The following discussion and analysis of our results of operations and financial
condition should be read in conjunction with our financial statements and
related notes appearing elsewhere in this report. This discussion and analysis
contains forward looking statements that involve risks, uncertainties and
assumptions. The actual results may differ materially from those anticipated in
these forwarding looking statements as a result of certain factors, including
but not limited to, those which are not within our control.
Overview
We are a growth-oriented 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 and 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
?5J Oilfield Services LLC
?5J Specialized LLC
?5J Transportation LLC
?5J Logistics Services LLC
?5J Driveaway 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, and 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 for retail and industrial customers,
In connection with our focus to expand our transportation services business and
exit certain up-stream oil and gas (O&G) industrial-related businesses, the
financial results of the following business have been classified as discontinued
operations on our consolidated financial statements for the following
businesses:
?MG Cleaners LLC. The Company sold this business in December 2020
?Trinity Services LLC
We are headquartered in Houston, Texas with facilities in Floresville,
Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill,
South Carolina. Our web site is www.5J-Group.com and www.SMGIndustries.com.
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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 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, 2022 and 2021
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, 2022 and 2021 as "net
loss from discontinued operations".
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.
Results of Operations
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The Consolidated Balance Sheets as of December 31, 2022 and 2021 present the
assets and liabilities of MG and Trinity as discontinued operations. The
Consolidated Statements of Operations for the years end December 31, 2022 and
2021 present the results of MG and Trinity as Net loss from discontinued
operations. The Consolidated Statements of Cash Flows for the years end
December 31, 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 year ended December 31, 2022 increased to $71,021,862, an increase
of 36% from $52,113,827 for the year ended December 31, 2021. The increase in
sales in the year end 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 Logistics brokerage division, not present in the previous year
period along with the general improvement in the domestic United States economy
from COVID-19 pandemic.
During the year ended December 31, 2022, cost of sales increased to $65,285,261,
or approximately 92% of sales, compared to $52,714,418, or about 101.2% of sales
for the 2021 period. The decrease in cost of sales as a percentage of revenues
is the result of higher revenues covering more fixed costs in cost of sales
compared to the previous year. The increase in cost of sales as a total amount
is due primarily to higher direct labor costs, higher freight expense, higher
fuel costs, and higher depreciation expenses, a non-cash expense, allocated in
cost of sales compared to the previous year period 2021. Our Cost of Sales
includes non-cash depreciation expense of $5,328,366 for the year ended December
31, 2022, and $5,398,529 for the comparable period in 2021.
Selling, general and administrative (SG&A) expenses for the year ended December
31, 2022 increased to $9,079,344, or approximately 13% of revenues, compared to
$8,377,682, or 16.1% of revenues for the year ended December 31, 2021. The
increase in total amount was due primarily to higher wage expense, professional
fees and higher consulting costs from accounting and other consultants. The
non-cash share based compensation expense included in SG&A expenses was $61,043
for the year ended December 31, 2022 compared to $67,460 for the same period in
2021. Bad debt expense included in SG&A expenses for the year ended December 31,
2022 was $208,996, as compared to bad debt expense of $454,990 in 2021 resulting
from uncollectable accounts receivables from certain customers.
Gain on disposal of assets for the years ended December 31, 2022 and 2021 was
$330,499 and $43,624 and was primarily related to the disposal of 5J assets.
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Interest expense, net, increased to $9,431,153 during the year ended December
31, 2022 from $7,618,889 during the year ended December 31, 2021, resulting from
increased convertible note issuances and associated debt discount amortization.
Gain on the US SBA's PPP loan forgiveness program for the years ended December
31, 2022 and 2021 was $0 and $5,023,089, respectively. The Company recognized
other income of $228,689 related to certain insurance reimbursements received
during the year ended December 31, 2022.
The net loss from continuing operations for the year ended December 31, 2022 was
$11,750,787 as compared to a net loss of $11,484,636 for the year ended December
31, 2021. Our decrease in net loss in 2022 was primarily attributable to the
increased gross profit due to the Company's expansion of its service offerings,
partially offset by the increases in interest expense and selling, general and
administrative costs.
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 raising prices for our services as the market bears, a better
sales mix adding more higher margin service revenues such as super heavy haul,
and reducing general and administrative costs including professional fees.
Liquidity and Capital Resources
Cash Flows
Operating activities
Net cash used in operating activities was $725,405 for the year ended December
31, 2022, compared to $8,176,146 for the year ended December 31, 2021, including
$80,450 and $568,519 of cash provided by discontinued operations during the
years ended December 31, 2022 and 2021, respectively.
For the year ended December 31, 2022, net cash used in continuing operating
activities of $805,855 consisted of net loss of $11,750,787, which included
non-cash costs of depreciation and amortization of $5,238,366, gain on
extinguishment of debt of $564,814, gain on disposal of assets of $330,499,
amortization of deferred financing costs of $3,790,028, shares issued for debt
extension $643,467 and bad debt expense of $208,996. Changes in working capital
accounts included changes in accounts receivable of $691,441, other assets of
$165,520, right of use operating lease liabilities of $172,736, accrued expenses
and other labilities of $980,656, and accounts payable of $1,005,206, partially
offset by changes in prepaid expenses and other current assets of $3,767,578,
accounts payable - related party of $471,001 and deferred revenue of $128,000.
For the year ended December 31, 2021, net cash used in continuing operating
activities of $8,744,665 consisted of net loss of $11,484,636, which included
non-cash costs of depreciation and amortization of $5,398,529, gain on PPP
forgiveness loan of $5,022,102, gain on sale of assets of $43,624, amortization
of deferred financing costs of $2,208,291, loss on settlement of liabilities of
$41,397 and bad debt expense of $454,990. Changes in working capital accounts
included changes in accounts receivable of $7,237,370, other assets of $241,940
and right of use operating lease liabilities of $537,616, partially offset by
changes in accounts payable of $2,677,329, prepaid expenses and other current
assets of $3,118,119 and accrued expenses and other labilities of $1,525,563.
Investing activities
Net cash provided by investing activities was $594,152 for the year ended
December 31, 2022, compared to net cash used investing activities $132,026 for
the year ended December 31, 2021.
For the year ended December 31, 2022, net cash used in investing activities
consisted of proceeds from disposal of property and equipment of 895,564 and
cash paid for property and equipment of 301,412. For the year ended December 31,
2021, net cash used in investing activities consisted of cash paid for property
and equipment of $97,026 and cash paid for disposal of MG Cleaners, LLC of
$35,000.
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Financing activities
Net cash provided by financing activities was $248,120 for the year ended
December 31, 2022, compared to $8,445,260 for the year ended December 31, 2021,
including $80,450 and $226,932 of cash used in financing from to discontinued
operations during the years ended December 31, 2022 and 2021, respectively.
For the year ended December 31, 2022, net cash provided by financing activities
consisted of net proceeds from secured line of credit of $1,126,700, net
proceeds from notes payable of $5,229,098, partially offset by payments on notes
payable of $6,027,228.
For the year ended December 31, 2021, net cash provided by financing activities
consisted of net proceeds from secured line of credit of $5,326,060, net
proceeds from notes payable of $15,064,003 and proceeds from convertible notes
payable of $3,906,079, partially offset by payments on notes payable of
$15,553,327, payment on convertible notes payable of $50,000 and payment of
deferred finance costs of $20,623.
Our cash flows from operations are primarily funded through our financing
activities, including our accounts receivable line of credit facility, 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 stock sales to sufficiently sustain our current level of
operations for the next 12 months. At present, we believe the industry and
general domestic economic activity is still partially depressed given the
current economic environment and current commodity 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 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 debt and equity
securities and through commercial leasing and financing programs.
On January 27, 2022, the Company issued a secured promissory note for $843,844,
which includes precomputed interest of $147,818. 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 plus an additional $10,634 payment, with monthly
payments of approximately $15,275 per month beginning in June 2022 through
maturity.
On January 6, 2022, Newton Dorsett, a member of our board of directors, loaned
us $100,000 pursuant to a short term note, that along with the initial loan to
us in 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 August 3, 2022, this
note was amended to a revised maturity date of December 31, 2022. In January
2023 the note was extended to June 30, 2023.
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 loan to us in December 2021 of $150,000, totals
$250,000. This note matured on January 31, 2022 and pays a 12% per annum
interest rate. On August 3, 2022, this note was amended to a revised maturity
date of December 31, 2022. In January 2023 the note was extended to June 30,
2023.
On January 7, 2022, Mr. Madden loaned us $100,000 pursuant to short term note,
that along with the initial loan to us in 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 August 3, 2022, this note was amended to a revised maturity
date of December 31, 2022. In January 2023 the note was extended to June 30,
2023.
On February 11, 2022, Mr. Madden loaned us $95,025 pursuant to a short term note
that matured on March 31, 2022. Mr. Madden also received 142,538 shares issued
in the first quarter 2022 as an equity incentive in connection with this note.
On August 3, 2022, this note was amended to a revised maturity date of December
31, 2022. In January 2023 the note was extended to June 30, 2023.
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On February 14, 2022, Mr. Madden loaned us $250,000 pursuant to a short term
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 August 3, 2022, this note was amended to a revised maturity date of
December 31, 2022. In January 2023 the note was extended to June 30, 2023.
On February 14, 2022, James Frye, a member of our board of directors, loaned us
$134,073 pursuant to a short term note that matured on March 31, 2022. Mr. Frye
also received 201,110 shares issued in the first quarter 2022 as an equity
incentive in connection with this note. On August 3, 2022, this note was amended
to a revised maturity date of December 31, 2022. In January 2023 the note was
extended to June 30, 2023.
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. On August 3, 2022, this note was amended to a revised maturity date of
December 31, 2022. In January 2023 the note was extended to June 30, 2023.
On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Logistics
Services and 5J Specialized LLC 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 Transportation Group, other than 5J Driveaway which was
formed subsequent to the date of the loan, 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
Transportation Group 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 Funding Inc. ("Amerisource"), our senior lender, to amend the Loan
Agreement dated September 7, 2021, 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 during the
year ended December 31, 2022.
Pursuant to the terms of the Security Agreement, the 5J Transportation Group,
other than 5J Driveaway which was formed subsequent to the date of the loan,
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 Transportation Group, 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 Transportation Group 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.
On February 27, 2020, the 5J Oilfield and 5J Trucking 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 Company used a portion of the
proceeds from the Amerisource Financing to pay the cash portion of the purchase
price of the 5J Oilfield and 5J Trucking.
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 Bridge Facility
was paid off during 2020 by the Company.
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 Transportation Group 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
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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 Transportation Group 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 AR Facility originally matured on
February 27, 2023, but automatically extended for an additional 12 months per
the terms of the agreement.
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 Transportation Group 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 matured on March 31, 2023 and was
extended to June 30, 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, 2022, the Company did not issue any
convertible promissory notes. 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.
Off-balance Sheet Arrangements
As of December 31, 2022, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates, assumptions and judgments that affect the amounts reported in the
financial statements, including the notes thereto. We consider critical
accounting policies to be those that require more significant judgments and
estimates in the preparation of our financial statements. Management relies on
historical experience and other assumptions believed to be reasonable in making
its judgment and estimates. Actual results could differ materially from those
estimates.
Management believes its application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made when facts and
circumstances dictate a change.
Management believes the following are its most critical accounting policies:
Intangible Assets, and Long-Lived Assets
The fair value of the Company's reporting unit is dependent upon the Company's
estimate of future cash flows and other factors. The Company's estimates of
future cash flows include assumptions concerning future operating performance
and economic conditions and may differ from actual future cash flows. Estimated
future cash flows are adjusted by an appropriate discount rate derived from the
Company's market capitalization plus a suitable control premium at date of the
evaluation.
The financial and credit market volatility directly impacts the Company's fair
value measurement through the Company's weighted average cost of capital that
the Company uses to determine its discount rate and through the Company's stock
price that the Company uses to determine its market capitalization. Therefore,
changes in the stock price may also affect the amount of impairment recorded.
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The Company recognizes an acquired intangible asset apart from goodwill whenever
the intangible asset arises from contractual or other legal rights, or when it
can be separated or divided from the acquired entity and sold, transferred,
licensed, rented or exchanged, either individually or in combination with a
related contract, asset or liability. Such intangibles are amortized over their
useful lives. Impairment losses are recognized if the carrying amount of an
intangible asset subject to amortization is not recoverable from expected future
cash flows and its carrying amount exceeds its fair value.
The Company's long-lived assets, including intangibles, are reviewed for
impairment whenever events or changes in circumstances indicate that the
historical cost carrying value of an asset may no longer be appropriate. The
Company assesses recoverability of the asset by comparing the undiscounted
future net cash flows expected to result from the asset to its carrying value.
If the carrying value exceeds the undiscounted future net cash flows of the
asset, an impairment loss is measured and recognized. An impairment loss is
measured as the difference between the net book value and the fair value of the
long-lived asset. During the years ended December 31, 2022 and 2021, the Company
evaluated long lived assets for impairment and recorded no impairment losses.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue From
Contracts With Customers. Revenues are recognized when control of the promised
goods or services is transferred to the customer in an amount that reflects the
consideration the Company expects to be entitled to in exchange for transferring
those goods or services. Revenue is recognized based on the following five step
model:
-Identification of the contract with a customer
-Identification of the performance obligations in the contract
-Determination of the transaction price
-Allocation of the transaction price to the performance obligations in the
contract
-Recognition of revenue when, or as, the Company satisfies a performance
obligation
Service revenues are recognized when (or as) the Company satisfies a performance
obligation by transferring control of the performance obligation to a customer.
Control of a performance obligation may transfer to the customer either over
time or at a point in time depending on an evaluation of the specific facts and
circumstances for each contract, including the terms and conditions of the
contract as agreed with the customer, as well as the nature of the services to
be provided. Control transfers over time when the customer is able to direct the
use of and obtain substantially all of the benefits of our work as we perform.
This typically occurs when services have no alternative use and the Company has
a right to payment for performance completed to date, including a reasonable
profit margin. The majority of our revenues are recognized at a point in time.
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