SMG Industries (SMGI) 8-K/A Financial Statements and Exhibits

Exhibit 99.2

5J TRUCKING, LLC

FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018 AND 2017

CONTENTS

	Page
INDEPENDENT AUDITORS’ REPORT	1-2
FINANCIAL STATEMENTS
Balance Sheets	3-4
Statements of Income	5
Statements of Members’ Equity	6
Statements of Cash Flows	7-8
Notes to Financial Statements	9-14

INDEPENDENT AUDITORS’ REPORT

To the Members

5J Trucking, LLC

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

Management’s Responsibility for the Financial Statements

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

Auditors’ Responsibility

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

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

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

-1-

Page 2

To the Members

5J Trucking, LLC

Opinion

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

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

Palestine, Texas

July 5, 2019

-2-

5J TRUCKING, LLC 

BALANCE SHEETS 

DECEMBER 31, 2018 AND 2017

	2018			2017
ASSETS
CURRENT ASSETS
Cash	$	187,098		$	193,758
Accounts receivable
Trade, net		52,616			18,115
Related party		348,501			351,097
Notes receivable - current portion		423,277			50,855
Prepaid expenses		278,447			263,653
TOTAL CURRENT ASSETS		1,289,939			877,478
PROPERTY AND EQUIPMENT (at cost)
Buildings		715,921			715,921
Cranes		10,536,569			10,822,280
Trucks, trailers and winches		33,099,446			31,261,224
Machinery and equipment		4,246,967			4,701,085
Total property and equipment		48,598,903			47,500,510
Less accumulated depreciation		(31,827,065	)		(33,402,710	)
TOTAL NET PROPERTY AND EQUIPMENT		16,771,838			14,097,800
OTHER ASSETS
Notes receivable, net of current portion		669,478			83,059
TOTAL OTHER ASSETS		669,478			83,059
TOTAL ASSETS	$	18,731,255		$	15,058,337

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

-3-

5J TRUCKING, LLC 

BALANCE SHEETS 

DECEMBER 31, 2018 AND 2017

	2018			2017
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	694,835		$	659,436
Accrued expenses		74,958			85,707
State income taxes payable		140,500			105,000
Current portion of long-term debt		3,707,721			3,810,698
TOTAL CURRENT LIABILITIES		4,618,014			4,660,841
LONG-TERM DEBT, net of current portion		19,901,173			17,827,568
TOTAL LIABILITIES		24,519,187			22,488,409
MEMBERS' EQUITY (DEFICIT)		(5,787,932	)		(7,430,072	)
TOTAL LIABILITIES AND MEMBERS' EQUITY (DEFICIT)	$	18,731,255		$	15,058,337

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

-4-

5J TRUCKING, LLC

STATEMENTS OF INCOME 

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
OPERATING REVENUES	$	25,919,903		$	21,512,855
OPERATING EXPENSES
Commissions and contract services		80,059			57,326
Depreciation		3,671,684			3,417,887
Equipment expenses		516,060			410,275
Insurance		1,367,962			1,240,222
Licenses and permits		2,142,414			1,639,160
Miscellaneous		31,100			20,209
Rent		144,000			205,000
Repairs		76,252			53,683
Payroll and benefits		9,023,088			7,243,831
Rigging supplies		246,640			135,834
Safety expenses		24,039			13,453
Taxes		206,226			202,400
Travel		803,447			781,605
Trucking expenses		4,842,777			4,290,289
Vehicle expenses		87,324			90,283
Shop expenses		141,505			103,659
TOTAL OPERATING EXPENSES		23,404,577			19,905,116
GROSS PROFIT (LOSS)		2,515,326			1,607,739
GENERAL AND ADMINISTRATIVE		569,167			1,020,834
INCOME (LOSS) FROM OPERATIONS		1,946,159			586,905
OTHER INCOME (EXPENSE)
Gain on sale of fixed assets		2,294,386			264,280
Other income		64,662			781
Interest expense		(743,820	)		(618,880	)
NET OTHER INCOME (EXPENSE)		1,615,228			(353,819	)
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES		3,561,387			233,086
STATE INCOME TAX EXPENSE		(132,597	)		(96,326	)
NET INCOME (LOSS)	$	3,428,790		$	136,760

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

-5-

5J TRUCKING, LLC 

STATEMENTS OF MEMBERS' EQUITY

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
MEMBERS' EQUITY (DEFICIT) AT BEGINNING OF YEAR	$	(7,430,072	)	$	(7,902,832	)
Net income (loss)		3,428,790			136,760
Contributions (Distributions) from/to Members		(1,786,650	)		336,000
MEMBERS' EQUITY (DEFICIT) AT END OF YEAR	$	(5,787,932	)	$	(7,430,072	)

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

-6-

5J TRUCKING, LLC

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	3,428,790		$	136,760
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation		3,671,684			3,417,887
Amortization		-			12,136
Gain on sale of fixed assets		(1,427,171	)		(264,280	)
Gain on distribution of property		(867,215	)		-
Bad debt expense		161,598			666,302
Decrease (Increase) in accounts receivable		(471,653	)		(610,993	)
Decrease (Increase) in prepaid expenses		(14,794	)		115,064
(Decrease) Increase in accounts payable		18,925			(42,073	)
(Decrease) Increase in accrued expenses		24,751			102,914
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		4,524,915			3,533,717
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(1,200,854	)		(603,982	)
Proceeds from disposal of equipment		460,752			237,435
Payments received from equipment sold on contract		439,159			16,586
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES		(300,943	)		(349,961	)
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction in long-term debt		(3,889,632	)		(3,260,658	)
Member contributions (distributions)		(341,000	)		336,000
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		(4,230,632	)		(2,924,658	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(6,660	)		259,098
CASH (OVERDRAFT) AND CASH EQUIVALENTS AT
BEGINNING OF YEAR		193,758			(65,340	)
CASH (OVERDRAFT) AND CASH EQUIVALENTS  AT END OF YEAR	$	187,098		$	193,758

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

-7-

5J TRUCKING, LLC

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2018 AND 2017

	2018			2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	743,820		$	606,744
State income taxes		97,097			46,326
Noncash investing and financing transactions:
Acquisition of property and equipment:
Cost of property and equipment		7,077,588			7,237,255
Property and equipment loans		(5,876,734	)		(6,633,273	)
Cash down payments	$	1,200,854		$	603,982
Sale of property and equipment:
Equipment sold on contract	$	1,398,000		$	230,500
Property distributions:
Fair value of property distributed		1,175,000			-
Cost basis		(307,785	)		-
Gain on distribution	$	867,215		$	-

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

-8-

5J TRUCKING, LLC 

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2018 AND 2017

ORGANIZATION

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

NATURE OF OPERATIONS

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

SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

-9-

SIGNIFICANT ACCOUNTING POLICIES (concluded)

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

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

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

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

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

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

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

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

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

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

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

-10-

LONG-TERM DEBT -less current portion

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

			Date of	Maturity	Interest	Original		Payment	Balance		2018		2018		Balance		2019
Notes Payable	Collateral		Inception	Date	Rate	Amount		Method	12/31/2017		Additions		Reductions		12/31/2018		Prin. Due
Citizens National Bank	2014 Kobelco Crane		Dec-14	Nov-18	4.90%		700,000	Monthly		187,163		-		187,163		-		-
Equity	various equipment		Aug-15	Jun-18	8.21%		7,269,913	Monthly		1,027,027		-		1,027,027		-		-
Equity	(4) Manitowoc Cranes		Aug-15	Mar-19	6.00%		1.353,514	Monthly		733,951		-		552,331		181,620		181,620
5J Oilfield Services, LLC	Miscellaneous Loan Fd Cash Ace.		Dec-13	Jun-26	2.00%		13,887,658	Quarterly		12,387,658		-		250,000		12,137,658		400,000
Citizens National Bank	2017 Holden & 2007 Aspen Trailers		Nov- 16	Nov-19	5.00%		92,100	Monthly		60,424		-		30,836		29,588		29,588
Scott Financial	2014 Kobelco Crane		Apr-16	Apr-20	5.75%		516,127	Monthly		334,567		-		137,796		196,771		145,974
Scott Financial	2006 Manitowoc Crane		Apr-16	Jan-20	5.75%		335,246	Monthly		195,418		-		90,808		104,610		96,206
Scott Financial	2013 Kobelco Crane		Apr-16	Apr-20	5.75%		531,500	Monthly		344,533		-		141,979		202,554		150,323
ALLY	2017 GMC Truck		Mar-17	Mar-20	4.69%		28,443	Monthly		21,688		-		9,383		12,305		9,833
ALLY	2017 GMC Truck		Mar-17	Mar-20	4.76%		30,368	Monthly		23,162		-		10,017		13,145		10,504
ALLY	2017 GMC Truck		Apr-17	Apr-20	4.59%		33,665	Monthly		26,564		-		11,066		15,498		11,585
ALLY	2017 GMC Truck		Apr-17	Apr-20	4.59%		42,762	Monthly		33,742		-		14,057		19,685		14,716
ALLY	2017 GMC Truck		Jun-17	Jun-20	4.59%		26,148	Monthly		22,719		-		8,497		14,222		8,895
ALLY	2017 GMC Truck		Jul-17	Jul-20	3.39%		18,380	Monthly		15,933		-		6,013		9,920		6,220
A LLY	2017 Chevrolet Truck		Sep-17	Sep-20	4.40%		30,996	Monthly		28,56 1		-		10,011		18,550		10,461
ALLY	2018 Chevrolet Truck		Oct-1 7	Oct-20	4.59%		29,318	Monthly		27,790		-		9,421		18,369		9,862
Citizens National Bank	13 Trailers		Aug-17	Aug-22	5.50%		448,000	Monthly		416,508		-		80,376		336,132		84,615
Scott Financial	Kobelco Crane		Aug-17	Aug-21	5.75%		550,500	Monthly		500,033		-		131,173		368,860		136,647
Scott Financial	2017 Kobelco Crane		Dec-17	Dec-22	5.75%		784,877	Monthly		784,877		-		139,357		645,520		147,623
Triumph	9 Trucks and 3 Trailers		Oct-17	Oct-20	5.50%		1,162,749	Monthly		1,018,881		-		368,540		650,341		389,625
De Lage Landen	2017 Grove Crane		Dec-17	Jan-24	5.48%		3,447,067	Monthly		3,447,067		-		455,923		2,991,144		524,904
Citizens Bank of Crockett	2 Trailers		Jan-18	Jan-21	6.5% floating		144,810	Monthly		-		144,810		41,145		103,665		47,888
Mercedes-Benz	1 Western Star Truck		Feb-18	Jul-21	6.15%		100,000	Monthly		-		100,000		22,061		77,939		27,625
Citizens National Bank	2 Kenworths		Jun-18	May-22	5.75%		319,120	Monthly		-		319,120		36,079		283,041		75,338
Citizens National Bank	2 Trailers		Jul-18	Jul-22	5.49%		368,000	Monthly		-		368,000		34,754		333,246		86,719
Mercedes-Benz	8 Western Star Trucks		Aug- 18	Sep-23	5.50%		1,344,961	Monthly		-		1,344,961		55,998		1,288,963		244,171
Volvo Financial	4 Volvo Trucks		Oct-18	Oct-22	5.50%		596,565	Monthly		-		596,565		22,331		574,234		138,358
Volvo Financial	2 Volvo Trucks		Dec-18	Nov-22	5.50%		309,993	Monthly		-		309,993		5,789		304,204		71,567
Mercedes-Benz	2 Western Star Trucks	��	Dec-18	Dec-23	5.84%		334,047	Monthly		-		334,047		-		334,047		58,771
Triumph	5 Kenworth Trucks		Nov-18	Jan-22	6.00%		1,000,750	Monthly		-		1,000,750		-		1,000,750		280,792
Citizens National Bank	2018 Cat Crane		Dec-18	Dec-22	6.00%		900,000	Monthly		-		900,000		-		900,000		205,641
Volvo Financial	3 Volvo Trucks		Dec-18	Dec-22	5.50%		442,313	Monthly		-		442,313		-		442,313		101,650
	Totals					$	37,179,890		$	21,638,266	$	5,860,559	$	3,889,931	$	23,608,894	$	3,707,721
						Total Long-Term Debt							$	23,608,894
						Less current portion							$	3,707,721
						Total Long-Term Debt, net of current portion							$	19,901,173

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

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

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

-11- 

COMMITMENTS AND CONTINGENCIES

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

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

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

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

RELATED PARTY TRANSACTIONS

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

5J Oilfield Services, LLC

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

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

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

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

-12-

RELATED PARTY TRANSACTIONS (concluded)

5J Oilfield Services, LLC (concluded)

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

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

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

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

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

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

	2018		2017
Accounts Receivable due from Certified Crane	$	-	$	4,454
Accounts Receivable due from Schwab		2,170		6,544
Accounts Payable due to Properties		17,000		17,000
Operating Revenue from Certified Crane		780,392		651,291
Operating Revenue from Schwab		81,286		85,294
Operating Revenue from 903 Industries		27,932		11,654
Contract service expense to Certified Crane		-		9,126
Rental expense to 5J Properties		102,000		102,000
Truck expense to 903 Industries		4,198		2,122
Bad Debt expense from Certified Crane		156,810		685,147
(included in General and Administrative expense)
Gain on sale of fixed assets from Certified Crane		867,215		-

-13-

NOTES RECEIVABLE

Notes receivable consisted of the following at December 31:

	2018			2017
Matthew Solt, with interest at 8%	$	165,643		$	-
Antero M. Zulueta, with interest at 8%		160,645			-
A-Starr Logistics, LLC, with interest at 8.5%		148,861			-
Banks Heavy Haul, with interest at 8%		131,811			-
Boyd Farner Jr., with interest at 8%		93,651			-
PCN Transportation, with interest at 7.5%		86,407			121,893
2J Trucking, LLC, with interest at 8%		78,263			-
PCN Transportation, with interest at 8%		59,448			-
Donna K. Slinker, with interest at 7.5%		58,250			-
Danny DelAngel, with interest at 8%		55,833			-
William Corley, with interest at 7.5%		53,943			-
Dean Cole, with no interest		-			6,702
Urbano Elizando, with no interest		-			5,319
		1,092,755			133,914
Less current portion		(423,277	)		(50,855	)
Notes receivable - less current portion	$	669,478		$	83,059

All Notes Receivable are secured by equipment.                

-14-