Exhibit 99.2
MG CLEANERS, LLC
UNAUDITED FINANCIAL STATEMENTS
For the six months ending June 30, 2017 and 2016
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TABLE OF CONTENTS
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Unaudited Financial Statements: | |
Balance Sheets at June 30, 2017 and December 31, 2016 | 3 |
Statements of Operations for the six months ended June 30, 2017 and 2016 | 4 |
Statements of Cash Flows for the six months ended June 30, 2017 and 2016 | 5 |
Notes to Financial Statements | 6-11 |
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MG CLEANERS, LLC
BALANCE SHEETS
(unaudited)
June 30 | December 31 | |||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 22,134 | $ | 22,461 | ||||
Accounts receivable, net of allowance of $10,695 and $21,134 | 350,253 | 285,923 | ||||||
Inventory | 45,922 | 10,948 | ||||||
Prepaid expenses and other current assets | 2,812 | - | ||||||
Total current assets | 421,121 | 319,332 | ||||||
Property and equipment, net of accumulated depreciation of $341,133 and $302,931 | 176,385 | 214,587 | ||||||
Land | 10,000 | 10,000 | ||||||
Total assets | $ | 607,506 | $ | 543,919 | ||||
LIABILITIES AND MEMBERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 204,812 | $ | 160,343 | ||||
Accrued expenses and other liabilities | 92,543 | 231,523 | ||||||
Secured line of credit | 322,303 | - | ||||||
Current portion of secured notes payable | 125,130 | 275,446 | ||||||
Total current liabilities | 744,788 | 667,312 | ||||||
Long term liabilities: | ||||||||
Notes payable - secured, net of current portion | 236,516 | 234,189 | ||||||
Total liabilities | 981,304 | 901,501 | ||||||
Commitments and contingencies | - | - | ||||||
Members' equity (deficit) | ||||||||
Members' equity | (641,038 | ) | (554,613 | ) | ||||
Retained earnings | 267,240 | 197,031 | ||||||
Total members' equity (deficit) | (373,798 | ) | (357,582 | ) | ||||
Total liabilities and members' equity | $ | 607,506 | $ | 543,919 |
The accompanying notes are an integral part of these unaudited financial statements
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MG CLEANERS, LLC
STATEMENTS OF OPERATIONS
For the six months ended June 30, 2017 and 2016
(unaudited)
2017 | 2016 | |||||||
REVENUES | $ | 1,182,402 | $ | 702,807 | ||||
COST OF REVENUES | 719,462 | 378,320 | ||||||
GROSS PROFIT | 462,940 | 324,487 | ||||||
OPERATING EXPENSES: | ||||||||
Selling, general and administrative | 339,508 | 167,274 | ||||||
Gain on asset sale | - | (393 | ) | |||||
Bad debt expense | 61 | 23,219 | ||||||
Total operating expenses | 339,569 | 190,100 | ||||||
INCOME FROM OPERATIONS | 123,371 | 134,387 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense, net | (53,162 | ) | (28,672 | ) | ||||
NET INCOME | $ | 70,209 | $ | 105,715 |
The accompanying notes are an integral part of these unaudited financial statements
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MG CLEANERS, LLC
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2017 and 2016
(unaudited)
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 70,209 | $ | 105,715 | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 38,199 | 38,729 | ||||||
Bad debt expense | 61 | 23,219 | ||||||
(Gain) loss on asset sale | - | (393 | ) | |||||
Changes in: | ||||||||
Accounts receivable | (64,389 | ) | 37,294 | |||||
Inventory | (34,974 | ) | (36,779 | ) | ||||
Prepaid expenses and other current assets | (2,812 | ) | - | |||||
Accounts payable | 44,470 | (40,634 | ) | |||||
Accrued expenses and other liabilities | (138,980 | ) | (1,867 | ) | ||||
Net cash provided by (used in) operating activities | (88,216 | ) | 125,284 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash received from the sale of property and equipment | - | 1,000 | ||||||
Cash paid for purchase of property and equipment | - | (5,000 | ) | |||||
Net cash used in investing activities | - | (4,000 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from secured line of credit, net | 322,303 | - | ||||||
Proceeds from notes payable | 25 | 70,700 | ||||||
Payments on notes payable | (148,014 | ) | (58,743 | ) | ||||
Proceeds from member contributions | 41,784 | 20,856 | ||||||
Payments for member distributions | (128,209 | ) | (95,307 | ) | ||||
Net cash used in financing activities | 87,889 | (62,494 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (327 | ) | 58,790 | |||||
CASH AND CASH EQUIVALENTS, beginning of period | 22,461 | 393 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 22,134 | $ | 59,183 | ||||
Supplemental disclosures: | ||||||||
Cash paid for income taxes | $ | - | $ | - | ||||
Cash paid for interest | $ | 45,666 | $ | 25,823 |
The accompanying notes are an integral part of these unaudited financial statements
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MG CLEANERS LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 –BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of MG Cleaners, LLC (“we”, “our”, “MG” or the “Company”) 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 financial statements and notes thereto for the years ended December 31, 2016 and 2015. 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 financial statements which would substantially duplicate the disclosures contained in the audited financial statements for years ended December 31, 2016 and 2015 have been omitted.
NOTE 2 – GOING CONCERN
The Company considered its going concern disclosure requirements in accordance with ASC 240-40-50. The Company concluded that its negative working capital and decreased cash flows from operating are conditions that raised substantial doubt about the Company’s ability to continue as a going concern. Without a successful plan in place from management these conditions could negatively impact the Company’s ability to meets its financial obligations over the next year. In response, the Company has implemented a plan to alleviate such substantial doubt as follows. The Company will continue to generate additional revenue (and positive cash flows from operations) partly related to the Company’s expansion into a new region during 2017 and partly related to the Company wide sales initiatives already implemented. In addition there were several one-time expenses in 2016 and 2017 related to expansion to the new region. As a result substantial doubt about the Company’s ability to continue as a going concern is alleviated.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2017 and December 31, 2016 consist of the following:
June 30, 2017 | December 31, 2016 | |||||||
Land | $ | 10,000 | $ | 10,000 | ||||
Building and improvements | 91,500 | 91,500 | ||||||
Vehicles and trailers | 283,462 | 278,462 | ||||||
Equipment | 129,446 | 130,946 | ||||||
Other | 13,110 | 16,610 | ||||||
527,518 | 527,518 | |||||||
Less: accumulated depreciation | (341,133 | ) | (302,931 | ) | ||||
$ | 186,385 | $ | 224,587 |
Depreciation expense for the six months ended June 30, 2017 and 2016 was $38,199 and $38,729, respectively.
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NOTE 4 – ACCRUED EXPENSES
Accrued expenses as of June 30, 2017 and December 31, 2016 included the following:
June 30, 2017 | December 31, 2016 | |||||||
Salaries payable | $ | 13,649 | $ | 6,372 | ||||
Payroll taxes payable | 13,984 | 91,962 | ||||||
Sales tax payable | 1,489 | 10,793 | ||||||
Interest payable | 7,496 | 11,646 | ||||||
Credit cards payable | 8,211 | 10,323 | ||||||
Inventory purchases payable | 34,842 | 75,538 | ||||||
Other | 12,872 | 24,889 | ||||||
Total Accrued Expenses | $ | 92,543 | $ | 231,523 |
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NOTE 5 – NOTES PAYABLE
Notes payable included the following as of June 30, 2017 and December 31, 2016:
June 30, | December 31, | |||||||
2017 | 2016 | |||||||
Notes payable: | ||||||||
Secured note payable issued on October 15, 2010 and refinanced in January 2015 for purchase of all membership interest, bearing interest of 6% per year and due in monthly installments | $ | 255,120 | $ | 274,077 | ||||
Equipment floor plan financing agreement issued July 29, 2013, bearing interest of 7.50% and due in monthly installments | - | 4,494 | ||||||
Secured note payable issued December 19, 2014, bearing interest of 7.25% per year, due in full on December 19, 2016 | - | 119,751 | ||||||
Secured note payable issued January 27, 2017, bearing interest of 7.25% per year, due in full on August 1, 2018 | 58,544 | - | ||||||
Secured note payable issued January 2, 2015, bearing interest of 6% per year, due in monthly installments | - | 24,075 | ||||||
Secured note payable issued April 16, 2015, bearing interest of 6% per year, due in monthly installments | - | 32,772 | ||||||
Secured note payable issued February 2, 2017, bearing interest of 6% per year, due in monthly installments | 47,982 | - | ||||||
Secured finance facility issued June 6, 2016, bearing effective interest of 28.50%, due in periodic installments | - | 54,466 | ||||||
361,646 | 509,635 | |||||||
Less current maturities | (125,130 | ) | (275,446 | ) | ||||
Long term debt, net of current maturities | $ | 236,516 | $ | 234,189 |
On October 15, 2010, our managing member purchased MG Cleaners from the previous membership interest owners. In connection with that transaction, a $450,000 seller note was issued to the sellers. The note bears an interest rate of 8% and principal and interest payments are made monthly. The remaining principal balance of $307,391 was refinanced by the note holder in January 2015, bearing an interest rate of 6.00%, with principal and interest payments due monthly. The note is secured by the land and building originally occupied by MG, as well as all of the membership interest of the Company. The balance of this note at June 30, 2017 was $255,120.
On July 29, 2013, the Company entered into an equipment floor plan financing totaling $23,843. The terms of this note were 7.5% interest per annum with principal and interest paid monthly over the 48 month term. The note is secured by certain equipment of the Company. This note was paid in full during the six months ended June 30, 2017.
On December 19, 2014, we issued a note to a community bank for $120,025, which is secured by accounts receivable and certain equipment of the Company. Interest is paid monthly at a rate of 7.25% per annum. The principal is due in full at the end of the term on December 19, 2016. This loan was refinanced on January 27, 2017 with a new note at the same community bank.
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On January 27, 2017, we issued a note to a community bank for $119,776 which is secured by accounts receivable and certain equipment of the Company. Interest is paid monthly at a rate of 7.25% per annum. The principal is due in full at the end of the term at August 1, 2018. A payment of $50,000 was made against this loan in May 2017 in connection with the bank’s agreement to subordinate their note to the Crestmark Bank facility.This loan was refinanced on August 14, 2017.
On January 2, 2015, we financed a truck with a note to a community bank. The $43,025 note has an interest rate of 6% and payments of principal and interest are paid monthly. The note is secured by the truck purchased. This loan was refinanced and rolled together with the remaining principal of the note issued on April 16, 2015 on February 2, 2017.
On April 16, 2015, we financed a truck with a note to a community bank. The $45,328 note has an interest rate of 6% and payments of principal and interest are paid monthly. The note is secured by the truck purchased. This loan was refinanced and rolled together with the remaining principal of the note issued on January 2, 2015 on February 2, 2017.
On February 2, 2017, we re-financed two truck notes existing with a community bank for one new note of $53,610. The term was principal and interest payments monthly over 42 months with an interest rate of 6%. The note is secured by certain trucks and equipment of the Company.
On August 5, 2015, the Company entered into an accounts receivable purchase agreement with security agreement against "Payment Card Receivables" in the initial amount of $40,800. We sold $40,800 of receivables during the year ended December 31, 2015 and $70,700 of receivables during the year ended December 31, 2016; the balance owed is paid by the automatic sale of new payment card receivables to a finance company, with the finance company retaining an amount equal to 2/7ths of the face amount of the receivables. The balance of this agreement was $25,505 on December 31, 2015 and $54,466 on December 31, 2016. On May 31, 2017, the Company paid off this financing arrangement in connection with closing the Crestmark Bank deal.
Accounts Receivable Financing Facility
On May 31, 2017, MG Cleaners LLC (the “Borrower”) entered into a $1 million revolving accounts receivable financing facility with Crestmark Bank. The financing facility provides for the Borrower to have access to the lesser of (i) $1 million or (ii) 85% of Net Amount of Eligible Receivables (as defined in the financing agreement). The financing facility is paid for by the assignment of the Borrower’s accounts receivable to Crestmark Bank and is secured by the Borrower’s assets. The financing facility has an interest rate of 7.25% in excess of the prime rate reported by the Wall Street Journal per annum, with a floor minimum rate of 11.5%. There were no loan origination or closing fees and we paid $1,330 to Crestmark to reimburse them for documentation, legal and audit fees. Interest and maintenance fees will be calculated on the higher of the average monthly loan balance from the prior month or a minimum average loan balance of $200,000. The financing facility is for an initial term of two-years and will renew on a year to year basis, unless terminated in accordance with the financing agreement. If the facility is terminated prior to the first anniversary, Borrower is obligated to pay Crestmark Bank a fee of $20,000 and if terminated after the first anniversary and prior to the second anniversary then Borrower shall pay a fee of $5,000. After the second anniversary of the financing facility no exit fee is due. Crestmark has a senior security interest in the Borrower’s assets.
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Certain debts were paid in connection with the closing of the Crestmark Bank Line of Credit, including a $50,000 reduction to the First State Bank note, pay off of past due IRS taxes totaling $70,898, and pay off of two accrued liabilities of $51,342. Total payments to debt and accrued liabilities at Crestmark closing were $172, 241.
Net proceeds received during the six months ending June 30, 2017 on this facility were $322,303.
Funding Advance Agreements
On April 7, 2017 MG Cleaners LLC (the “Seller”) received $100,000 in return for an assignment and transfer to Capital Stack LLC of a specified percentage of the proceeds of each future sale made by seller, collectively “Future Receipts” until Seller has received the Purchased Amount of $143,000. This transaction is accounted for as a sale of accounts receivable and the outstanding balance of $92,791 is recorded as a reduction of the net balance of accounts receivable at June 30, 2017.
A summary of the activity in notes payable for the six months ended June 30, 2017 and 2016 is shown below:
Notes payable | ||||
Balance at January 1, 2016 | $ | 533,940 | ||
Note issued secured by accounts receivable | 70,700 | |||
Notes issued in connection with purchase of property and equipment | - | |||
Less: payments on notes payable | (58,743 | ) | ||
545,897 | ||||
Less - current maturities, net | (262,201 | ) | ||
Long-term notes payable, net June 30, 2016 | $ | 283,696 | ||
Balance at January 1, 2017 | $ | 509,635 | ||
Secured borrowings, net | 322,303 | |||
Notes issued in connection with purchase of property and equipment | 25 | |||
Less: payments on notes payable | (148,014 | ) | ||
683,949 | ||||
Less - current maturities, net | (447,433 | ) | ||
Long-term notes payable, net June 30, 2017 | $ | 236,516 |
NOTE 6 – MEMBERS’ EQUITY (DEFICIT)
At June 30, 2017, Stephen Christian, our President and Managing Member of MG Cleaners LLC owned 100% of its membership interests.
During the six months ended June 30, 2017 and 2016, the managing member made contributions to the Company totaling $41,784 and $20,856, respectively.
During the six months ended June 30, 2017 and 2016, the Company made distributions to the managing member totaling $128,209 and $95,307, respectively.
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NOTE 7 – COMMITMENTS AND CONTINGENCIES.
Future maturities of required payments under capital and operating leases as of December 31, 2016 are as follows:
Operating Leases | ||||
2017 | $ | 24,000 | ||
2018 | 36,000 | |||
2019 | 36,000 | |||
2020 | 19,500 | |||
2021 | - | |||
Totals | $ | 115,500 |
Litigation
From time to time, MG 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 MG are expected to have a material adverse effect on MG’s financial position, results of operations or cash flows. MG cannot predict with certainty, however, the outcome or 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.
Leases
The Company has entered into various leases for office and storage facilities for terms ranging from month to month to three years. At December 31, 2016, the Company was engaged in on month to month lease which requires a 90 day termination notice. Rent expense for the six months ended June 30, 2017 and 2016 for these leases amounted to $14,830 and $18,503, respectively.
NOTE 8 – SUBSEQUENT EVENTS
Subsequent events have been evaluated through August 28, 2017, which is the date of issuance of the financial statements.
Funding Advance Agreements
On August 10, 2017 MG Cleaners LLC (the “Seller”) received $51,150 in return for an assignment and transfer to Libertas Funding LLC of a specified percentage of the proceeds of each future sale made by seller, collectively “Future Receipts” until Seller has received the Purchased Amount of $67,100.
On August 14, 2017, our company refinanced one of its notes with a community bank for $66,348. The unsecured note bears an interest rate of 7.25% per annum, has 47 monthly payments of $1,400, with a balloon payment of $12,086 at maturity on August 1, 2021.
Leases
Effective July 15, 2017, we leased a facility in Midland, Texas for $3,000 per month for approximately 2,400 square feet of space and a shared yard with several acres of storage area. The Midland lease is for a period of 3 years and expires on July 15, 2020.
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