—		32,565		11,000
Interest expense, net		(8,224)		(77,694)		(98,039)		(260,962)
Gain on forgiveness of PPP loan										—		—		—		196,469
Gain on asset sale										—		202,751		—		202,751
Other expense										(35,294)		(54,079)		(27,545)		(54,079)
Other income										—		28,887		—		25,974
Interest income (expense), net										(2,832)		21,532		(5,693)		(17,678)
Net income (loss) from discontinued operations	$	316,926	$	(420,254)	$	360,207	$	(935,623)	$	(38,126)	$	99,736	$	(33,238)	$	43,281

NOTE 11 – COMMITMENTS AND CONTINGENCIES

As of ~~September~~June 30, ~~2021,~~2022, the Company has an open letter of credit in the amount of ~~$323,516~~$414,638 as collateral for its insurance policy.

Litigation

During the ~~nine months~~year ended ~~September 30,~~December 31, 2021, 5J Trucking LLC and James E. Frye entered into a settlement and release agreement with a third party equipment provider to settle outstanding claims by the provider. The Company agreed to pay a total of $196,188 to settle outstanding accounts payable, with $50,000 due upon execution and 24 monthly payments of $6,822. The Company recorded the liability as an unsecured note payable, as described in Note 7, which has a balance of ~~$118,900~~$64,324 as of ~~September~~June 30, ~~2021.~~2022.

From time to time, SMG may be subject to routine litigation, claims, or disputes in the ordinary course of business. In the opinion of management, no pending or known threatened claims, actions or proceedings against SMG are expected to have a material adverse effect on SMG’s financial position, results of operations or cash flows. SMG cannot predict with certainty, however, the outcome or

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effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any lawsuits and investigations.

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NOTE 12 – LEASES

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

~~On April 19, 2021, 5J Transportation LLC~~During the three months ended June 30, 2022, the Company entered into a ~~five year~~termination agreement with a lessor to release the Company from its obligation under the lease, ~~with Miller Investments & Properties for 45 acres in N.E. Houston, Texas,~~and change the Company’s use of ~~which 24 acres is stabilized, and office and warehouse facilities, with monthly payments starting at $55,000 per month, escalating annually~~the asset to a ~~maximum~~month to month basis. In exchange for the use of ~~$58,191 per month by year five.~~the property previously being leased, the Company will maintain the premises, handle administrative services of the storage facility customers, and operate the storage business on behalf of the lessor. The Company derecognized a right of use asset of $2,120,881 and right of use lease ~~has an early~~liabilities of $2,260,803 in connection with this agreement, and recognized a gain on lease termination ~~option at~~of $139,922, included in “Gain on disposal of assets” on the ~~end~~consolidated statement of ~~year~~ ~~three~~operations. In connection with ~~appropriate notice. 5J Transportation also~~this termination, the Company entered into an ~~equipment lease~~ agreement with ~~BJJ Trailer Leasing on~~ the ~~same day~~lessor to ~~lease approximately 40 trailers used~~manage the property for the lessor in ~~hauling equipment and pipe~~exchange for ~~a twelve-month term at a rate~~use of ~~$22,500 per month. At its option, 5J may extend~~ the ~~equipment lease.~~property for the Company’s operations. The Company ~~capitalized new right of use assets and lease~~ ~~liabilities~~ ~~of $2,478,508 related to the real estate lease, which utilized an incremental borrowing rate of 13%. The equipment~~ is ~~accounted~~accounting for this transaction as a ~~short-term lease~~contract with a customer under ASC 606, with the Company receiving non-cash consideration for the services provided. The Company estimated the fair value of the non-cash consideration in accordance with ASC 606-10-32 based on the market value of the lease ~~term under~~payment for the space being used by the Company, and recognized revenue and corresponding rental expense, included within cost of sales on the Company’s ~~accounting policy election.~~consolidated statements of operations. During the three months ended June 30, 2022, the Company recognized revenue and expense of $120,000 related to this agreement.

The components of lease cost for operating leases for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 were as follows:


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Operating lease cost	$	271,356	$	113,610	$	661,870	$	270,329	$	134,433	$	140,294	$	435,191	$	265,404
Short-term lease cost		37,487		203,468		159,077		254,079		116,292		86,144		267,313		142,742
Variable lease cost		0		0		0		0
Sublease income		0		0		0		0
Total lease cost	$	308,843	$	317,078	$	820,947	$	524,408	$	250,725	$	226,438	$	702,504	$	408,146

Supplemental cash flow information related to leases was as follows:


	Nine Months Ended		Nine Months Ended		Six Months Ended		Six Months Ended
	September 30, 2021		September 30, 2020		June 30, 2022		June 30, 2021
Other Lease Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	277,329	$	47,038	$	23,593	$	110,282

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


Lease Position	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Operating Leases
Operating lease right-of-use assets	$	3,310,099	$	1,270,989	$	965,757	$	3,312,710
Right of use liability operating lease current portion	$	1,054,836	$	575,517	$	568,800	$	816,671
Right of use liability operating lease long term		2,568,072		846,212		509,425		2,545,950
Total operating lease liabilities	$	3,622,908	$	1,421,729	$	1,078,225	$	3,362,621

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


Lease Term and Discount Rate	September 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Weighted-average remaining lease term (years)
Operating leases	3.9		3.6		11.2		3.7
Weighted-average discount rate
Operating leases	11.6	%	8.4	%	8.6	%	10.9	%

The following table provides the maturities of lease liabilities at ~~September~~June 30, ~~2021:~~2022:


	Operating		Operating
	Leases		Leases
2021 (Three months remaining)	$	773,653
2022		1,089,241
2022 (Six months remaining)			$	371,226
2023		1,067,195		513,325
2024		877,289		267,583
2025 and thereafter		938,542
2025				23,347
2026 and thereafter				0
Total future undiscounted lease payments		4,745,920		1,175,481
Less: Interest		(1,123,012)		(97,256)
Present value of lease liabilities	$	3,622,908	$	1,078,225

NOTE 13 – RELATED PARTY TRANSACTIONS

Newton Dorsett, who received 2,000 shares of Series A Convertible Preferred Stock with a stated value of $1,000 per share in connection with the sale of Trinity Services to us also owns or has control over Dorsett Properties LLC, an entity that is the lessor to a lease with the Company. The lease was for $2,000 per month from July 1, 2019 until June 1, 2024. The lease was terminated May 30, 2021. The 2,000 shares of Series A non-redeemable convertible preferred stock of the Company matured on July 20, 2021 and is convertible at a fixed price of $0.50 per share. The Company issued 4,443,292 restricted common shares to the holder and family members in October 2021 subsequent to the end of the quarter.

James E. Frye, who currently serves as a director on our Board and President of our 5J subsidiary and ~~received 6,000 shares of Series B Convertible Preferred Stock in connection with the sale of 5J to us,~~ also owns or has control over 5J Properties LLC, an entity that is the lessor to 3 leases with the Company. On December 31, 2020, the Company entered into an agreement whereby James Frye returned all of his Series B Convertible Preferred Stock to the Company for no consideration and forgave all accumulated dividends. There is no Series B preferred outstanding today. These 3 leases located in Palestine, West Odessa and Floresville Texas all have similar five-year terms with options for renewal. The current monthly rent for these leases totals approximately $14,250. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. ~~Through~~During the ~~first nine~~six months ~~of 2021,~~ended June 30, 2022, we purchased ~~$343,184~~$27,485 in rental services and have charged the crane company ~~$74,629~~$42,352 that are included in our revenues.

OnDuring the six months ended June ~~15, 2020,~~30, 2022, the Company entered into an Interim Management Services Agreement with Apex Heritage Group, Inc. (the “Consultant”), of which Steven H. Madden, a related party, has sole voting and investment control over. The Consultant provided Jeffrey Martini to serve as the Company’s Chief Financial Officer, and in December 2020 serving additionally as the Company’s Chief Executive Officer reporting to its Board of Directors.

While Mr. Martini served as our Chief Executive Officer and Chief Financial Officer, we are not party to an employment agreement with Mr. Martini. Instead, APEX Heritage Group, Inc. (“Apex”) has contracted directly with Mr. Martini for such management services and is routinely compensated in turn via the provision of debt and/or equity instruments under the terms of an interim management services agreement, among other arrangements. During 2020, Apex was reimbursed via convertible debt valued at $225,000, which was in part compensation for such employment, and during the nine months ended September 30, 2021, $931,034 was reimbursed through the issuance of convertible debt from the Company. Mr. Martini resigned as the Company’s Chief Executive Officer and Chief Financial Officer on August 23, 2021 and serves as a consultant to us contracted through the Apex Management Services Agreement. On August 24, 2021, Steven H. Madden was elected our Chief Transition Officer.

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~~During the year ended December 31, 2020 and the nine months ended September 30, 2021, the Company entered into new convertible~~unsecured notes ~~payable~~ with related parties ~~with total principal amount of $3,269,000 and $3,536,034 respectively.~~totaling approximately $1,229,098 in principal. See Note 7.

~~NOTE 14 – SUBSEQUENT EVENTS~~

On October 4, 2021, an affiliate and stockholder was issued a $77,592 secured convertible note, paid in kind to settle outstanding payables, that matures after twenty-four months, pays a 10% per annum interest rate, paid quarterly, and has a fixed conversion rate at $0.10 per share. This lender also received 116,388 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 29, 2021, an affiliate and stockholder was issued a $212,000 secured convertible note, paid in kind to settle outstanding payables, that matures after twenty-four months, pays a 10% per annum interest rate, paid quarterly, and has a fixed conversion rate at $0.10 per share. This lender also received 318,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 30, 2021, an affiliate and stockholder was issued a $232,709 secured convertible note, paid in kind to settle outstanding payables, that matures after twenty-four months, pays a 10% per annum interest rate, paid quarterly, and has a fixed conversion rate at $0.10 per share. This lender also received 349,184 shares of the Company’s restricted common stock in connection with this convertible note investment.

Subsequent to September 30, 2021, the Company issued 375,000 shares of common stock to settle notes payable with principal of $73,818 and accrued interest of $18,926. In addition, the Company issued 410,000 shares of common stock to settle $41,000 in legal fees.

Pursuant to the Loan Agreement with Amerisource (see Note 7), the additional funding of the additional funding of $6.34 million was received on October 31, 2021 was used by the Company to pay down the remaining outstanding balance owed to Utica. Utica has agreed to file a UCC-3 to release its security interest in all of the assets of 5J Trucking and 5J Oilfield.

~~On or about October 30, 2021, the Company's 2,000 shares Series A Convertible Preferred Stock and its accrued dividends were converted into 4,443,292 shares of the Company's common stock.~~

~~On November 1, 2021, the Company received notice from its bank of the SBA’s forgiveness of its $1,769,002 Paycheck Protection Program (PPP2) loan as administered by the SBA under the CARES Act.~~

~~On November 8, 2021, Newton Dorsett and Steven H. Madden were appointed to the Company’s Board of Directors.~~

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

Cautionary Note Regarding Forward-Looking Statements

Unless otherwise indicated, the terms “SMG Industries,” “SMG,” the “Company,” “we,” “us,” and “our” refer to SMG Industries Inc. In this Quarterly Report on Form 10-Q, we may make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form10-Q contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Quarterly Report, and they may also be made a part of this Quarterly Report by reference to other documents filed with the SEC, which is known as “incorporation by reference.”

The statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms. All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of SMG Industries Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. There are a number of factors that could negatively affect our business and the value of our securities, including, but not limited to, fluctuations in the market price of our common stock; changes in our plans, strategies and intentions; changes in market valuations associated with our cash flows and operating results; the impact of significant acquisitions, dispositions and other similar transactions; our ability to attract and retain key employees; changes in financial estimates or recommendations by securities analysts; asset impairments; decreased liquidity in the capital markets; and changes in interest rates. Such factors could materially affect our Company’s future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to our Company. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues that we might face.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Quarterly Report on Form 10-Q or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or the date of the document incorporated by reference in this Quarterly Report on Form 10-Q, as applicable. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by applicable law. All subsequent forward-looking statements attributable to the Company or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We urge readers to carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business including the risk factors included herein under Item 1A “Risk Factors.” in our Annual Report on Form 10-K.

Overview

We are a growth-oriented ~~Transportation Services~~transportation services company focused on the domestic logistics market. Our primary business objective is to grow our operations and create value for our stockholders through organic growth and strategic acquisitions. We have implemented a Buy & Build growth strategy of acquiring middle market transportation companies and generating organic growth post-acquisition when possible, by removing business constraints and strategic cross-selling of services benefiting us with higher equipment utilization and market share. We believe our business focus and equipment fleet position us to be significant participant in the domestic United States infrastructure market.

Our wholly-owned operating subsidiaries are:

●

5J Trucking LLC

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●

5J Oilfield Services LLC

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●

5J Specialized LLC

●

5J Transportation LLC

●

5J ~~Brokerage~~Logistics Services LLC

Together these business units are referred to as the “5J Transportation Group”.

Our operating subsidiaries provide a range of transportation services such as:

●

Transporting infrastructure components including bridge beams and power generation transformers

●

Transporting wind energy components

●

Heavy haul of production equipment, heat exchangers, coolers, construction equipment, refinery components

●

Super heavy haul over-dimensional permit-required loads up to 500 thousand pounds for engineered projects

●

Transportation of midstream compressors

●

Flatbed freight

●

Crane services used to set equipment on compressor stations, pipeline infrastructure and load drilling rig components

●

Drilling rig relocation for drilling contractors and oil and gas operators

●

Freight brokerage

In connection with our focus to expand our transportation services business and exit certain up-stream oil and gas industrial-related businesses, the financial results of the following business have been classified as discontinued operations on our consolidated financial statements:

●

MG Cleaners LLC. The Company sold this business in December 2020

●

Trinity Services LLC

We are headquartered in Houston, Texas with facilities in ~~East~~Floresville, Hempstead, Henderson, Houston, ~~Floresville, Henderson,~~ Odessa, Palestine, Victoria, Texas and ~~Victoria, Texas.~~Fort Mill, South Carolina . Our web site is www.SMGIndustries.com.

Acquisition, divestiture and wind-down of businesses

On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), combined referred to as “5J”. The aggregate purchase price of 5J was $12.7 million, consisting of a combination of cash, notes and Series B Convertible Preferred Stock.

In December 2020 we sold MG Cleaners LLC (“MG”), an oil and gas (“O&G”) drilling rig cleaning company. The results of operations of MG are reflected in the Consolidated Statements of Operations for the year ended December 31, 2020 as “net loss from discontinued operations”.

In December 2020, the Company decided to cease the operations of Trinity Services LLC (“Trinity”), an O&G drilling pad dirt construction company. The assets and operations of Trinity are reflected on the December 31, 2021 and 2020 Consolidated Balance Sheets as “assets or liabilities of discontinued operations” and the results of operations are reflected in the Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 as “net loss from discontinued operations”.

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In the second quarter of 2021 we formed 5J Transportation LLC in connection with leasing the East Houston terminal operations for our flatbed services. In the first quarter of 2021, we formed 5J Brokerage LLC, which was renamed 5J Logistics Services LLC during the fourth quarter of 2021, our transportation brokerage business, in connection with offering those services.

All of our 5J subsidiaries are referred to as the 5J Transportation Group.

Recent Accounting Pronouncements

Critical Accounting Policies and Estimates

The preparation for financial statements and related disclosures in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For a description of our significant accounting policies, see the Company’s audited consolidated financial statements for the year ended December 31, 2021, included in the Company’s Form 10-K as filed with the SEC on April 15, 2022. We do not consider any of our policies or estimates to be critical. Management will base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

Results of Operations

Comparison of the Three Months Ended June 30, 2022 and 2021

The following table sets forth the results of our operations for the three months ended June 30, 2022 and 2021.


	Three months ended June 30,
	2022		2021
Sales	$	18,076,897	$	12,243,091
Cost of goods sold		16,935,840		12,955,028
Gross profit (loss)		1,141,057		(711,937)
Operating expenses		2,287,965		1,617,201
Loss from operations		(1,146,908)		(2,329,138)
Other income (expense)		(1,835,242)		1,909,778
Loss from continuing operations		(2,982,150)		(419,360)
Income (loss) from discontinued operations		(38,126)		99,736
Net loss		(3,020,276)		(319,624)
Preferred stock dividends		—		(25,000)
Net loss attributable to common shareholders	$	(3,020,276)	$	(344,624)

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 present the assets and liabilities of MG and Trinity as ~~assets and liabilities of~~ discontinued operations. The Consolidated Statements of Operations for the ~~three~~quarters ended June 30, 2022 and ~~nine months ended September 30,~~ 2021 ~~and 2020~~ present the results of MG and Trinity as ~~net~~Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the ~~nine months~~quarters ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 present operating, investing and financing activities of MG and Trinity as cash flows from or used in discontinued operations.

~~Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020~~Table of Contents

~~Revenues~~Sales for the quarter ended ~~September~~June 30, ~~2021~~2022 increased to ~~$14,772,939~~$18,076,897, an increase of 47.6% from ~~$6,810,714~~$12,243,091 for the quarter June 30, 2021. The increase in sales in the second quarter of 2022 was primarily driven by increased revenues in our industrial transportation segment from higher customer activity transporting drilling rigs, and in our heavy haul business transporting bridge beams, over-dimensional infrastructure items and large natural gas compressors. Our increase in revenues was also attributable to the new contribution of revenues from our 5J Transportation flatbed and 5J Logistics brokerage division, not present in the comparable period in 2021 along with the general improvement in the domestic United States economy from COVID-19 pandemic.

Cost of Goods Sold

Cost of goods sold for the three months ended ~~September~~June 30, ~~2020, an increase~~2022, was $16,935,840, compared to $12,955,028 for the same period of ~~117 %, driven by increased drilling rig relocations, improved customer demand resulting from lessened impacts~~2021. As a percentage of overall sales, the ~~global COVID-19 pandemic and the establishment~~cost of ~~a new East Houston terminal generating additional flat bed transportation revenues.~~

~~During~~goods sold was 93.7% during the three months ended ~~September~~June 30, ~~2021, cost of sales increased to $15,292,090, or 104% of sales,~~2022, compared to ~~$8,674,357, or 127% of sales~~105.8% for the ~~2020 period.~~same fiscal period a year ago. Cost of ~~sales~~goods sold includes $1,397,490 and $1,319,104, respectively in non-cash depreciation ~~expense of $1,337,233 and a refundable tax credit reducing labor costs of $836,971~~charges for the three months ended ~~September~~June 30, ~~2021,~~2022 and ~~$1,461,979 for~~2021. The increase over the ~~comparable period in 2020. The~~prior year was due to higher direct expenses associated with the increased volume of revenues, including driver payroll and settlements, fuel and freight costs compared to the prior period. We currently believe the Company will continue to improve cost of sales ~~exceeding~~as a percentage of sales through increased revenues ~~during 2021 and 2020 was the result of lower than required revenues to cover~~covering more fixed costs within cost of sales and higher ~~labor~~utilization of our existing equipment fleet through anticipated future increases in customer demand.

Gross Profit (Loss)

Gross profit for the three months ended June 30, 2022, was $1,141,057, compared to a gross loss of $(711,937) for the same period of 2021. Our gross profit margin was 6.3% during the three months ended June 30, 2022, compared to (5.8)% for the same fiscal period a year ago. The improvement in gross loss margin is due to higher volumes of revenues as described above and more favorable pricing as compared to the second quarter 2021 results.

Operating Expenses


	Three months ended June 30,
	2022		2021
Operating expenses:
General and administrative	$	2,287,965	$	1,617,201
Operating expenses	$	2,287,965	$	1,617,201

Total operating expenses were $2,287,965 in the three months ended June 30, 2022, compared to $1,617,201 in the same period of 2021, representing an increase in operating expenses of $670,764, or 41.5%, from the three months ended June 30, 2021. The increase in operating expenses was primarily attributable to higher wage expense from additional managerial personnel added during the period for our newer divisions of logistics brokerage and heavy haul, as well as general corporate expenses.

Loss From Operations

As a result of the preceding, our loss from operations was $1,146,908 during the three months ended June 30, 2022, compared with $2,329,138 for the same period of 2021. This $1,182,230, or 50.8%, improvement in our loss from operations was primarily attributable to gross margin improvement and higher revenues in the second quarter 2022 compared to the year ago period.

Other Income (Expense)

Total other expense was $1,835,242 for the three months ended June 30, 2022 compared to other income of $1,909,778 for the three months ended June 30, 2021. Interest expense was $2,178,694 and $1,321,988 for the three months ended June 30, 2022 and 2021, respectively, as a result of increased non-cash amortization of debt costs associated with convertible debt issued in 2021. Additionally, in the prior period, the Company recognized a gain of $3,148,100 from PPP loan forgiveness.

Net Loss From Continuing Operations

The result was that our net loss from continuing operations was $2,982,150 during the three months ended June 30, 2022, compared with $419,360 for the same period of 2021. This $2,562,790, or 611.1%, increase in our net loss from continuing operations was primarily attributable to the prior period including a $3,148,100 gain related to PPP loan forgiveness. Excluding this one time item, the Company improved its net loss from continuing operations due to the gross margin improvements described above.

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The following table sets forth the results of our operations for the six months ended June 30, 2022 and 2021.


	Six months ended June 30,
	2022		2021
Sales	$	34,257,950	$	19,845,419
Cost of goods sold		31,660,945		21,655,536
Gross profit (loss)		2,597,005		(1,810,117)
Operating expenses		4,751,846		3,129,601
Loss from operations		(2,154,841)		(4,939,718)
Other income (expense)		(4,463,327)		711,790
Loss from continuing operations		(6,618,168)		(4,227,928)
Income (loss) from discontinued operations		(33,238)		43,281
Net loss		(6,651,406)		(4,184,647)
Preferred stock dividends		—		(50,000)
Net loss attributable to common shareholders	$	(6,651,406)	$	(4,234,647)

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 present the assets and liabilities of MG and Trinity as discontinued operations. The Consolidated Statements of Operations for the six months ended June 30, 2022 and 2021 present the results of MG and Trinity as Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 present operating, investing and financing activities of MG and Trinity as cash flows from or used in discontinued operations.

Sales for the six months ended June 30, 2022 increased ~~third party contract services utilized~~ to ~~address rapidly~~$34,257,950, an increase of 73% from $19,845,419 for the six months ended June 30, 2021. The increase in sales during the six months of 2022 was primarily driven by increased revenues in our industrial transportation segment from higher customer activity transporting drilling rigs, and in our heavy haul business transporting bridge beams, over-dimensional infrastructure items and large natural gas compressors. Our increase in revenues was also attributable to the new contribution of revenues from our 5J Transportation flatbed and 5J Logistics brokerage division, not present in the comparable period in 2021 along with the general improvement in the domestic United States economy from COVID-19 pandemic.

Cost of Goods Sold

Cost of goods sold for the six months ended June 30, 2022, was $31,660,945, compared to $21,655,536 for the same period of 2021. As a percentage of overall sales, the cost of goods sold was 92.4% during the six months ended June 30, 2022, compared to 109.1% for the same fiscal period a year ago. Cost of goods sold includes $2,754,891 and $2,737,505, respectively in non-cash depreciation charges for the six months ended June 30, 2022 and 2021. The increase over the prior year was due to higher direct expenses associated with the increased volume of revenues, including driver payroll and settlements, fuel and freight costs compared to the prior period. We currently believe the Company will continue to improve cost of sales as a percentage of sales through increased revenues covering more fixed costs within cost of sales and higher utilization of our existing equipment fleet through anticipated future increases in customer demand.

Gross Profit (Loss)

Gross profit for the six months ended June 30, 2022, was $2,597,005, compared to a gross loss of $1,810,117 for the same period of 2021. Our gross profit (loss) margin was 7.6% during the six months ended June 30, 2022, compared to (9.1)% for the same fiscal period a year ago. The improvement in gross loss margin is due to higher volumes of revenues and more favorable pricing as compared to the first quarter 2021 results.

Operating Expenses


	Six months ended June 30,
	2022		2021
Operating expenses:
General and administrative	$	4,751,846	$	3,129,601
Operating expenses	$	4,751,846	$	3,129,601

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~~increasing customer demand, partially offset by improved pricing during~~Total operating expenses were $4,751,846 in the period. The Company believes it can improve gross margins through additional sales volumes from infrastructure logistics market growth and increased in oilfield rig move activity given current hydrocarbon price improvements, continued market recovery post-COVID pandemic with more activity, better utilization of our equipment inventory, lessening costs of third party contract services and continued increases in our pricing.

~~Selling, general and administrative expenses for the three~~six months ended ~~September~~June 30, ~~2021 was $1,455,253, or 9.9% of revenues,~~2022, compared to ~~$1,000,032, or 14.7%~~$3,129,601 in the same period of ~~revenues, for the quarter ended September 30, 2020. The increased amount of SG&A was reflecting of the 109%~~2021, representing an increase in ~~sales and related costs and included a benefit~~operating expenses of ~~$129,949 related to refundable employee retention tax credits during~~$1,622,245, or 51.8%, from the ~~three~~six months ended ~~September~~June 30, 2021. ~~As a percentage of revenue, the improvement in SG&A is primarily the result of higher revenues absorbing additional fixed costs.~~

~~Interest expense, net was $2,059,908 and $1,087,535 for the three months ended September 30, 2021 and 2020, respectively.~~ The increase in ~~interest~~operating expenses was primarily attributable to higher wage expense from additional managerial personnel added during the period for our newer divisions of logistics brokerage and heavy haul, as well as general corporate expenses.

Loss From Operations

As a result of the preceding, our loss from operations was $2,154,841 during the six months ended June 30, 2022, compared with $4,939,718 for the same period of 2021. This $2,784,877, or 56.4%, improvement in our loss from operations was primarily attributable to gross margin improvement and higher revenues reducing our gross loss during the six month period ended June 30, 2022 compared to the year ago period.

Other Income (Expense)

Total other expense was $4,463,327 for the six months ended June 30, 2022 compared to other income of $711,790 for the six months ended June 30, 2021. Interest expense was $4,797,731 and $2,570,777 for the six months ended June 30, 2022 and 2021, respectively, as a result of increased non-cash amortization of debt costs associated with convertible debt issued in 2021. Additionally, in the ~~third quarter~~prior period, the Company recognized a gain of ~~2021~~$3,148,100 from PPP loan forgiveness.

Net Loss From Continuing Operations

The result was ~~the result of additional borrowings from convertible notes payable and its related expense.~~

~~The~~that our net loss from continuing operations was $6,618,168 during the six months ended June 30, 2022, compared with $4,227,928 for the ~~quarter ended September 30, 2021 was $3,928,964 as compared to a net loss~~same period of $3,975,802 for the quarter ended September 30, 2020. The net loss in the third quarter of 2021 compared to the previous period was due primarily to slightly higher loss from continuing operations, significantly higher interest expense, partially offset by the gain on PPP loan forgiveness of $105,000.

~~Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020~~

Revenues for the nine months ended September 30, 2021 increased to $34,618,358 from $18,670,321 for the nine months ended September 30, 2020, and increase of 85%, driven by the acquisition of 5J on February 27, 2020, not fully realized in the comparable period, increased drilling rig activity given higher hydrocarbon prices, improved customer demand resulting from lessened impacts of the global COVID-19 pandemic and to the establishment of a new East Houston terminal generating additional flat bed transportation revenues.

~~During the nine months ended September 30, 2021, cost of sales increased to $36,947,626~~2021. This $2,390,240, or 107% of sales, compared to $21,825,811 or 117% of sales for the 2020 period. Cost of sales includes non-cash depreciation expense of $4,074,738 and a refundable tax credit reducing labor costs of $836,971 for the nine months September 30, 2021, and $3,434,164 for the comparable nine month period in 2020, the increase of which was primarily the result of the 5J acquisition and its related fair value step up adjustments in the prior year. The cost of sales exceeding revenues during 2021 and 2020 was the result of lower than required revenues to cover fixed costs within cost of sales. The Company believes it can improve gross margins through additional sales volumes from infrastructure logistics market growth and increased in oilfield rig move activity given current hydrocarbon price improvements, continued market recovery post-COVID pandemic with more activity, better utilization of our equipment inventory, lessening costs of third-party contract services and continued increases in our pricing.

Selling, general and administrative expenses for the nine months ended September 30, 2021 was $4,584,854 or 13.2% of revenues, compared to $2,554,107, or 13.7% of revenues. Selling general and administrative expenses as a percentage of revenues was basically unchanged compared to the previous period. Selling general and administrative expenses primarily includes personnel costs, facilities expenses, insurances and professional fees, and included a benefit of $129,949 related to refundable employee retention tax credits during the three months ended September 30, 2021.

~~Interest expense, net was $4,630,685 and $2,563,606 for the nine months ended September 30, 2021 and 2020, respectively. The~~56.5%, increase in ~~interest expense was a result of the increased convertible note borrowings to fund the 5J acquisition and note financing.~~

~~The~~our net loss from continuing operations ~~for~~was primarily attributable to the ~~nine months ended September 30, 2021 was $8,156,892 as compared~~prior period including a $3,148,100 gain related to aPPP loan forgiveness. Excluding this one time item, the Company improved its net loss ~~of $9,698,649 for the nine months ended September 30, 2020. The reduction in the net loss was~~from continuing operations due ~~primarily~~ to the ~~gain on PPP loan forgiveness of $3,253,100, partially offset by higher cost of sales, selling general and administrative expenses and interest expense.~~

We plan to address our net loss and future operating results with a goal to achieve positive cash flow from operations by increasing sales organically or through acquisitions, covering more fixed costs within cost of sales, improving gross ~~margins with better sales mix adding more higher~~ margin ~~service revenues such as super heavy haul, and reducing general and administrative costs including professional fees.~~improvements described above.

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Liquidity and Capital Resources

~~Cash Flows~~

~~Operating activities~~

Net cash used in operating activities was $5,317,730 for the nine months ended September 30, 2021, compared to $3,652,992 for the nine months ended September 30, 2020, including $568,518 of cash provided by discontinued operations during the quarter ended September 30, 2021, and $466,153 of cash used in discontinued operations during the quarter ended September 30, 2020.

For the nine months ended September 30, 2021, net cash used in continuing operating activities of $5,886,248 consisted of net loss of $8,156,892, which included non-cash costs of depreciation and amortization of $4,074,738, gain on PPP forgiveness loan of $3,253,100, gain on sale of assets of $114,926, amortization of deferred financing costs of $1,096,867. Changes in working capital accounts included changes in accounts receivable of $6,508,178, other assets of $306,029 and right of use operating lease liabilities of $277,329, partially offset by changes in accounts payable of $2,454,235, prepaid expenses and other current assets of $2,193,864 and accrued expenses and other labilities of $2,155,223.

For the nine months ended September 30, 2020, net cash used in continuing operating activities of $3,186,839 consisted of net loss of $9,698,649 which included non-cash costs of depreciation and amortization of $3,434,164, amortization of deferred financing costs of $375,680, bad debt expense of $247,558 and gain on sale of assets of $47,052. Changes in working capital accounts included changes in accounts receivable of $2,530,715, prepaid expenses of $858,112 and accrued liabilities of $2,278,250, partially offset by changes in accounts payable of $2,852,030, other assets of $560,131 and right of use operating lease labilities of $47,038.

~~Investing activities~~

~~Net cash used in investing activities was $132,026 for the nine months ended September 30, 2021, compared to $6,494,172 for the nine months ended September 30, 2020.~~

For the nine months ended September 30, 2021, net cash used in investing activities consisted of $35,000 paid to the buyer of MG Cleaners and cash used for the purchase of equipment of $97,026. For the nine months ended September 30, 2020, net cash used in investing activities consisted of $6,320,168, net cash paid for the acquisition of 5J Entities and $174,004 of fixed asset purchases.

~~Financing activities~~

Net cash provided by financing activities was $5,412,972 for the nine months ended September 30, 2021, compared to $10,800,332 for the nine months ended September 30, 2020, including $226,932 cash used in discontinued operations and $666,150 cash provided by discontinued operations, respectively.

For the nine months ended September 30, 2021, net cash provided by financing activities consisted of net proceeds from notes payable of $8,274,002, proceeds from convertible notes payable of $3,255,000 and net proceeds on secured lines of credit of $2,880,180, offset by payments on notes payable of $8,698,655and payment on convertible note payable of $50,000.

For the nine months ended September 30, 2020, net cash provided by financing activities consisted of net proceeds from secured notes payable of 5,574,048, proceeds from convertible notes payable of $2,644,295 and net proceeds from secured line of credit, net of $3,256,101, which was partially offset by payments on notes payable of $1,100,704, and payments of deferred financing costs of $239,558.

Our cash flows from operations are primarily funded through our financing activities, including our accounts receivable line of credit facility, ~~notes, convertible~~ notes and loans, stock sales, issuing our stock for services and various leases. Currently, we believe we will need to continue to utilize lines of credit, borrowings, and ~~investor funding~~stock sales to sufficiently sustain our current level of operations for the next 12 months. ~~While~~At present, we believe the industry and general domestic economic activity ~~and~~has realized improvement relative to the period one year ago as commodity prices have ~~improved, we believe we remain at risk for potential effects of the global~~risen generating higher customer activity in our industrial division, as well as economic improvement from reduced COVID-19 pandemic ~~that is prevalent~~prevalence in the markets we operate.

These economic improvements, currently anticipated by the Company are partially offset by believed inflationary pressures such as higher fuel prices. We likely will require additional capital to maintain or expand operations. Additionally, we believe any material acquisition of another operating company would require additional outside capital consisting of debt or equity. Failure to secure additional funds could significantly hamper our ongoing operations particularly if a down cycle in our industry continues further. As the business cycle improves, and the pandemic dissipates in the markets we serve, we plan to improve our cash flows provided in operating activities by

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focusing on increasing sales by increasing utilization of the assets we have acquired and offering higher value services that receive higher gross margins. However, there can be no assurances given of industry improvement, pandemic relief or improved cash flows of our business.

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

On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Brokerage and 5J Specialized LLC (the “5J Entities”) entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) in the total amount of $12,740,000. Pursuant to the terms of the Loan Agreement, the 5J Entities will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Entities will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company. On March 15, 2022, each of our 5J subsidiaries entered into an agreement with Amerisource pursuant to which Amerisource agreed to increase the loan commitment to the 5J entities from $12,740,000 to $16,740,000. The Company received $4,000,000 of cash proceeds from this agreement.

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Pursuant to the terms of the Security Agreement, the 5J Entities granted a security interest in all of their assets to Amerisource as collateral for the repayment of the Amerisource loan.

In connection with the Loan Agreement, the Company, the parent company of each of the 5J Entities, entered into a pledge agreement pursuant to which the Company has granted a security interest in all of its assets to Amerisource and a guaranty agreement pursuant to which the Company has guaranteed the timely payment of all amounts due under the Loan Agreement. The Loan Agreement includes customary covenants, including a negative convent that the 5J Entities may not create or permit for any lien to exist on the collateral nor enter into any new debt agreement.

The proceeds from the issuance of the Note were used to pay down the outstanding balance owed to Utica Leaseco LLC (“Utica”) pursuant to a Second Forbearance Agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on September 7, 2021 (“Forbearance Agreement”). The Utica agreement was paid in full through the Amerisource Loan Agreement in November 2021.

The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”).

The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 90% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0%) of the then maximum account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0%) of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing.

The Amerisource Equipment Loan in the amount of $1,401,559 is secured by certain equipment pledged as collateral, has a term of thirty-six (36) months during which the 5J Entities shall make equal monthly payments of principal and interest, bears an interest rate of prime rate plus five and one-quarter percent (5.25%) and an origination fee equal to one and one-half percent (1.5%) of the loan amount.

On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Note”) to Amerisource (“Amerisource Loan Agreement”). The Amerisource Note matures on February 27, 2023 and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s common stock were issued to the noteholder in connection with the sale of the Amerisource Note. The Amerisource Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty.

During the year ended December 31, 2021, we sold an aggregate of $5,287,740 principal amount of convertible promissory notes and issued 7,931,612 shares of restricted common stock in connection therewith.

We had net working capital deficit of $10,929,787, as of June 30, 2022, compared to a deficit of $10,295,788 as of December 31, 2021.

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Cash Flows

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2022 and 2021:


	Six months ended June 30,
	2022		2021
Cash provided by (used in):
Operating activities from continuing operations	$	(1,203,237)		(4,778,695)
Operating activities from discontinued operations		—		608,519
Operating activities		(1,203,237)		(4,170,176)

Investing activities from continuing operations		269,021		(132,026)
Investing activities from discontinued operations		—		—
Investing activities		269,021		(132,026)

Financing activities from continuing operations		2,405,298		4,268,002
Financing activities from discontinued operations		—		(226,932)
Financing activities	$	2,405,298		4,041,070

Operating Activities

Net cash used in operating activities was $1,203,237 for the six months ended June 30, 2022, a decrease of $2,966,939, or 71.1%, from cash used in operating activities of $4,170,176 during the same period of 2021, including $0 and $608,519 of cash flows provided by discontinued operations, respectively.

For the six months ended June 30, 2022, net cash used in continuing operating activities of $1,203,237 consisted of net loss of $6,618,168, which included non-cash costs of depreciation and amortization of $2,574,891, amortization of deferred financing costs of $2,387,577 and bad debt expense of $211,984. Changes in working capital accounts included changes in accounts receivable of $238,725, other assets of $233,955 and accounts payable of $1,392,707, partially offset by changes in prepaid expenses and other current assets of $1,890,998.

For the six months ended June 30, 2021, net cash used in continuing operating activities of $4,778,695 consisted of net loss from continuing operations of $4,227,928, plus $274,156 of non-cash items, consisting primarily of depreciation and amortization of $2,737,505, amortization of deferred financing costs of $566,039 amortization of right of use assets – operating leases of $209,753, gain on PPP loan forgiveness of $3,148,100 and gain on disposal of assets of $114,926, less $824,923 changes in operating assets and other operating activities.

Investing Activities

Net cash provided by investing activities was $269,021 for the six months ended June 30, 2022, compared to net cash used in investing activities of $132,026 for the six months ended June 30, 2021.

For the six months ended June 30, 2022, net cash provided by investing activities consisted of $329,271 of cash proceeds from disposal of property and equipment and $60,250 cash paid for fixed asset additions. For the six months ended June 30, 2021, net cash used in investing activities consisted of $35,000 paid to the buyer of MG Cleaners and $97,026 cash paid for fixed asset additions.

Financing Activities

Net cash provided by financing activities was $2,405,298 for the six months ended June 30, 2022, compared to $4,041,070 for the six months ended June 30, 2021, including $0 and $226,932 of cash used in related to discontinued operations, respectively.

For the six months ended June 30, 2022, net cash provided by financing activities consisted of proceeds from notes payable of $5,229,098, partially offset by repayment of notes payable of $2,291,454 and net payments on secured line of credit of $532,346.

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For the six months ended June 30, 2021, net cash provided by financing activities consisted of net proceeds from notes payable of $1,874,002, proceeds from convertible notes payable of $1,405,000 and net proceeds on secured lines of credit of $1,819,234, offset by payments on notes payable of $830,234.

Off-Balance-Sheet Transactions

As of ~~September~~June 30, ~~2021,~~2022, the Company has an open letter of credit in the amount of ~~$323,516~~$414,638 as collateral for its insurance policy.

Contractual Commitments

None

Item 3. Qualitative and Quantitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures: Our management carried out an evaluation of the effectiveness and design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer has concluded that, at ~~September~~June 30, ~~2021,~~2022, such disclosure controls and procedures were not effective.

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

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

Changes in Internal Control over Financial Reporting:There have been no changes in our internal controls over financial reporting that occurred during the three month period ended ~~September~~June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On January 14, 2021, the Company issued a convertible promissory note in the amount of $150,000, in exchange for proceeds of $150,000. The note is convertible into 1,500,000 shares of the Company’s common stock. In addition, the Company issued 225,000 shares of its common stock to the note holder in connection with the issuance of the note.

On March 31, 2021, the Company issued a convertible promissory note in the amount of $150,000, in exchange for payment of Company expenses of $112,071. The note is convertible into 1,500,000 shares of the Company’s common stock. In addition, the Company issued 168,107 shares of its common stock to the note holder in connection with the issuance of the note.

On April 14, 2021, the Company issued a convertible promissory note in the amount of $300,000, in exchange for proceeds of $300,000. The note is convertible into 3,000,000 shares of the Company’s common stock. In addition, the Company issued 450,000 shares of its common stock to the note holder in connection with the issuance of the note.

On April 30, 2021, the Company issued a convertible promissory note in the amount of $195,000, in exchange for proceeds of $195,000. The note is convertible into 1,950,000 shares of the Company’s common stock. In addition, the Company issued 292,500 shares of its common stock to the note holder in connection with the issuance of the note.

On April 30, 2021, the Company issued a convertible promissory note in the amount of $350,000, in exchange for proceeds of $350,000. The note is convertible into 3,500,000 shares of the Company’s common stock. In addition, the Company issued 525,000 shares of its common stock to the note holder in connection with the issuance of the note.

On May 24, 2021, the Company issued a convertible promissory note in the amount of $260,000, in exchange for proceeds of $260,000. The note is convertible into 2,600,000 shares of the Company’s common stock. In addition, the Company issued 390,000 shares of its common stock to the note holder in connection with the issuance of the note.

On June 22, 2021, the Company issued a convertible promissory note in the amount of $150,000, in exchange for proceeds of $150,000. The note is convertible into 1,500,000 shares of the Company’s common stock. In addition, the Company issued 225,000 shares of its common stock to the note holder in connection with the issuance of the note.

On June 30, 2021, the Company issued a convertible promissory note in the amount of $96,058, in exchange for payment of Company expenses of $96,058. The note is convertible into 960,580 shares of the Company’s common stock. In addition, the Company issued 144,087 shares of its common stock to the note holder in connection with the issuance of the note.

On July 12, 2021, the Company issued a convertible promissory note in the amount of $200,000, in exchange for proceeds of $200,000. The note is convertible into 2,000,000 shares of the Company’s common stock. In addition, the Company issued 300,000 shares of its common stock to the note holder in connection with the issuance of the note.

On July 13, 2021, the Company issued a convertible promissory note in the amount of $350,000, in exchange for proceeds of $350,000. The note is convertible into 3,500,000 shares of the Company’s common stock. In addition, the Company issued 525,000 shares of its common stock to the note holder in connection with the issuance of the note.

On August 19, 2021, the Company issued a convertible promissory note in the amount of $200,000, in exchange for proceeds of $200,000. The note is convertible into 2,000,000 shares of the Company’s common stock. In addition, the Company issued 300,000 shares of its common stock to the note holder in connection with the issuance of the note.

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On September 1, 2021, the Company issued a convertible promissory note in the amount of $83,000, in exchange for payment of Company expenses of $83,000. The note is convertible into 830,000 shares of the Company’s common stock. In addition, the Company issued 124,500 shares of its common stock to the note holder in connection with the issuance of the note.

On September 1, 2021, the Company issued a convertible promissory note in the amount of $93,000, in exchange for payment of Company expenses of $93,000. The note is convertible into 930,000 shares of the Company’s common stock. In addition, the Company issued 139,500 shares of its common stock to the note holder in connection with the issuance of the note.

On September 2, 2021, the Company issued a convertible promissory note in the amount of $800,000, in exchange for proceeds of $800,000. The note is convertible into 8,000,000 shares of the Company’s common stock. In addition, the Company issued 1,200,000 shares of its common stock to the note holder in connection with the issuance of the note.

On September 24, 2021, the Company issued a convertible promissory note in the amount of $275,000, in exchange for payment of Company expenses of $275,000. The note is convertible into 2,750,000 shares of the Company’s common stock. In addition, the Company issued 412,500 shares of its common stock to the note holder in connection with the issuance of the note.

On September 28, 2021, the Company issued a convertible promissory note in the amount of $300,000, in exchange for proceeds of $300,000. The note is convertible into 3,000,000 shares of the Company’s common stock. In addition, the Company issued 450,000 shares of its common stock to the note holder in connection with the issuance of the note.

On September 30, 2021, the Company issued a convertible promissory note in the amount of $142,500, in exchange for payment of Company expenses of $142,500. The note is convertible into 1,425,000 shares of the Company’s common stock. In addition, the Company issued 213,750 shares of its common stock to the note holder in connection with the issuance of the note.

On September 30, 2021, the Company issued a convertible promissory note in the amount of $129,405, in exchange for payment of Company expenses of $129,405. The note is convertible into 1,294,050 shares of the Company’s common stock. In addition, the Company issued 194,108 shares of its common stock to the note holder in connection with the issuance of the note.

On or about October 30, 2021, the Company's 2,000 Series A Convertible Preferred Stock with a stated value of $1,000 and its accrued dividends automatically converted into 4,443,292 shares of the Company's common stock at a fixed conversion of $0.50 per share.

~~The proceeds from the notes were used by the Company in its operations for working capital and general corporate purposes.~~

The shares of common stock issued in connection with the note issuances and the conversion of the Series A Preferred Stock described above are restricted securities and were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended.None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

Exhibit No.		Description of Document
31.1	*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2	*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1	*	Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

32.2	*	Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

101.	INS	XBRL Instance Document - the instance document does not appear in the Interative Data File because its XBRL tags are embedded within the Inline XBRL document.

101.	SCH	XBRL Taxonomy Extension Schema Document

101.	CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.	DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.	LAB	XBRL Taxonomy Extension Label Linkbase Document

101.	PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104		Cover page Interative Data File - The cover page interactive date file does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*	A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		SMG Industries Inc.
		(Registrant)

~~November~~August 15, ~~2021~~2022		/s/ ~~Allen R. Parrott~~Matthew C. Flemming
Date		~~Allen R. Parrott~~Matthew C. Flemming
		~~Acting~~Interim Chief Executive Officer and Interim Chief Financial Officer
		(Principal Executive Officer and Principal Financial Officer)