Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
The number of shares of the registrant’s
common stock outstanding as of March 31, 2018 was 10,005,190.
Unless otherwise indicated,
the terms “SMG Industries,” “SMG,” the “Company,” “we,” “us,” and
“our” refer to SMG Industries Inc. In this Annual Report on Form 10-K, 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 Annual Report on Form10-K
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 Annual Report, and they may also be made a part of this Annual Report by reference
to other documents filed with the SEC, which is known as “incorporation by reference.”
The statements contained
in this Annual Report on Form 10-K 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-K 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.
PART I
Our Corporate History and Background
We were incorporated
under the laws of the State of Delaware on January 7, 2008. From inception through December 31, 2014, our primary business purpose
was to stockpile indium, a specialty metal that is used as a raw material in a wide variety of consumer electronics manufacturing
applications. As of December 31, 2014, we sold all of the indium from our stockpile. As a result, at such time we were no longer
in the business of purchasing and selling indium. In December 2015, our Board of Directors approved a cash distribution to our
stockholders in the amount of $1.75 per share (or approximately $3.05 million). The distribution was classified as a return of
capital for tax purposes. The aggregate cash distribution was recorded against additional paid in capital for accounting purposes.
During the third quarter of 2015, our Board of Directors approved a program to repurchase up to $650,000 worth of our shares of
common stock. In connection therewith, we repurchased 139,070 shares of our common stock in September 2015 for approximately $200,000,
or $1.40 per share. After completion of the share repurchase program and immediately prior to the Acquisition, we had 1,744,569
shares issued and outstanding.
On September 19, 2017,
we acquired one hundred percent of the issued and outstanding membership interests (“MG Membership Interests”) of
MG Cleaners LLC, a Texas limited liability company (“MG”) pursuant to which MG became our wholly-owned subsidiary
(the “Acquisition”). In connection with the Acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in
cash to the MG Members, payable with $250,000 at closing and the remaining $50,000 paid to the MG Members upon the completion
of the Company’s sale of a minimum of $500,000 of its securities in a private offering to investors.
Effective April 2,
2018, we changed our corporate name to SMG Industries Inc.
The Business of MG Cleaners LLC
General
MG Cleaners was organized
as a limited liability company in Texas in 2005. In 2010, Stephen Christian, acquired MG Cleaners from its prior owner and has
served as its Managing Member and President since. Mr. Christian was a former Rig Supervisor for Nabors Drilling (“Nabors”)
from 2004 until 2010. Nabors Industries (NYSE: NBR), the parent company of Nabors Drilling, owns and operates the nation's largest
land-based drilling rig fleet and is one of our larger customers.
We are an emerging
growth oilfield service company focused on the drilling rig operator market segment in the domestic United States pursuant to
which we offer the following products and services: (i) product sales for the oilfield industry focused on drilling rig wash,
oilfield cleaning, industrial cleaning, fleet and equipment cleaning; (ii) equipment sales for the oilfield industry including,
industrial pressure washers; (iii) parts sales for our installed base on equipment, including water guns, hoses and fittings,
and (iv) service crews for the oilfield industry related to rig wash and repairing drilling rigs on location.
Industry Overview
In February 2018,
the Domestic United States Rig Count, as measured by Baker Hughes, stood at 978, up 142% from the May 2016 lows of 404. Rig Counts
are a measurement of oilfield activity particularly relevant to us, as we sell products to drilling rig operator customers. As
a result of favorable operating economics for oil and gas companies, there is a high concentration of rigs and oilfield activity
in Texas relative to other areas in the domestic United States. In February 2018, Texas and adjacent New Mexico (Permian and Delaware
basins) had approximately 569 rigs operating, representing about 58% of the entire domestic United States rigs concentrated in
these West Texas/New Mexico basins.
MG Cleaner’s
Products and Services
Proprietary Products
Our branded products
have proprietary formulations that perform in specific applications. These products include soaps, surfactants and degreasers
which are environmentally friendly and sold primarily to drilling rig operators, exploration and production companies, and distribution
and supply companies serving this market segment.
Our branded products
have proprietary formulations that have been sold direct via our sales force and through distribution supply companies for over
ten years. Miracle Blue™, a powerful degreaser, Luma Brite™, an aluminum brightener and descaler, and Wicked Green™,
an enviro-friendly emulsifier used in oil remediation jobs that is bio-degradable, are some of the Company’s top selling
products. In total, we currently offer 14 branded and proprietary products used by industry leading drilling contractors in the
domestic United States including Nabors, UTI-Patterson, Helmrich & Payne and Cactus Drilling. MG’s products are sold
throughout Texas using direct sales employees in the East Texas market (based in Carthage, Texas) and in the West Texas market
(based in Odessa, Texas) with distributors/suppliers handling other areas.
Service Crews
MG’s service
crews consist of Company employees who perform drilling rig wash and mechanical repair services for drilling rig operator customers.
MG’s rig wash crews typically consist of four employees using company equipment that clean a drilling rig prior to its transport
to another location. Mechanic crews generate service revenues by performing onsite repairs of centrifugal pumps, mud agitators
and related equipment. MG’s mechanic service crews also operate at MG’s East and West Texas facilities for non-time
critical jobs.
In other examples,
customers prefer to outsource cleaning and repair services where our service crews become strategic to MG’s business solving
customer problems and using our products during service.
Equipment and Parts
Sales
Other customers prefer
to purchase equipment and perform their own maintenance on their equipment, using a variety of our cleaning products. Through
long-standing relationships with manufacturers, we sell equipment and related parts to our customers which strategically promote
our future product sales. We currently offer a full line of industrial and oilfield pressure washers along with compressors, heaters,
water pumps and combination units. We also sell spare parts to customers who have purchased equipment, which include pressure
washer water guns, hoses and fittings.
Rentals
Some drilling rig
operators, oil company operators and other oilfield companies rent our rig wash equipment trailer units that are comprised of
pressure washers, heating equipment, water containment units and related components. These rental revenues typically come in five
to seven day rental cycles, and MG charges a day rate for this equipment.
MG’s customers
include drilling rig operators such as Nabors, UTI-Patterson, Cactus Drilling; oil companies such as Chesapeake and Chevron; and
other oilfield service companies.
Our Strategy
Continued Development
of Texas business.
Currently, more than half of the rigs in the domestic United States are located in Texas and adjacent New
Mexico due to favorable economics in Texas’s resource basins, such as the Permian Basin and Delaware Basin, relative to
other parts of the United States. We have initiated a direct sales presence in West Texas, based out of Odessa, Texas, to complement
our existing distribution channels for that market area which will allow us to further penetrate that market. In West Texas, the
Company has enjoyed good market penetration via distribution and supply companies. We believe that high activity levels in West
Texas’s Permian and Delaware basins should allow for further growth with new direct sales. In July 2017, we hired a strategic
level employee, from Odessa, Texas, experienced with many of our customers, to support and grow our presence in that market. Currently,
the Company has a sales force in East Texas servicing the Haynesville Shale, Woodbine, Cotton Valley and other oil & gas resource
plays in the area.
Sell New Products
and Additional Services to Existing Customers.
We have over 50 customers, many of which are leading companies in their field.
We believe we can further monetize our relationships with our customers by bringing other products and services to them that we
develop or acquire when there is a demand. As an example, on February 15, 2018, we acquired a product, formulation, trademark
and brand for Rig Hands™ that aligns with our current distribution system.
Acquire Complementary
Oilfield Service Companies.
Our management team has prior experience acquiring owner/operated companies in oilfield. The Company
believes this acquisition strategy can be an attractive way to grow more quickly than organic growth alone allows. In our experience,
operating companies that want to be acquired often have complementary and many times non-overlapping customers that could have
a positive strategic impact to our future.
Maintaining High
Quality Service
. Our success and history has been built on a reputation of high-quality service. We try to ingrain this philosophy
in our Company culture and employee attitudes. The oilfield service business is demanding, and keeping a 24/7 service policy is
a priority that we intend to continue to focus on and maintain.
Leverage Access
to Public Company Markets
. We believe that the public capital markets can facilitate funding access for our long-term growth
initiatives, including making strategic acquisitions, however, there can be no assurance that we will identify acquisition targets
or if we do identify acquisition targets that we will be able to acquire them on terms acceptable to us. Additionally, there can
be no assurance that we will be able to access the public capital markets to facilitate funding for our long-term growth initiatives,
or if funding is available that it will be on terms acceptable to us.
Sales.
The
Company’s sales plan includes continuing to support its East Texas direct sales presence and establishing a direct sales
force in West Texas to complement the distribution and supply channels already present in that area. This will be led by a recently
hired strategic employee who has a significant number of customer and sales contacts. We also have meaningful sales through distributors
and supply firms that benefit from their customers’ requests for our products. Any demand for the Company’s products
outside the state of Texas are typically fulfilled through a distribution supply channel.
Manufacturing.
The Company manufacturers its products in its facility in Carthage, Texas. Raw materials are procured by the Company and the
proprietary formulas for our brands are utilized throughout the process. Mixing tanks and other process equipment are used to
make the products. The final product is then stored in large gravity-fed containers onsite or in transportation quantities such
as totes or gallons. Third party shipping and distribution companies are currently utilized for certain shipments of product to
West Texas. We may install manufacturing capabilities in our Odessa, Texas facility as activity increases in that market area.
Marketing Plan.
The Company’s marketing plan focuses around supporting its product brands such as Miracle Blue™, Luma Brite™,
and Wicked Green™, as well as supporting its direct sales force. MG participates in industry trade shows, sponsorships and
community events that allow its products to be featured. Social media, including LinkedIn, is utilized to facilitate awareness
and discussion groups focused around these product cleaning applications. The Company’s web site has been updated recently
to create higher relevance for our target market customers and promote testimonials of our products and equipment. For our service
crews, the marketing plan is to increase crew counts in West Texas market area so as to increase availability and service hours.
Market Segment
Description.
The Company views the oilfield services market in three principal segments: Drilling, Completions and Production.
MG’s position in the market is to focus on the Drilling segment. In our opinion, the Drilling market is very elastic resulting
in its segment being the first to recover on industry up-cycles.
Market Activity.
In any given unconventional well typically drilled in Texas, the completion and fracturing costs can be two to three times
the cost of drilling. Therefore, a trend has developed over recent years referred to as "fraclog”, illustrating the
number of Drilled Uncompleted Wells (DUCs). According to the United States Energy Information Administration (EIA), DUC’s
total more than 7,600 in the domestic US in January 2018. As industry economics improve, the Company believes that the Completions
market segment could become more attractive. Today, however, MG believes the Drilling market segment is where we should focus
our resources and attention. The Production market segment has been relatively steady, compared to Drilling and Completion, as
wells already online which are maintaining positive economics can support operations and continued production.
The Company currently
believes the price of oil and gas may stay at present levels for several years therefore, we believe our focus and positioning
on the drilling market segment is critical to the Company’s future profitability.
Management
.
The Company’s Chief Executive Officer, Matthew Flemming, is located in Houston, Texas. Mr. Flemming was the CEO of HII Technologies
(“HII”) when it was a small public company with approximately $300,000 in cash, no debt and plans to enter the oilfield
services business through an initial platform acquisition. HII had no revenues prior to its first acquisition in September 2012,
when it acquired AES Water Solutions for approximately $2.3 million in cash, a seller note and stock. Following this initial acquisition,
HII completed two more acquisitions as well as two additional subsidiary startups in the power and safety segments of the oilfield
services business. By December 2014, HII’s consolidated revenues had grown to $4.2 million for that month (or an annual
run rate of revenues of $50 million). Falling rig counts, industry activity and oil & gas prices created an industry down-turn
by 2015. In July 2015, HII’s senior lender declared HII in default of its senior credit facility, and as a result the lender
did not continue to release funds to HII pursuant to the terms of the credit facility. As a result, HII was unable to continue
to fund its operations or satisfy its reporting obligations with the SEC subsequent to its March 31, 2015 Form 10-Q filing. Led
by its Chief Restructuring Officer, Loretta Cross, HII filed a voluntary Chapter 11 petition with the US Bankruptcy court in Houston,
Texas in September 2015. On April 15, 2016, Mr. Flemming resigned as an officer and director of HII and HII emerged from bankruptcy
protection. On July 13, 2016, HII’s registration was revoked by the Securities and Exchange Commission (“SEC”)
pursuant to Section 12(j) of the Securities Exchange Act of 1934. The revocation of HII’s registration was the result of
proceedings instituted by the SEC, which HII accepted and consented to without admitting or denying the findings of the SEC. The
SEC’s findings included that HII filed a Chapter 11 petition with the Bankruptcy court and that HII failed to comply with
Exchange Act Section 13(a) and Rules 13a-1 and 13a-13.
Mr. Flemming has been
a CEO and CFO for more than twenty years in high growth capital intensive businesses with more than twelve years’ experience
in a public company environment. He has significant relationships in the oilfield market place that help provide access to products
and company acquisition targets.
Stephen Christian
has been the President of MG Cleaners, LLC since October 2010, when he acquired MG Cleaners’ membership interests and will
continue to have operational responsibility for MG, our wholly-owned subsidiary. Prior to MG, Stephen was employed by the largest
drilling rig operator in the United States, known as Nabors Drilling, a subsidiary of Nabors Industries (NYSE:NBR), as a Rig Manager
from 2004 to 2010. Over the six years he was employed by Nabors, Mr. Christian developed a strong reputation with Nabors’
employees and industry partners. He purchased MG Cleaners in 2010 and has operated the business as its President since its acquisition.
The Company believes Mr. Christian’s industry relationships and reputation will continue to assist its growth.
Geographic Diversification
All of our operations
are based in Texas. Most of our products and all of our service work is conducted in Texas. Our products are sold outside of Texas
through several long-standing relationships with distributors.
Competition
The markets in which
we operate are highly competitive. We provide services and sell our products in the State of Texas. Our competitors include many
large and small oilfield service companies. In addition, the business segments in which we compete are highly fragmented. We believe
that the principal competitive factors in the markets we serve are: reputation for service and technical expertise, equipment
and personnel capacity, work force competency, efficiency, safety record and price. Our branded products compete against other
cleaning products, surfactants and degreasers, some of which are branded retail and some industrial. Because of our dealer status
with certain equipment, we do not frequently compete for equipment sales on selected items. With our service crews, we compete
with the human resources that drilling rig operators and oil companies employ. These firms may have their own service personnel,
in which case we may not get awarded that service job. While we seek to be competitive in our pricing, we believe many of our
customers elect to work with us based on safety, performance and quality of our crews, equipment and services. We seek to differentiate
ourselves from our competitors by delivering the highest quality services, experienced personnel and equipment possible, coupled
with superior execution and operating efficiency in a safe working environment. Many of our competitors have greater financial
and personnel resources than we do.
Cyclical Nature
of Industry
We operate in a highly
cyclical industry. The key factor driving demand for our services is the level of drilling activity by E&P companies, which
in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Global
supply and demand for oil and the domestic supply and demand for natural gas are critical in assessing industry outlook. Demand
for oil and natural gas is cyclical and subject to large, rapid fluctuations. Producers tend to increase capital expenditures
in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield service
companies such as ours. Increased capital expenditures also ultimately lead to greater production, which historically has resulted
in increased supplies and reduced prices, which in turn tend to reduce activity levels for oilfield services. For these reasons,
the results of our operations may fluctuate from quarter to quarter and year to year. These fluctuations may distort comparisons
of results across periods.
Dependence on One
or a Few Major Customers
The Company serves
several major drilling companies and independent oil & gas companies that are active in our core areas of operations.
As of December 31,
2017, two customers comprised more than 10% of our accounts receivable balance at approximately 44% and 20%, respectively. During
the twelve-month period ended December 31, 2017, two customers represented more than 10% of our revenues at 34% and 18%, respectively,
and no other customer represented more than 10% of our revenues during this period.
As of December 31,
2016, four customers comprised more than 10% of our accounts receivable balance at approximately 30%, 19%, 11% and 11%, respectively.
Revenues from these four customers represented 23%, 12%, 7% and 6%, respectively, for the year ended December 31, 2016.
Seasonality
Weather conditions
affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural
gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results
of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis.
Raw Materials
The Company purchases
a wide variety of raw materials, parts and components that are made by other manufacturers and suppliers for our use. The Company
is not dependent on any single source of supply for those parts, supplies or materials and we believe that such parts, supplies
and materials are readily available from multiple sources. We do not foresee significant price fluctuations in our raw material
costs.
Intellectual
Property
We do not have any
patents on our current products and do not intend to file any patents on such products. We protect our trademarks and may from
time to time file for registration of those trademarks.
We currently protect
our trade secrets and in-house intellectual property through contractual arrangements, including confidentiality, non-competition
and non-disclosure agreements with employees, and will continue to use such contractual arrangements in the future to help protect
our proprietary intellectual property.
Government
Regulation
We
are not currently subject to any direct regulation by any government agency, other than regulations generally applicable to businesses.
General
business regulations include the packaging, labeling, distribution, advertising and sale of our chemical products, such as those
we sell, are subject to regulation by one or more federal agencies, principally the Federal Trade Commission, or FTC, and to a
lesser extent the Consumer Product Safety Commission.
Federal
agencies, primarily the FTC, have a variety of procedures and enforcement remedies available to them, including the following:
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initiating
investigations,
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issuing
warning letters and cease and desist orders,
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requiring
corrective labeling or advertising,
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requiring
consumer redress, such as requiring that a company offer to repurchase products, previously
sold to consumers,
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seeking
injunctive relief or product seizures,
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imposing
civil penalties, or,
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commencing
civil action and/or criminal prosecution.
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In
addition, certain state agencies have similar authority. These federal and state agencies have in the past used these remedies
in regulating participants in the industry, including the imposition by federal agencies of civil penalties. We cannot assure
you that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action
taken against us, will not result in a material adverse effect on our operations.
We
cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect
such additional regulation, when and if it occurs, would have on our business in the future. Such additional regulation could
require, however, any or all of the actions listed below, which could have a material adverse effect on our operations:
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the
reformulation of certain products to meet new standards,
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the
recall or discontinuance of certain products,
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additional
record keeping,
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expanded
documentation of the properties of certain products,
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revised,
expanded or different labeling, or
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additional
scientific substantiation.
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Property
Our
principal executive office is located at 710 N. Post Oak Road, Suite 400, Houston, Texas, where we lease approximately 700 square
feet of office space on a month to month basis at a rate of $500 per month. We also have offices located in Carthage, Texas and
Odessa, Texas. Our Carthage facility is comprised of a 2,500 square foot building and one acre of property that is leased for
$2,500 per month. The Carthage lease is on a month to month basis and is used for our operations throughout East Texas. Effective
July 15, 2017, we leased a facility in Midland, Texas for a three year period ending July 15, 2020 at a rate of $3,000 per month.
The Midland, Texas facility is comprised of approximately 2,400 square feet of space and a shared yard with several acres of storage
area used for our operations in West Texas including the Permian Basin. We terminated the Midland Texas lease effective January
2018 with mutual consent. On January 22, 2018, we entered into a two year lease for a 6,500 square foot building on approximately
1.5 acres in Odessa, Texas providing for three lease term extensions totaling six additional years. The initial rent is $6,500
per month and increases to $8,500 per month at the seventh month of the lease. After the first year anniversary, we may cancel
the lease with 30 days’ notice to our landlord. Lease extensions are at our discretion and require rent increases. The Company
is responsible for the repair, maintenance and insurance of the facility.
Currently,
we believe that our facilities are adequate for our present and future needs.
Legal
Proceedings
From
time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of our business. We
are not currently a party to any material legal proceedings.
Employees
As of December 31,
2017, we had 34 employees of whom 5 were administrative, 4 were in sales and marketing and 25 were in service or operations. In
addition, we may employ independent contractors from time to time. Our employees are not represented by a labor union, and we
believe our relations with our employees are satisfactory. Our independent contractors are either paid day rates or hourly commensurate
with the job. Employees and independent contractors are required to execute agreements with us that set forth terms of engagement
and contain customary confidentiality and non-competition provisions.
Corporate Information
Our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and beneficial ownership reports on Forms 3, 4 and
5 filed on behalf of directors and executive officers and any amendments to such reports filed pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act have been filed with the Securities and Exchange Commission
(SEC). Such reports and other information that we file with the SEC are available on our website at http://www.smg-indium.com
when such reports are filed with the SEC. Copies of this Annual Report on Form 10-K may also be obtained without charge electronically
or by paper by contacting Matthew Flemming, SMG Industries Inc., by calling (713) 821-3153.
The public may also
read and copy the materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding
companies that file electronically with the SEC. References to our website and the SEC’s website are intended to be inactive
textual references and the contents of these websites are not incorporated into this filing.
Investing in our
securities involves a high degree of risk. Before purchasing our common stock, you should carefully consider the following risk
factors as well as other information contained in this Annual Report, including our financial statements and the related notes.
The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware
of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur,
our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading
price of our securities could decline, and you may lose some or all of your investment.
Risks Related to Our Business
We depend on several significant
customers, and a loss of one or more significant customers could adversely affect our results of operations.
Our customers consist
primarily of drilling rig operators and oil and natural gas companies. During fiscal year 2017, two of our customers accounted
for approximately 52% of our total gross revenues, with one customer accounting for 34% and another accounting for 18%. No other
customers exceeded 10% of revenues during 2017. During fiscal year 2016, two of our customers accounted for approximately 35%
of our total gross revenues, with one customer accounting for 23% and another accounting for 12%. No other customers exceeded
10% of revenues during 2016. These customers do not have any ongoing commitment to purchase our services. While additional
customers have been sourced since December 31, 2016, significant customer concentration still exists. The loss of or a sustained
decrease in demand by these customers could result in a substantial loss of revenues and could have a material adverse effect
on our results of operations. In addition, should these large customers default in their obligations to pay, our results
of operations and cash flows could be adversely affected.
Our business
depends on domestic (United States) spending by the crude oil and natural gas industry which has suffered significant negative
price volatility since July 2014, and such volatility may continue; our business has been, and may in the future be, adversely
affected by industry and financial market conditions that are beyond our control.
We depend on our customers’
ability and willingness to make operating and capital expenditures to explore, develop and produce crude oil and natural gas in
the United States. Customers’ expectations for future crude oil and natural gas prices, as well as the availability of capital
for operating and capital expenditures, may cause them to curtail spending, thereby reducing demand for our services and equipment.
Major declines in oil and natural gas prices from July 2014 (when WTI prices were at approximately $100 per barrel) through 2015
resulted in substantial declines in capital spending and drilling programs across the industry in which we operate. As a result
of the declines in oil and natural gas prices, most exploration and production companies shut down or substantially reduced drilling
programs. Any significant decline in oil and natural gas prices or a significant decline in the North American rig count could
have a material adverse effect on our business.
Industry conditions
and specifically the market price for crude oil and natural gas are influenced by numerous domestic and global factors over which
the Company has no control, such as the supply of and demand for oil and natural gas, domestic and worldwide economic conditions,
weather conditions, political instability in oil and natural gas producing countries, and merger and divestiture activity among
oil and natural gas producers. The volatility of the oil and natural gas industry and the consequent impact on commodity prices
as well as exploration and production activity could adversely impact the level of drilling and activity by some of our customers.
Where declining prices lead to reduced exploration and development activities in the Company’s market areas, the reduction
in exploration and development activities also may have a negative long-term impact on the Company’s business. Continued
decline in oil and natural gas prices may result in increased pressure from our customers to make pricing concessions in the future
and may impact our borrowing arrangements with our principal bank.
There has also been
significant political pressures for the United States economy to reduce its dependence on crude oil and natural gas due to the
perceived impacts on climate change. These activities may make oil and gas investment and production less attractive.
Higher oil and gas
prices do not necessarily result in increased drilling activity because our customers’ expectation of future prices also
drives demand for drilling services. Oil and gas prices, as well as demand for the Company’s services, also depend upon
other factors that are beyond the Company’s control, including the following:
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Supply
and demand for crude oil and natural gas,
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political
pressures against crude oil and natural gas exploration and production,
|
|
·
|
cost
of exploring for, producing, and delivering oil and natural gas,
|
|
·
|
expectations
regarding future energy prices,
|
|
·
|
advancements
in exploration and development technology,
|
|
·
|
adoption
or repeal of laws regulating oil and gas production in the U.S.,
|
|
·
|
imposition
or lifting of economic sanctions against foreign companies,
|
|
·
|
rate
of discovery of new oil and natural gas reserves,
|
|
·
|
tax
policy regarding the oil and gas industry,
|
|
·
|
development
and use of alternative energy sources, and,
|
|
·
|
the
ability of oil and gas companies to generate funds or otherwise obtain external capital
for projects and production operations.
|
Ongoing
volatility and uncertainty in the domestic and global economic and political environments have caused the oilfield services industry
to experience volatility in terms of demand. While our management is generally optimistic for the continuing development of the
onshore North American oil and gas industry, there are a number of political and economic pressures negatively impacting the economics
of continuing production from some existing wells, future drilling operations, and the willingness of banks and investors to provide
capital to participants in the oil and gas industry. These cuts in spending will continue to curtail drilling programs as well
as discretionary spending on well services, and will continue to result in a reduction in the demand for the Company’s services,
the rates and equipment utilization can be charged. In addition, certain of the Company’s customers could become unable
to pay their suppliers, including the Company. Any of these conditions or events could adversely affect our operating results.
New cleaning technologies and products may render our
products and services obsolete.
As technology continues
to develop, our clients and our competitors may develop or discover new cleaning technologies that are superior to, or more cost
effective than, the cleaning products and services we provide. In the event that any such technologies are developed, and we are
unable to adapt to such new products or services, our business could be materially adversely effected.
We are dependent on third-parties to procure the chemicals
required to manufacture our products.
We do not manufacture
the chemicals that are required to manufacture our products and we rely on third-parties to supply such chemical products to us.
In the event that there is a shortage in the supply of chemicals that are required to manufacture our products and we are unable
to acquire any such chemicals from another source, our sales and results of operations will be materially adversely effected.
The loss of one or more key members
of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could
harm our business.
Our success is largely
dependent on the skills, experience and efforts of our people. We currently depend on the continued services and performance
of the key members of our management team, including Matthew Flemming, our Chief Executive Officer, and Stephen Christian, President
of MG Cleaners, LLC, our operating subsidiary. The loss of key personnel could disrupt our operations and have an adverse effect
on our ability to grow our business if we are unable to replace them.
We operate in a highly competitive
environment, which could adversely affect our sales and pricing.
We operate in a highly
competitive environment. We expect competition to intensify in the future. We compete on the basis of our brands and branding,
customer service, quality and price. There can be no assurance that we will be able to compete successfully with other companies.
Thus, revenues could be reduced due to aggressive pricing pursued by competitors. Many of our competitors are entities that
are more established, larger and have greater financial and personnel resources than we do. If we do not compete successfully,
our business and results of operations will be materially adversely affected.
The line of credit with Crestmark
Bank contains restrictive covenants which limit management’s discretion to operate MG’s business and is secured by
all of MG’s assets.
In order to obtain
the line of credit from Crestmark Bank, MG, our wholly-owned subsidiary, agreed to certain covenants that place certain restrictions
on MG, among other things, MG’s ability to incur additional indebtedness, to create liens or other encumbrances, and to
sell or otherwise dispose of MG’s assets. Any failure to comply with the covenants included in the Crestmark Bank
loan agreements could result in an event of default, which could trigger an acceleration of the related debt. If MG were
unable to repay the debt upon any such acceleration, Crestmark Bank could seek to foreclose on MG’s assets in an effort
to seek repayment under the loans. If Crestmark Bank were successful, we would be unable to conduct our business as it is
presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.
The interest rate on a significant
portion of our indebtedness varies with the market rate of interest. An increase in the prime interest rate could have a
material adverse effect on our interest expense and our results of operations.
The interest on the
line of credit and term loan from Crestmark Bank is payable monthly and is at a rate per annum equal to the prime rate plus 7.50%,
per annum (provided that at no time shall be less than 11.5%). The interest under the Crestmark Credit Facility will fluctuate
over time, and if the prime rate significantly increases, our interest expense will increase. This could have a material
adverse effect on our results of operations.
We may need additional financing to further our business
plans.
We may require additional
funds to finance our business development projects. We may not be successful in raising additional financing as and when
needed. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, our operating results and
prospects could be adversely affected.
We may not realize all of the anticipated
benefits of our acquisitions, joint ventures or divestitures, or these benefits may take longer to realize than expected.
Our business strategy
includes growth through the acquisitions of other businesses in the areas of drilling, completions or production business segments.
We may not be able to continue to identify attractive acquisition opportunities or successfully acquire those opportunities
that are identified. There is always the possibility that even if there is success in integrating our current or future
acquisitions into the existing operations, we may not derive the benefits, such as administrative or operational synergy or earnings
obtained, that were expected from such acquisitions, which may result in the commitment of capital resources without the expected
returns on the capital. The competition for acquisition opportunities may increase which in turn would increase our cost
of making further acquisitions or causing us to curb our activities of making additional acquisitions.
In pursuing our business
strategy, from time to time we evaluate targets and enter into agreements regarding possible acquisitions, divestitures and joint
ventures. To be successful, we conduct due diligence to identify valuation issues and potential loss contingencies, negotiate
transaction terms, complete transactions and manage post-closing matters such as the integration of acquired businesses. Our due
diligence reviews are subject to the completeness and accuracy of disclosures made by third parties. We may incur unanticipated
costs or expenses following a completed acquisition, including post-closing asset impairment charges, expenses associated with
eliminating duplicate facilities, litigation, and other liabilities.
The risks associated
with our future acquisitions also include the following:
|
·
|
the
business culture of the acquired business may not match well with our culture,
|
|
·
|
we
may fail to retain, motivate and integrate key management and other employees of the
acquired business,
|
|
·
|
we
may experience problems in retaining customers and integrating customer bases, and
|
|
·
|
we
may experience complexities associated with managing the combined businesses and consolidating
multiple physical locations.
|
We believe that we
have sufficient resources to integrate these acquisitions successfully, such integration involves a number of significant risks,
including management’s diversion of attention and resources. There can be no assurance as to the extent to which the
anticipated benefits of these acquisitions will be realized, if at all, or that significant time and cost beyond that anticipated
will not be required with the integration of new acquisitions to the existing business. If we are unable to accomplish the
integration and management successfully, or achieve a substantial portion of the anticipated benefits of these acquisitions within
the time frames anticipated by management and within budget, it could have a material adverse effect on our business.
Many of these factors
will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues
and diversion of management’s time and attention. They may also delay the realization of the benefits we anticipate when
we enter into a transaction. Failure to implement our acquisition strategy, including successfully integrating acquired
businesses, could have an adverse effect on our business, financial condition and results of operations.
We are vulnerable to the potential difficulties associated
with rapid growth
We believe that our
future success depends on our ability to manage the rapid growth that we expect to experience organically and through acquisitions.
Our anticipated growth will place additional demands and responsibilities on our management to maintain existing customers
and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer
support and financial control systems. The following could present difficulties:
|
·
|
Lack
of sufficient executive level personnel,
|
|
·
|
Increased
administrative burden,
|
|
·
|
Availability
of suitable acquisitions,
|
|
·
|
Additional
equipment to satisfy customer requirements, and,
|
|
·
|
The
ability to provide focused service attention to our customers.
|
If we are unable to
manage our expected future growth, our business could be materially adversely effected.
Compliance with climate change legislation or initiatives
could negatively impact our business.
The U.S. Congress
has considered legislation to mandate reductions of greenhouse gas emissions and certain states have already implemented, or may
be in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisions that
carbon dioxide can be regulated as an “air pollutant” under the Clean Air Act, which could result in future regulations
even if the U.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict
how legislation or new federal or state government mandates regarding the emission of greenhouse gases could impact our business;
however, any such future laws or regulations could require us or our customers to devote potentially material amounts of capital
or other resources in order to comply with such regulations. These expenditures could have a material adverse impact on our financial
condition, results of operations, or cash flows.
Changes in accounting guidance could
have an adverse effect on our results of operations, as reported in our financial statements.
Our consolidated financial
statements are prepared in accordance with GAAP, which is periodically revised and/or expanded. Accordingly, from time to time
we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies,
including the Financial Accounting Standards Board and the SEC. Market conditions have prompted these organizations to issue new
guidance that further interprets or seeks to revise accounting pronouncements related to various transactions as well as to issue
new guidance expanding disclosures. An assessment of proposed standards is not provided, as such proposals are subject to change
through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is
possible that future accounting guidance we are required to adopt could change the current accounting treatment that we apply
to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported
in our consolidated financial statements.
Unexpected events, including natural disasters, may increase
our cost of doing business or disrupt our operations.
The occurrence of
one or more unexpected events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods and other forms of severe
weather in the United States or in other countries in which our suppliers may be located could adversely affect our operations
and financial performance. Natural disasters, pandemic illness, equipment failures, power outages or other unexpected events could
result in physical damage to and complete or partial closure of one or more of our offices and disrupt our ability to deliver
our products and services. Existing insurance arrangements may not provide protection for all of the costs that may arise from
such events.
Failure to obtain and retain skilled technical personnel
could impede our operations.
We require skilled
personnel to operate and provide technical services and support for our business. Competition for the personnel required for our
businesses intensifies as activity increases. In periods of high utilization it may become more difficult to find and retain qualified
individuals. This could increase our costs or have other adverse effects on our operations.
Our operations are subject to inherent
risks, some of which are beyond our control. These risks may not be fully covered under our insurance policies.
Our operations are
subject to hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions,
fires and oil spills. These conditions can cause:
|
·
|
Personal
injury or loss of life,
|
|
·
|
Damage
to or destruction of property, equipment and the environment, and
|
|
·
|
Suspension
of operations by our customers.
|
The Company maintains
insurance coverage that we believe to be customary in the industry against these hazards. However, we do not have insurance against
all foreseeable risks, either because insurance is not available or because of the high premium costs. As such, not all of our
property is insured. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance
obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future
at reasonable rates. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available,
it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance
prohibitively expensive. It is likely that, in our insurance renewals, our premiums and deductibles will be higher, and certain
insurance coverage either will be unavailable or considerably more expensive than it has been in the recent past. In addition,
our insurance is subject to coverage limits. The occurrence of a significant event or adverse claim in excess of the insurance
coverage that we maintain or that is not covered by insurance could have a material adverse effect on our financial condition
and results of operations.
Risks Related to Our Securities
There is a limited trading market for our shares. You
may not be able to sell your shares if you need money.
Our common stock is
traded on the OTC Pink Market, an inter-dealer automated quotation system for equity securities. During the thirty days
preceding filing of this report, the average daily trading volume of our common stock was approximately 1,000 shares traded per
day, on average, and currently is thinly traded. As of March 31, 2018, we had 65 record holders of our common
stock (not including an indeterminate number of stockholders whose shares are held by brokers in “street name”). There
has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely. We consider our
common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the
common stock. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid
market and limited public float for our common stock.
We are subject to the penny stock rules and these rules
may adversely affect trading in our common stock.
Our common stock is
a “low-priced” security under rules promulgated under the Securities Exchange Act of 1934. In accordance with
these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document
which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination
approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience
and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases
the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases
transaction costs for sales and purchases of our common stock as compared to other securities.
Transfers of our securities may
be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual
state laws. These restrictions may make it difficult or impossible to sell shares in those states.
Transfers of our common
stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions,
commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not
be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue
sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant
state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities.
These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for
our securities to be a limited one.
Our Officers, Directors and significant
shareholders collectively own a substantial portion of our outstanding common stock, and as long as they do, they may be able
to control the outcome of stockholder voting.
Our Officers, Directors
and significant shareholders are collectively the beneficial owners of approximately 56.7% of the outstanding shares of our common
stock as of the date of this report. As long as our Officers, Directors and significant shareholders collectively own a
significant percentage of our common stock, our other shareholders may generally be unable to affect or change the management
or the direction of our company without the support of our Officers, Directors and significant shareholders. As a result,
some investors may be unwilling to purchase our common stock. If the demand for our common stock is reduced because our
Officers, Directors and significant shareholders have significant influence over our company, the price of our common stock could
be materially depressed. The Officers, Directors and significant shareholders will be able to exert significant influence
over the outcome of all corporate actions requiring stockholder approval, including the election of Directors, amendments to our
certificate of incorporation and approval of significant corporate transactions.
We have the ability to issue additional
shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment
to be diluted.
Our Certificate of
Incorporation authorizes the Board of Directors to issue up to 25,000,000 shares of common stock and up to 1,000,000 shares of
preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options
to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any
additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of
diluting your investment.
By issuing preferred stock, we may be able to delay,
defer or prevent a change of control.
Our Certificate of
Incorporation permits us to issue, without approval from our shareholders, a total of 1,000,000 shares of preferred stock. Our
Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares
of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible
that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued,
may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our
common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights
of the holders of our common stock.
Our stock price is volatile.
The trading price
of our common stock has been and continues to be subject to fluctuations. The stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other
companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors. Significant
volatility in the market price of our common stock may arise due to factors such as:
|
·
|
our
developing business,
|
|
·
|
relatively
low price per share,
|
|
·
|
relatively
low public float,
|
|
·
|
variations
in quarterly operating results,
|
|
·
|
general
trends in the industries in which we do business,
|
|
·
|
the
number of holders of our common stock, and,
|
|
·
|
the
interest of securities dealers in maintaining a market for our common stock.
|
As long as there is
only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular
time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause
a severe decline in the price of our common stock.
There are limitations in connection with the availability
of quotes and order information on the OTC Markets.
Trades and quotations
on the OTC Markets involve a manual process and the market information for such securities cannot be guaranteed. In addition,
quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and
intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly
different price. Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.
There are delays in order communication on the OTC Markets.
Electronic processing
of orders is not available for securities traded on the OTC Marketplace and high order volume and communication risks may prevent
or delay the execution of one's OTC Marketplace trading orders. This lack of automated order processing may affect the timeliness
of order execution reporting and the availability of firm quotes for shares of our common stock. Heavy market volume may
lead to a delay in the processing of OTC Marketplace security orders for shares of our common stock, due to the manual nature
of the market. Consequently, one may not able to sell shares of our common stock at the optimum trading prices.
There is a risk of market fraud on the OTC Marketplace.
OTC Marketplace securities
are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTC
Pink Market reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no
exchange requirements are imposed. Dealers may dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the
equally sudden collapse of the market price for shares of our common stock.
There is a limitation in connection with the editing
and canceling of orders on the OTC Markets.
Orders for OTC Pink
Market securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be
submitted to, received and processed by the OTC Markets. Due to the manual order processing involved in handling OTC Markets
trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one's order. Consequently, one
may not be able to sell its shares of our common stock at the optimum trading prices.
Increased dealer compensation could adversely affect
our stock price.
The dealer's spread
(the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our
Common Stock on the OTC Markets if the stock must be sold immediately. Further, purchasers of shares of our Common Stock
may incur an immediate "paper" loss due to the price spread. Moreover, dealers trading on the OTC Markets may
not have a bid price for shares of our Common Stock on the OTC Markets. Due to the foregoing, demand for shares of our Common
Stock on the OTC Markets may be decreased or eliminated.
|
Item
1B.
|
Unresolved
Staff Comments
|
None.
Our
principal executive office is located at 710 N. Post Oak Road, Suite 400, Houston, Texas, where we lease approximately 700 square
feet of office space on a month to month basis at a rate of $500 per month. We also have offices located in Carthage, Texas and
Odessa, Texas. Our Carthage facility is comprised of a 2,500 square foot building and one acre of property that is leased for
$2,500 per month. The Carthage lease is on a month to month basis and is used for our operations throughout East Texas. Effective
July 15, 2017, we leased a facility in Midland, Texas for a three year period ending July 15, 2020 at a rate of $3,000 per month.
The Midland, Texas facility is comprised of approximately 2,400 square feet of space and a shared yard with several acres of storage
area used for our operations in West Texas including the Permian Basin. We terminated the Midland, Texas lease effective January
2018 with mutual consent. On January 22, 2018, we entered into a two year lease for a 6,500 square foot building on approximately
1.5 acres in Odessa, Texas providing for three lease term extensions totaling six additional years. The initial rent is $6,500
per month and increases to $8,500 per month at the seventh month of the lease. After the first year anniversary, we may cancel
the lease with 30 days’ notice to the landlord. Lease extensions are at our discretion and require rent increases. The Company
is responsible for the repair, maintenance and insurance of the facility.
Currently, we believe
that our facilities are adequate for our present and future needs.
|
Item
3.
|
Legal
Proceedings
|
There are no legal proceedings currently pending
or, to our knowledge, threatened against us.
|
Item
4.
|
Mine
Safety Disclosures
|
Not applicable.
PART III
|
Item
10.
|
Directors,
Executive Officers, and Corporate Governance
|
The following table
sets forth the names of our Executive Officers and Directors as of the date of this Annual Report. Directors hold office for a
period of one year from their election at the annual meeting of stockholders or until their successors are duly elected and qualified.
Officers are elected by, and serve at the discretion of, the Board of Directors.
Name
|
|
Age
|
|
Position
|
Matthew C. Flemming
|
|
49
|
|
Chief Executive Officer, Interim Chief Financial Officer and Chairman
|
John P. Boylan
|
|
51
|
|
Director
|
Steven E. Paulson
|
|
54
|
|
Director
|
Michael A. Gilbert II
|
|
43
|
|
Director
|
Mr. Flemming
has
served as our Chief Executive Officer and Chairman of the Board of Directors since the completion of our acquisition of MG on
September 19, 2017, and since March 19, 2018 has served as our interim Chief Financial Officer. Prior thereto, Mr. Flemming was
the Chief Executive Officer of MG Cleaners since June 2017. Previous to that, Mr. Flemming was a consultant for a financial restructuring
firm and a financial advisor to a private closely held oilfield services company during 2016 and early 2017. From June 2011 to
March 2016, Mr. Flemming was the Chief Executive Officer, Treasurer, Secretary, and Chairman of the Board of HII Technologies
Inc. HII Technologies was a Houston, Texas based oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia
focused on commercializing technologies and providing services in frac water management, safety services and portable power used
by exploration and production companies in the United States. During his tenure at HII, the Company acquired three frac water
management companies and started up two other operating subsidiaries driving monthly revenues from nil in August 2012 to $4.2
million by its peak in December 2014. In 2015, HII experienced significantly reduced customer activity and oil & gas pricing
levels creating an industry down-turn pressuring its covenants with its debt with its senior lenders. In July 2015, HII’s
senior lender declared HII in default of its senior credit facility and as a result the lender did not continue to release funds
pursuant to the terms of the credit facility. As a result, HII was unable to continue to fund its operations or satisfy its reporting
obligations with the SEC subsequent to its March 31, 2015 Form 10-Q filing. On September 18, 2015, HII Technologies filed voluntary
petitions for reorganization under Chapter 11 of Title 111 of the U.S. Code in the United States Bankruptcy Court for the Southern
District of Texas Victorian Division. On April 15, 2016, Mr. Flemming resigned as an officer and director of HII and the bankruptcy
court entered an order confirming HII Technologies’ Plan of Reorganization. This plan became effective on May 20, 2016.
On July 13, 2016, HII’s registration was revoked by the Securities and Exchange Commission (“SEC”) pursuant
to Section 12(j) of the Securities Exchange Act of 1934. The revocation of HII’s registration was the result of proceedings
instituted by the SEC, which HII accepted and consented to without admitting or denying the findings of the SEC. The SEC’s
findings included that HII filed a Chapter 11 petition with the Bankruptcy court and that HII failed to comply with Exchange Act
Section 13(a) and Rules 13a-1 and 13a-13.
Prior thereto, from
2009 to 2011, Mr. Flemming was Chief Financial Officer of Hemiwedge Industries Inc. a proprietary valve technology company with
oilfield applications that was sold in 2011. From 2005 to 2009, Mr. Flemming was Chief Financial Officer of Shumate Industries,
Inc., an oilfield manufacturing company and successor of Excalibur. Previous to that, from 2001 to 2005, Mr. Flemming was Chief
Financial Officer of Excalibur Industries, Inc. an industrial and energy related manufacturer and fabrication company. From June
1999 to March 2001, he served as Chief Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held technology
company. From January 1994 to May 1999, Mr. Flemming served as Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately
held national specialty products company that he founded. Mr. Flemming received a Bachelor of Arts in Finance from
the University of Houston.
Mr. Boylan
has served as a Director of the Company since the completion of our acquisition of MG. Mr. Boylan has served as the Chairman,
Chief Executive Officer and President of Houston American Energy Corp. (NYSE MKT: HUSA) since April 2015 and served as a director
of that company since 2006. Since 2008, Mr. Boylan has owned and operated EJC Ventures, LP, a financial and management consulting
firm providing executive and financial management, asset management, corporate finance, risk management, complex financial reporting,
crisis management, turnaround services and pre- and post-bankruptcy management services to the oil and gas industry. Mr. Boylan
has served as interim chief executive officer, interim chief financial officer and in other interim management roles with private
and publicly traded oil and gas companies, including operators in pre- and post-bankruptcy. Mr. Boylan holds a BBA with a major
in Accounting from the University of Texas and an MBA with majors in Finance, Economics and International Business from New York
University. Mr. Boylan is a licensed CPA in the State of Texas.
Mr.
Paulson
has served as a Director of the Company since the completion of our acquisition of MG. Mr. Paulson has been a
director of TOR Minerals International Inc. (“TOR Minerals”) since 2008. TOR Minerals is a global producer of high
performance, specialty mineral products focused on product innovation and technical support. Mr. Paulson has served as the President
and Chief Executive Officer of Contech Control Services, an electrical and automation engineering/design services and construction
firm since December 2014. Previously, Mr. Paulson served as President and Director of The Automation Group, or TAG, a national
engineering firm focused in process automation, from 1996 until its sale to Emerson Electric in December 2007. Following the sale,
he continued to serve as a consultant to Emerson and TAG until November 2012. Mr. Paulson received his Bachelors of Science in
Electrical Engineering from Texas A&M University.
Mr. Gilbert
has served as a Director of the Company since the completion of our acquisition of MG. Mr. Gilbert is the co-founder and
has been the Managing Partner of Sable Power and Gas LLC (“Sable”), an energy management services and advisory company
since 2008. Prior to co-founding Sable, Mr. Gilbert was Senior Director of Gexa Energy,
a retail
electricity provider for residential and commercial customers
from 2006 to 2008. From 2001 to 2006, Mr. Gilbert served
several roles in energy trading and asset management at Citibank, Citigroup Energy and Reliant Energy. Mr. Gilbert’s experience
includes energy management strategy, energy trading, risk management, data management, wholesale origination and structuring power
and gas contracts for firm clients. Mr. Gilbert holds a Bachelor of Science degree from Texas A&M University.
Director Independence
and Qualifications
The Board of Directors
has determined that each of Messrs. Boylan, Paulson and Gilbert qualifies as an “independent director.” Because our
common stock is not currently listed on a national securities exchange, we have used the definition of “independence”
of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director”
is a person other than an officer or employee of the Company or any other individual having a relationship with the Company that,
in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director. The NASDAQ listing rules provide that a director cannot be independent if:
|
·
|
the
Director is, or at any time during the past three years was, an employee of the Company,
|
|
·
|
the
Director or a family member of the Director accepted any compensation from the Company
in excess of $120,000 during any period of 12 consecutive months within the three years
preceding the independence determination (subject to certain exclusions, including,
among other things, compensation for board or board committee service),
|
|
·
|
a
family member of the Director is, or at any time during the past three years was, an
Executive Officer of the Company,
|
|
·
|
the
director or a family member of the Director is a partner in, controlling stockholder
of, or an Executive Officer of an entity to which the Company made, or from which the
Company received, payments in the current or any of the past three fiscal years that
exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000,
whichever is greater (subject to certain exclusions),
|
|
·
|
the
Director or a family member of the director is employed as an executive officer of an
entity where, at any time during the past three years, any of the executive officers
of the Company served on the compensation committee of such other entity, or,
|
|
·
|
the
Director or a family member of the director is a current partner of the Company’s
outside auditor, or at any time during the past three years was a partner or employee
of the Company’s outside auditor, and who worked on the Company’s audit.
|
The
Board believes that the qualifications of the Directors, as set forth in their biographies which are listed above and briefly
summarized in this section, gives them the qualifications and skills to serve as a Director of our Company. All of our directors
have strong business backgrounds. The Board also believes that each of the Directors has other key attributes that are important
to an effective Board: integrity and demonstrated high ethical standards; sound judgment; analytical skills; the ability to engage
management and each other in a constructive and collaborative fashion and the commitment to devote significant time and energy
to service on the Board and its Committees.
Involvement in Certain Legal Proceedings
Except
as set forth below, none of our directors or executive officers has, during the past ten years:
|
·
|
been
convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding
traffic violations and other minor offences),
|
|
·
|
been
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated,
of any court of competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business, securities,
futures, commodities or banking activities, or,
|
|
·
|
been
found by a court of competent jurisdiction (in a civil action), the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed, suspended,
or vacated, or,
|
|
·
|
has
had any bankruptcy petition filed by or against any business of which he was a general
partner or executive officer, either at the time of the bankruptcy or within two years
prior to that time.
|
On September 18, 2015,
HII Technologies, Inc., and each of its wholly-owned subsidiaries, Apache Energy Services, LLC, Aqua Handling of Texas, LLC, Hamilton
Investment Group, Inc. and Sage Power Solutions, Inc. (collectively, the “Debtors’) filed voluntary petitions for
reorganization under Chapter 11 of Title 111 of the U.S. Code in the United States Bankruptcy Court for the Southern District
of Texas Victorian Division. On April 15, 2016, the bankruptcy court entered an order confirming the Debtors’ Plan of Reorganization
and the plan became effective on May 20, 2016. Mr. Flemming, who is currently an officer and member of our Board of Directors,
was an officer and director of each of the Debtors during those periods.
Family Relationships
There are no family
relationships among the individuals comprising our Board of Directors, management and other key personnel.
Board Composition
Our certificate of
incorporation, as amended, and bylaws provide that the authorized number of Directors may be changed only by resolution of the
Board. We currently have four Directors with each Director serving a one-year term which will expire at our next annual meeting
of stockholders. At each annual meeting of stockholders, the successors to the current Directors will be elected to serve until
the next annual meeting following the election.
Director Independence
Our Board has reviewed
the materiality of any relationship that each of our Directors has with us, either directly or indirectly. Based on this review,
the Board has determined that Messrs. Boylan, Gilbert and Paulson are “independent directors” under the NASDAQ independence
standards.
Board Committees
Our Board currently
has three standing committees: Audit Committee, Nominating and Governance Committee, and a Compensation Committee, each of which
is described below. All standing committees operate under charters that have been approved by the Board. Copies of the charters
of the Audit Committee, Compensation Committee and the Nominating and Governance Committee can be found on our Internet site
www.smg-indium.com
.
Audit Committee.
Our Audit Committee is composed of Mr. Boylan, Mr. Gilbert and Mr. Paulson. All members of our Audit Committee are independent
as defined in the NASDAQ rules. In addition, the Board of Directors has determined that Mr. Boylan satisfies the SEC’s criteria
for an “audit committee financial expert.” Our Audit Committee oversees our corporate accounting, financial reporting
practices and the annual audit and quarterly reviews of the financial statements. For this purpose the Audit Committee has a charter
(which is reviewed periodically) and performs several functions.
The Audit Committee’s
primary functions are:
|
·
|
assist
the Board in monitoring the integrity of our financial statements,
|
|
·
|
appoint
and retain the independent registered public accounting firm to conduct the annual audit
and quarterly reviews of our financial statements and review the firm’s independence,
|
|
·
|
review
the proposed scope and results of the audit and discuss required communications in connection
with the audit,
|
|
·
|
review
and pre-approve the independent registered public accounting firm’s audit and non-audit
services rendered,
|
|
·
|
review
accounting and financial controls with the independent registered public accounting firm
and our financial and accounting staff,
|
|
·
|
meet
regularly with the independent registered public accounting firm without management present,
|
|
·
|
recognize
and prevent prohibited non-audit services,
|
|
·
|
establish
procedures for complaints received by us regarding accounting matters,
|
|
·
|
review,
pass on the fairness of, and approve “related-party transactions” as required
by and in conformance with the rules and regulations of NASDAQ or the SEC,
|
|
·
|
establish
procedures for the identification of management of potential conflicts of interest, and
review and approve any transactions where such potential conflicts have been identified,
and,
|
|
·
|
prepare
the report of the audit committee that SEC rules require to be included in our annual
meeting proxy statement.
|
Compensation Committee.
Our Compensation Committee is composed of Mr. Boylan, Mr. Gilbert and Mr. Paulson. The Compensation Committee reviews
its charter periodically. Our Compensation Committee’s primary functions are:
|
·
|
review
and recommend the compensation arrangements for management, including the compensation
for our Chief Executive Officer,
|
|
·
|
establish
and review general compensation policies with the objective to attract and retain superior
talent, to reward individual performance and to achieve our financial goals,
|
|
·
|
approve
and oversee reimbursement policies for Directors, Executive Officers and key employees,
|
|
·
|
administer
our stock incentive plan,
|
|
·
|
review
and discuss the compensation discussion and analysis prepared by management to be included
in our annual report, proxy statement or any other applicable filings as required by
the SEC, and,
|
|
·
|
prepare
the report of the compensation committee that SEC rules require to be included in our
annual meeting proxy statement.
|
Decisions regarding
executive compensation are ultimately determined by the Board upon recommendations of the Compensation Committee, which reviews
a number of factors in its decisions, including market information about the compensation of executive officers at similar-sized
companies within our industry and geographic region, and recommendations from our Chief Executive Officer. The Compensation Committee
may consult external compensation consultants to assist with the recommendation of executive compensation. The Compensation Committee
did not utilize the services of an external compensation consultant in 2017.
Non-executive director
compensation is determined by the entire Board after review and approval by the Compensation Committee.
Nominating and
Governance Committee.
Our Nominating and Governance Committee is composed of Mr. Boylan, Mr. Gilbert and Mr. Paulson.
The Nominating and Governance Committee has a charter, which is reviewed periodically.
Our Nominating and
Governance Committee’s primary functions are:
|
·
|
identify
the appropriate size, functioning and needs of and nominate members of the Board,
|
|
·
|
develop
and recommend to the Board of Directors a set of corporate governance principles applicable
to our company and review at least annually our code of conduct and ethics,
|
|
·
|
review
and maintain oversight of matters relating to the independence of our board and committee
member, in light of the independence standards of the Sarbanes-Oxley Act of 2002 and
the rules of the NASDAQ Stock Market, and,
|
|
·
|
Oversee
the evaluation of the Board and management.
|
The Nominating and
Governance Committee recommends to the Board candidates for nomination to the Board. When considering individuals to recommend
for nomination as Directors, our Nominating and Governance Committee seeks persons who possess the following characteristics:
integrity, education, commitment to the Board, business judgment, relevant business experience, diversity, reputation, and high-performance
standards. While the Board values a diversity of viewpoints and backgrounds, it does not have a formal policy regarding the consideration
of diversity in identifying director nominees. The Nominating and Governance Committee may engage the services of third party
search firms to assist in identifying and assessing the qualifications of Director candidates.
The Nominating and
Governance Committee will consider recommendations for Director candidates from stockholders, provided that the stockholder submits
the Director nominee and reasonable supporting material concerning the nominee by the due date for a stockholder proposal to be
included in the Company’s Proxy Statement for the applicable annual meeting as set forth in Section 2.14 of the Company’s
Bylaws and the rules of the SEC then in effect.
The Nominating and
Governance Committee will consider properly and timely submitted Director candidates recommended by stockholders of the Company.
Stockholders who wish to suggest qualified candidates for election to the Board should write to 710 N. Post Oak Road, Suite 400,
Houston, Texas 77024 Attn: Matthew Flemming. These recommendations should include detailed biographical information concerning
the nominee, his or her qualifications to be a member of the Board and a description of any relationship the nominee has to other
stockholders of the Company. A written statement from the candidate consenting to be named as a candidate and, if nominated and
elected, to serve as a Director should accompany any such recommendation.
Board Leadership Structure and Role
in Risk Oversight
Our Board evaluates
its leadership structure and role in risk oversight on an ongoing basis. Currently, Matthew Flemming serves as Chairman of the
Board, President and Chief Executive Officer. Our Board determines what leadership structure it deems appropriate based on factors
such as the experience of the applicable individuals, the current business environment of the Company and other relevant factors.
After considering these factors, our Board has determined that the role of Chairman of the Board, Chief Executive Officer and
President, is an appropriate Board leadership structure for our company at this time.
The Board is also
responsible for oversight of our risk management practices, while management is responsible for the day-to-day risk management
processes. This division of responsibilities is the most effective approach for addressing the risks facing the Company, and the
Company’s Board leadership structure supports this approach. Through our President, and other members of management, the
Board receives periodic reports regarding the risks facing the Company. In addition, the Audit Committee assists the Board in
its oversight role by receiving periodic reports regarding our risk and control environment.
Corporate Code of Conduct and Ethics
We have adopted a
corporate Code of Conduct and Ethics which is reviewed annually. The text of our Code of Conduct and Ethics, which applies to
our officers and each member of our Board, is posted in the “Corporate Governance” section of our website,
www.smg-indium.com
.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendments to, or waiver from, a provision
of our Code of Conduct and Ethics by posting such information on our website,
www.smg-indium.com
. A copy of our Code of
Conduct and Ethics is also available in print; free of charge, upon written request to 710 N. Post Oak Road, Suite 400, Houston,
Texas 77024, Attn: Matthew Flemming.
Executive
Compensation
On October 1, 2017,
we entered into an employment agreement with Mr. Flemming, our Chief Executive Officer and interim Chief Financial Officer. Pursuant
to the terms of the agreement, Mr. Flemming is paid an annual salary of $180,000 and receives health care insurance and other
customary benefits. The initial term of the agreement is for a period of three years. In addition to Mr. Flemming’s base
salary, Mr. Flemming is entitled to bonuses at the discretion of the Compensation Committee of the Board of Directors.
On September 19, 2017,
we entered into a consulting agreement with Ms. Rhodes to act as our Chief Financial Officer, which she subsequently resigned
from effective March 19, 2018. Pursuant to the terms of the agreement, Ms. Rhodes was paid a monthly consulting fee of $4,500.
On January 15, 2018, we terminated the previous agreement and entered into a new consulting agreement. Pursuant to the terms of
the agreement, Ms. Rhodes is paid a monthly consulting fee of $11,700. The initial term of the agreement was set to expire on
March 31, 2018. Ms. Rhodes resigned as Chief Financial Officer on March 19, 2018.
Certain Relationships
and Related Transactions and Director Independence
The following is a
description of the transactions we have engaged in since January 1, 2017, with our Directors and Officers and beneficial owners
of more than five percent of our voting securities and their affiliates:
In March 2015, the
Company’s Chief Executive Officer and Chief Operating Officer resigned and Ailon Grushkin was named Chief Executive Officer,
and subsequently resigned from such position on September 19, 2017. In March 2015, we also entered into the Consulting Agreement
with Nano-Cap Advisors LLC (“Nano”) (2015 Nano Agreement). Mr. Grushkin is the only member of Nano. Pursuant to the
terms of the 2015 Nano Agreement, Nano provided us with services normally provided by a Chief Executive Officer, as determined
and directed by us, and provided us with office facilities. We agreed to pay Nano $90,000 during the year ended December 31, 2016
for such services. The term of the 2015 Nano Agreement continued until December 31, 2015. In January 2016, we entered into an
agreement with Nano (the 2016 Nano Agreement), pursuant to which Ailon Grushkin, our sole officer at such time, would provide
us with services normally provided by a Chief Executive Officer, as determined and directed by us, and provide us with office
facilities, for an annual fee of $70,000. In March 2017, we agreed to pay Nano $35,000 under the terms of the 2016 Nano Agreement,
as amended in March 2017.
In January 2016, we
entered into a consulting agreement with Brack Advisors LLC (Brack), a company owned by Richard A Biele, one of our former Directors
(Brack Agreement) that provided for the payment of $50,000 in 2016 to assist us in identifying, evaluating and negotiating strategic
transactions including, but not limited to, the acquisition of a new line of business and or a reverse merger. We agreed to pay
Brack $25,000 in 2017 under the Brack agreement, as amended in March 2017.
Simultaneously with
the completion of the acquisition of MG Cleaners LLC, EJC Ventures LP entered into a purchase agreement to acquire 125,000 shares
of our common stock at a price of $0.20 per share pursuant to the Company’s offering of its securities. Mr. John P. Boylan,
one of our directors, is the control person of EJC Ventures LP.
The Board of Directors
has adopted a Related Party Transaction Policy for the review of related person transactions. Under these policies and procedures,
the audit committee reviews related person transactions in which we are or will be a participant to determine if they are fair
and beneficial to the Company. Financial transactions, arrangements, relationships or any series of similar transactions, arrangements
or relationships in which a related person has or will have a material interest and that exceeds the lesser of: (i) $120,000,
and (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, in
the aggregate per year are subject to the audit committee’s review. Any member of the Audit Committee who is a related person
with respect to a transaction under review may not participate in the deliberation or vote requesting approval or ratification
of the transaction. Transactions that are subject to the policy include any transaction, arrangement or relationship (including
indebtedness or guarantees of indebtedness) in which the Company is a participant with a related person. The related person may
have a direct or indirect material interest in the transaction. It is Company policy that the audit committee shall approve any
related party transaction before the commencement of the transaction. However, if the transaction is not identified before commencement,
it must still be presented to the audit committee for their review and ratification. For more information regarding related party
transactions, see the section entitled “Certain Relationships and Related Transactions” below.
Director Independence
Our Board of Directors
has determined that Messrs. Boylan, Paulson and Gilbert are “independent” as defined under the standards set forth
in Rule 5605 of the NASDAQ Stock Market Rules. In making this determination, the Board of Directors considered all
transactions set forth under “Certain Relationships and Related Transactions.”
Legal Proceedings
To the best of our
knowledge, none of our Directors or Executive Officers has been convicted in a criminal proceeding, excluding traffic violations
or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted
in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed
without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,”
none of our Directors, Director nominees, or Executive Officers has been involved in any transactions with us or any of our Directors,
Executive Officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the
Commission.
|
Item
11
.
|
Executive
Compensation
|
Summary Compensation Table
The following table
shows the total compensation earned during the fiscal years ended December 31, 2017 and 2016 to (1) our Chief Executive Officer,
and (2) our other named executive officers during the fiscal years ended December 31, 2017 and 2016 (collectively, the “named
executive officers”):
Name and principal
position
|
|
Year
|
|
|
Salary
($)
(1) (2)(3)
|
|
|
Bonus
($)
|
|
|
Stock
awards($)
(2)(3)
|
|
|
Option
awards($)
(3)
|
|
|
Non-equity
incentive
plan
compensation
($)
|
|
|
Non-qualified
deferred
compensation
earnings ($)
|
|
|
All other
compensation
($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew Flemming
|
|
|
2017
|
|
|
|
116,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
116,385
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meggen Rhodes
|
|
|
2017
|
|
|
|
26,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,340
|
|
|
|
42,715
|
|
Former Chief Financial Officer
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ailon Z. Grushkin
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
|
Former Chief Executive Officer
(2)
|
|
|
2016
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70,000
|
|
|
|
74,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary E. Paetzold
|
|
|
2017
|
|
|
|
45,000
|
|
|
|
-
|
|
|
|
55,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Former Chief Financial
|
|
|
2016
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,900
|
|
Officer
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Ms. Rhodes resigned
as the Chief Financial Officer of the Company on March 19, 2018.
|
|
(2)
|
Mr. Grushkin resigned
as an officer and director of the Company on September 19, 2017. In 2017 and 2016, management
services were provided under an agreement with Nano-Cap Advisors LLC where Ailon Z. Grushkin
is the sole member.
|
|
(3)
|
Ms. Paetzold resigned
as an officer of the Company on September 19, 2017. During 2017 (through September 19,
2017) and 2016, the Company had an arrangement with Ms. Paetzold that provided for cash
compensation of $60,000 per year.
|
|
(3)
|
Share awards are
valued at the fair value at the grant date. Stock options are valued at a fair value
in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718.
All options vest at the date of grant and are exercisable at the market value at the
date of grant. For information regarding assumptions underlying the determination of
grant date fair value of share and option awards in accordance with FASB ASC Topic 718,
see note 2 of notes to financial statements included herein.
|
All compensation awarded
to directors and executive officers are deliberated among, and approved by, the Compensation Committee and the Board.
Director Compensation
Director Compensation Table
The following table
shows the compensation paid to our non-executive, independent directors for their Board service during the year ended December
31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
or
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
Deferred
|
|
|
All Other
|
|
|
|
|
|
|
Cash ($)
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
|
|
|
(1)
|
|
|
($)
(2)
|
|
|
($)
(2)
|
|
|
($)
|
|
|
Earnings ($)
|
|
|
($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Biele
|
|
|
-
|
|
|
|
55,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,000
|
|
|
(1)
|
For
further information, see "Cash Compensation of Directors” below.
|
|
(2)
|
On
September 19, 2017, Mr. Biele was granted 100,000 shares of our common stock pursuant
to our 2008 Long-Term Incentive Compensation Plan, as amended. See below under “Equity
Compensation to Directors”
|
Cash Compensation of Directors
Members of our Board
of Directors do not currently receive cash compensation for their services, however, the Board may in the future determine to
compensate it members through the payment of cash compensation. We reimburse our non-employee directors for out-of-pocket expenses
for attending such meetings.
Equity Compensation of Directors
Our directors are eligible to participate
in our 2008 Long-Term Incentive Compensation Plan, as amended, and our 2018 Stock Option Plan. In 2017, we granted an aggregate
of 100,000 fully-vested shares of our common stock to one of our directors pursuant to our 2008 Long-Term Incentive Compensation
Plan, as amended.
Outstanding Equity Awards at 2016 Year
End
The table below presents
outstanding unexercised options, unvested stock and equity incentive plan awards held by each of our executive officers as of
December 31, 2017:
|
|
Option awards
|
|
|
|
|
Stock awards
|
|
Name
|
|
Number of
securities
underlying
unexercised
options
exercisable
(#)
|
|
|
Number of
securities
underlying
unexercised
options
unexercisable
(#)
|
|
|
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
|
|
Option
exercise
price
($)
|
|
|
Option
expiration date
|
|
Number
of
shares
or units
of
stock
that
have
not
vested
(#)
|
|
|
Market
value
of
shares
or
units of
stock
that
have
not
vested
($)
|
|
|
Equity
incentive
plan
awards;
Number
of
unearned
shares,
units or
other
rights
that
have not
vested
(#)
|
|
|
Equity
incentive
plan
awards:
Market
or
payout
value of
unearned
shares,
units
or other
rights
that
have not
vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ailon
Grushkin
(1)
|
|
|
150,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
.24
|
|
|
5/11/21
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary Paetzold
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.45
|
|
|
1/01/18
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.58
|
|
|
3/31/18
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.85
|
|
|
6/30/18
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.29
|
|
|
9/30/18
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.78
|
|
|
1/01/19
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.18
|
|
|
3/31/19
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.13
|
|
|
6/30/19
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.08
|
|
|
9/30/19
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.89
|
|
|
1/01/20
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.00
|
|
|
3/31/20
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.80
|
|
|
6/30/20
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.81
|
|
|
9/30/20
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
.24
|
|
|
5/11/21
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Mr.
Grushkin resigned effective September 19, 2017 in connection with the Company’s
acquisition of MG Cleaners LLC.
|
|
(2)
|
Ms.
Paetzold resigned effective September 19, 2017 in connection with the Company’s
acquisition of MG Cleaners LLC.
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The following table
sets forth, as of March 31, 2018, information regarding the beneficial ownership of our common stock based upon the most recent
information available to us for: (i) each person known by us to own beneficially five percent (5%) or more of our outstanding
common stock, (ii) each of our officers and directors, and (iii) all of our officers and directors as a group. Unless otherwise
indicated, each of the persons listed below has sole voting and investment power with respect to the shares beneficially owned
by them. As of March 31, 2018, there were 9,930,190 shares of our common stock issued and outstanding upon consummation of the
Acquisition. Except as otherwise listed below, the address of each person is 710 N. Post Oak Road, Suite 400, Houston Texas 77024.
Name
|
|
Amount of
Beneficial
Ownership of
Common
Stock(1)
|
|
|
Percent of
Common
Stock
|
|
Stephen Christian
|
|
|
1,408,276
|
|
|
|
14.1
|
%
|
Raging Capital Master Fund Ltd.(4)
|
|
|
782,498
|
|
|
|
7.8
|
%
|
Raging Capital Management LLC(5)
|
|
|
782,498
|
|
|
|
7.8
|
%
|
William Martin(6)
|
|
|
783,884
|
|
|
|
7.8
|
%
|
Ramsey Financial Fund One LLC (7)
|
|
|
760,000
|
|
|
|
7.6
|
%
|
Jody R. Samuels (8)
|
|
|
600,000
|
|
|
|
6.0
|
%
|
Aeneas LC (9)
|
|
|
550,000
|
|
|
|
5.5
|
%
|
Mary Payne Family Trust (10)
|
|
|
500,000
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Matthew Flemming(2)
|
|
|
600,000
|
|
|
|
6.0
|
%
|
John Boylan(3)
|
|
|
225,000
|
|
|
|
2.2
|
%
|
Steven Paulson
|
|
|
100,000
|
|
|
|
1.0
|
%
|
Michael A. Gilbert II
|
|
|
100,000
|
|
|
|
1.0
|
%
|
All Directors and Executive Officers as a group (4 persons) (1)(2)(3)
|
|
|
1,025,000
|
|
|
|
10.2
|
%
|
|
(1)
|
Pursuant
to the rules and regulations of the Securities and Exchange Commission, shares of common
stock that an individual or group has a right to acquire within 60 days pursuant to the
exercise of options or warrants are deemed to be outstanding for the purposes of computing
the percentage ownership of such individual or group, but are not deemed to be outstanding
for the purposes of computing the percentage ownership of any other person shown in the
table.
|
|
(2)
|
Flemming
Family Trust, an irrevocable trust, is the owner of the shares. Rolf O. Flemming, Father
to Matthew Flemming, is the Grantor of the trust and Matthew Flemming is the Trustee.
His immediate relatives are the beneficiaries.
|
|
(3)
|
Includes
225,000 shares of common stock held by EJC Ventures of which Mr. Boylan is the control
person.
|
|
(4)
|
Based
on Schedule 13D filed with the Securities and Exchange Commission on May 4, 2016 by Raging
Capital Master Fund, LTD. (“Raging Group”)
includes
782,498 shares held by Raging Capital Master Fund, Ltd. William C. Martin is the Managing
Member of Raging Capital Management, LLC the General Partner of Raging Capital Master
Fund, Ltd. William C. Martin retains 100% equity ownership in Raging Capital Management,
LLC. Also includes 1,386 shares held by William C. Martin SEP IRA.
|
|
(5)
|
Includes
782,498 shares held by Raging Capital Master Fund Ltd. Raging Capital Management, LLC
is the General Partner of Raging Capital Master Fund Ltd. William C. Martin is the Chairman,
Chief Investment Officer and Managing Member of Raging Capital Management, LLC.
|
|
(6)
|
RCM
Indium, LLC, a Delaware limited liability company, whose members include Raging Capital
Fund (QP), LP and Raging Capital Management, LLC, whose sole member is William C. Martin.
However, RCM Indium, LLC does not have any ownership rights to any common Stock owned
by Mr. Martin.
|
|
(7)
|
Ramsey
Financial Fund One, LLC’s managing member is Leo B. Womack who has sole voting
and investment control over the shares.
|
|
(8)
|
Includes 300,000 shares of common stock
owned by Essential Strategic Partners Group Inc. Mr. Samuels has sole voting and investment
control over the shares.
|
|
(9)
|
Aeneas LC’s manager is George
Gilman who has sole voting and investment control over the shares.
|
|
(10)
|
The Mary Payne Family Trust is the
owner of the shares. George Gilman is the Trustee of the trust and has sole voting and
investment control over the shares.
|
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires that our directors, executive officers and persons who beneficially own
more than ten percent of our common stock file with the SEC initial reports of their ownership of our common stock and reports
of changes in such ownership.
Based solely upon
a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting
any independent investigation of our own, in 2017, all of these filing requirements were satisfied.
Equity Compensation Plan Information
The following table
provides information with respect to our compensation plans under which equity compensation is authorized as of December 31, 2017.
Plan Category
|
|
Number of
securities
to
be issued
upon
exercise of
outstanding
options
and
rights
|
|
|
Weighted-average exercise
price of outstanding options
|
|
|
Number of
securities
remaining
available
for
future issuance
under equity
compensation
plans
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security
holders 2008 Long-Term Incentive Compensation Plan
|
|
|
1,000,000
|
|
|
$
|
.73
|
|
|
|
27,500
|
|
Total
|
|
|
1,000,000
|
|
|
$
|
.73
|
|
|
|
27,500
|
|
2008 Long-Term Incentive Compensation Plan
In
2008, our Board adopted and our stockholders approved the 2008 Long-Term Incentive Compensation Plan (“the Plan”).
Under this plan, we may grant incentive stock options, non-qualified stock options restricted and unrestricted stock awards and
other stock-based awards. The purpose of the Plan is to provide an incentive to attract directors, officers, consultants, advisors
and employees whose services are considered valuable to encourage a sense of proprietorship and to stimulate an active interest
of such person in our development and financial achievements. As amended in July 2010, a maximum of 1,000,000 shares of our common
stock are authorized under the Plan. The Plan expired on January 31, 2018. Our Board has authorized our Compensation Committee
to administer the Plan. In connection with the administration of the Plan, the Compensation Committee, with respect to awards
to be made to any person who is not one of our directors, will:
|
·
|
determine
which employees and other persons will be granted awards under the Plan;
|
|
·
|
grant
the awards to those selected to participate;
|
|
·
|
determine
the exercise price for options; and
|
|
·
|
prescribe
any limitations, restrictions and conditions upon any awards, including the vesting conditions
of awards.
|
With
respect to stock options or restricted stock awards to be made to any of our directors, the Compensation Committee will make recommendations
to our Board as to:
|
·
|
which
of such persons should be granted stock options, restricted stock awards, performance
units or stock appreciation rights;
|
|
·
|
the
terms of proposed grants of awards to those selected by our Board to participate;
|
|
·
|
the
exercise price for options; and
|
|
·
|
any
limitations, restrictions and conditions upon any awards.
|
Any grant of awards to
any directors under the Plan must be approved by our Board. In addition, the Compensation Committee will:
|
·
|
interpret
the Plan; and
|
|
·
|
make
all other determinations and take all other action that may be necessary or advisable
to implement and administer the Plan.
|
Our
Board may amend the Plan at any time. However, without stockholder approval, the Plan may not be amended in a manner that would:
|
·
|
increase
the number of shares that may be issued under the Plan;
|
|
·
|
materially
modify the requirements for eligibility for participation in the Plan;
|
|
·
|
materially
increase the benefits to participants provided by the Plan; or
|
|
·
|
otherwise
disqualify the Plan for coverage under Rule 16b-3 promulgated under the Exchange Act.
|
Awards
previously granted under the Plan may not be impaired or affected by any amendment of the Plan, without the consent of the affected
grantees.
Transferability
With
the exception of Non-Qualified Stock Options, awards are not transferable other than by will or by the laws of descent and distribution.
Non-Qualified Stock Options are transferable on a limited basis. Restricted stock awards are not transferable during the restriction
period.
Change
of Control Event
The
Plan provides that in the event of a change of control the Board shall have the discretion to determine whether, and to what extent
to, accelerate the vesting, exercise or payment of an Award.
Termination
of Employment/Relationship
Awards
granted under the Plan that have not vested will generally terminate immediately upon the grantee’s termination of employment
or business relationship with us or any of our subsidiaries for any reason other than retirement with our consent, disability
or death. The Board or a committee of the Board may determine at the time of the grant that an award agreement should contain
provisions permitting the grantee to exercise the stock options for any stated period after such termination, or for any period
the Board or a committee of the Board determines to be advisable after the grantee’s employment or business relationship
with us terminates by reason of retirement, disability, death or termination without cause. Incentive Stock Options will, however,
terminate no more than three months after termination of the optionee’s employment, twelve months after termination of the
optionee’s employment due to disability and three years after termination of the optionee’s employment due to death.
The Board or a committee of the Board may permit a deceased optionee’s stock options to be exercised by the optionee’s
executor or heirs during a period acceptable to the Board or a committee of the Board following the date of the optionee’s
death but such exercise must occur prior to the expiration date of the stock option.
Dilution;
Substitution
As
described above, the Plan will provide protection against substantial dilution or enlargement of the rights granted to holders
of awards in the event of stock splits, recapitalizations, asset acquisitions, consolidations, reorganizations or similar transactions.
New award rights may, but need not, be substituted for the awards granted under our the Plan, or our obligations with respect
to awards outstanding under the Plan may, but need not, be assumed by another corporation in connection with any asset acquisition,
consolidation, acquisition, separation, reorganization, sale or distribution of assets, liquidation or like occurrence in which
we are involved. In the event that the Plan is assumed, the stock issuable with respect to awards previously granted under the
Plan shall thereafter include the stock of the corporation granting such new option rights or assuming our obligations under the
Plan.
2018
Stock Option Plan
In
January 2018, our board of directors and a majority of our stockholders approved and adopted the 2018 Stock Option Plan (“2018
Plan”). Under this plan, we may grant incentive stock options and non-qualified stock options.
The Purpose
of the Plan
. The purpose of the 2018 Plan is to provide additional incentive to the directors, officers, employees
and consultants of the Company who are primarily responsible for the management and growth of the Company. Each option shall be
designated at the time of grant as either an incentive stock option (an “ISO”) or as a non-qualified stock option
(a “NQSO”).
The Board of
Directors believes that the ability to grant stock options to employees which qualify for ISO treatment provides an additional
material incentive to certain key employees. The Internal Revenue Code requires that ISOs be granted pursuant to an option plan
that receives stockholder approval within one year of its adoption. The Company adopted the Plan in order to comply with this
statutory requirement and preserve its ability to grant ISOs.
The benefits
to be derived from the 2018 Plan, if any, are not quantifiable or determinable.
Administration
of the Plan
. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the “Administrator”). The
Board of Directors shall appoint and remove members of the Compensation Committee in its discretion in accordance with applicable
laws. In compliance with Rule 16b-3 under the Exchange Act and Section 162(m) of the Internal Revenue Code (the “Code”),
the Compensation Committee shall, in the Board of Director's discretion, be comprised solely of “non-employee directors”
within the meaning of said Rule 16b-3 and “outside directors” within the meaning of Section 162(m) of the Code. Notwithstanding
the foregoing, the Administrator may delegate non-discretionary administrative duties to such employees of the Company as it deems
proper and the Board of Directors, in its absolute discretion, may at any time and from time to time exercise any and all rights
and duties of the Administrator under the Plan.
Subject to the
other provisions of the Plan, the Administrator shall have the authority, in its discretion: (i) to grant options; (ii) to determine
the fair market value of the Common Stock subject to options; (iii) to determine the exercise price of options granted; (iv) to
determine the persons to whom, and the time or times at which, options shall be granted, and the number of shares subject to each
option; (v) to interpret the Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vii) to
determine the terms and provisions of each option granted (which need not be identical), including but not limited to, the time
or times at which options shall be exercisable; (viii) with the consent of the optionee, to modify or amend any option; (ix) to
defer (with the consent of the optionee) the exercise date of any option; (x) to authorize any person to execute on behalf of
the Company any instrument evidencing the grant of an option; and (xi) to make all other determinations deemed necessary or advisable
for the administration of the Plan. The Administrator may delegate non-discretionary administrative duties to such
employees of the Company as it deems proper.
Shares
of Stock Subject to the Plan
. Subject to the conditions outlined below, the total number of shares of stock which may be issued
under options granted pursuant to the Plan shall not exceed 2,000,000 shares of Common Stock, $.001 par value per share.
The number of
shares of Common Stock subject to options granted pursuant to the Plan may be adjusted under certain conditions. If
the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination
or reclassification, appropriate adjustments shall be made by the Board of Directors in (i) the number and class of shares of
stock subject to the Plan, and (ii) the exercise price of each outstanding option; provided, however, that the Company shall not
be required to issue fractional shares as a result of any such adjustments. Each such adjustment shall be subject to
approval by the Board of Directors in its sole discretion.
In the event
of the proposed dissolution or liquidation of the Company, the Administrator shall notify each optionee at least thirty days prior
to such proposed action. To the extent not previously exercised, all options will terminate immediately prior to the
consummation of such proposed action; provided, however, that the Administrator, in the exercise of its sole discretion, may permit
exercise of any options prior to their termination, even if such options were not otherwise exercisable. In the event
of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive,
or in the event of a sale of all or substantially all of the assets of the Company in which the Stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all options shall be assumed or equivalent options shall be substituted
by the successor corporation (or other entity) or a parent or subsidiary of such successor corporation (or other entity); provided,
however, that if such successor does not agree to assume the options or to substitute equivalent options therefor, the Administrator,
in the exercise of its sole discretion, may permit the exercise of any of the options prior to consummation of such event, even
if such options were not otherwise exercisable.
Participation
.
Every person who at the date of grant of an option is an employee of the Company or of any Affiliate (as defined below) of the
Company is eligible to receive NQSOs or ISOs under the Plan. Every person who at the date of grant is a consultant
to, or non-employee director of, the Company or any Affiliate (as defined below) of the Company is eligible to receive NQSOs under
the Plan. The term “Affiliate” as used in the Plan means a parent or subsidiary corporation as defined
in the applicable provisions (currently Sections 424(e) and (f), respectively) of the Code. The term “employee”
includes an officer or director who is an employee of the Company. The term “consultant” includes persons
employed by, or otherwise affiliated with, a consultant.
Option Price.
The
exercise price of a NQSO shall be not less than 85% of the fair market value of the stock subject to the option on the date of
grant. To the extent required by applicable laws, rules and regulations, the exercise price of a NQSO granted to any
person who owns, directly or by attribution under the Code (currently Section 424(d)), stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of any Affiliate (a “10% Stockholder”) shall in no
event be less than 110% of the fair market value of the stock covered by the option at the time the option is granted. The
exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be
less than the fair market value of the stock covered by the option at the time the option is granted. The exercise
price of an ISO granted to any 10% Stockholder shall in no event be less than 110% of the fair market value of the stock covered
by the Option at the time the Option is granted.
Term of the
Options.
The Administrator, in its sole discretion, shall fix the term of each option, provided that the maximum
term of an option shall be ten years. ISOs granted to a 10% Stockholder shall expire not more than five years after the date of
grant. The Plan provides for the earlier expiration of options in the event of certain terminations of employment of the holder.
Restrictions
on Grant and Exercise
. Except with the express written approval of the Administrator, which approval the Administrator is
authorized to give only with respect to NQSOs, no option granted under the Plan shall be assignable or otherwise transferable
by the optionee except by will or by operation of law. During the life of the optionee, an option shall be exercisable
only by the optionee.
Termination
of the Plan.
The Plan shall become effective upon adoption by the Board of Directors; provided, however, that no option
shall be exercisable unless and until written consent of the Stockholders of the Company, or approval of Stockholders of the Company
voting at a validly called Stockholders’ meeting, is obtained within twelve months after adoption by the Board of Directors. If
such Stockholder approval is not obtained within such time, options granted pursuant to the Plan shall be of the same force and
effect as if such approval was obtained except that all ISOs granted pursuant to the Plan shall be treated as NQSOs. Options may
be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities
laws. The Plan shall terminate within ten years from the date of its adoption by the Board of Directors.
Termination
of Employment.
If for any reason other than death or permanent and total disability, an optionee ceases to be employed
by the Company or any of its Affiliates (such event being called a “Termination”), options held at the date of Termination
(to the extent then exercisable) may be exercised in whole or in part at any time within three months of the date of such Termination,
or such other period of not less than thirty days after the date of such Termination as is specified in the Option Agreement or
by amendment thereof (but in no event after the expiration date of the option (the “Expiration Date”)); provided,
however, that if such exercise of the option would result in liability for the optionee under Section 16(b) of the Exchange Act,
then such three-month period automatically shall be extended until the tenth day following the last date upon which optionee has
any liability under Section 16(b) (but in no event after the Expiration Date). If an optionee dies or becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Code) while employed by the Company or an Affiliate or within
the period that the option remains exercisable after Termination, options then held (to the extent then exercisable) may be exercised,
in whole or in part, by the optionee, by the optionee's personal representative or by the person to whom the option is transferred
by devise or the laws of descent and distribution, at any time within twelve months after the death or twelve months after the
permanent and total disability of the optionee or any longer period specified in the Option Agreement or by amendment thereof
(but in no event after the Expiration Date). “Employment” includes service as a Director or as a Consultant. For
purposes of the Plan, an optionee's employment shall not be deemed to terminate by reason of sick leave, military leave or other
leave of absence approved by the Administrator, if the period of any such leave does not exceed 90 days or, if longer, if the
optionee's right to reemployment by the Company or any Affiliate is guaranteed either contractually or by statute.
Amendments
to the Plan.
The Board of Directors may at any time amend, alter, suspend or discontinue the Plan. Without the consent
of an optionee, no amendment, alteration, suspension or discontinuance may adversely affect outstanding options except to conform
the Plan and ISOs granted under the Plan to the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance shall require stockholder approval unless (i) stockholder approval is required to preserve
incentive stock option treatment for federal income tax purposes or (ii) the Board of Directors otherwise concludes that stockholder
approval is advisable.
Tax Treatment
of the Options
. Under the Code, neither the grant nor the exercise of an ISO is a taxable event to the optionee
(except to the extent an optionee may be subject to alternative minimum tax); rather, the optionee is subject to tax only upon
the sale of the Common Stock acquired upon exercise of the ISO. Upon such a sale, the entire difference between the
amount realized upon the sale and the exercise price of the option will be taxable to the optionee. Subject to certain
holding period requirements, such difference will be taxed as a capital gain rather than as ordinary income. Optionees who receive
NQSOs will be subject to taxation upon exercise of such options on the spread between the fair market value of the Common Stock
on the date of exercise and the exercise price of such options. This spread is treated as ordinary income to the optionee,
and the Company is permitted to deduct as an employee expense a corresponding amount. NQSOs do not give rise to a tax
preference item subject to the alternative minimum tax.
New Plan Benefits
Future grants and
awards under the 2018 Plan, which may be made to Company executive officers, directors, consultants and other employees, are not
presently determinable.
Information Regarding Options Granted
No grants and awards
under the 2018 Plan have been made to Company executive officers, directors, consultants and other employees. Such
grants and awards will be made at the discretion of the Compensation Committee or the Board of Directors in accordance with the
compensation policies of the Compensation Committee.
|
Item
13.
|
Certain
Relationships and Related Transactions and Director Independence
|
The
following is a description of the transactions we have engaged in since January 1, 2017, with our directors and officers and beneficial
owners of more than five percent of our voting securities and their affiliates:
In March 2015, the
Company’s Chief Executive Officer and Chief Operating Officer resigned and Ailon Grushkin was named Chief Executive Officer,
and subsequently resigned from such position on September 19, 2017. In March 2015, we also entered into the Consulting Agreement
with Nano-Cap Advisors LLC (“Nano”) (2015 Nano Agreement). Mr. Grushkin is the only member of Nano. Pursuant to the
terms of the 2015 Nano Agreement, Nano provided us with services normally provided by a Chief Executive Officer, as determined
and directed by us, and provided us with office facilities. We agreed to pay Nano $90,000 during the year ended December 31, 2016
for such services. The term of the 2015 Nano Agreement continued until December 31, 2015. In January 2016, we entered into an
agreement with Nano (the 2016 Nano Agreement), pursuant to which Ailon Grushkin, our sole officer at such time, would provide
us with services normally provided by a Chief Executive Officer, as determined and directed by us, and provide us with office
facilities, for an annual fee of $70,000. In March 2017, we agreed to pay Nano $35,000 under the terms of the 2016 Nano Agreement,
as amended in March 2017.
In January 2016, we
entered into a consulting agreement with Brack Advisors LLC (Brack), a company owned by Richard A Biele, one of our former Directors
(Brack Agreement) that provided for the payment of $50,000 in 2016 to assist us in identifying, evaluating and negotiating strategic
transactions including, but not limited to, the acquisition of a new line of business and or a reverse merger. We agreed to pay
Brack $25,000 in 2017 under the Brack agreement, as amended in March 2017.
Simultaneously with
the completion of the acquisition of MG Cleaners LLC, EJC Ventures LP entered into a purchase agreement to acquire 125,000 shares
of our common stock at a price of $0.20 per share pursuant to the Company’s offering of its securities. Mr. John P. Boylan,
one of our directors, is the control person of EJC Ventures LP.
|
Item
14.
|
Principal
Accounting Fees and Services
|
In September 2017,
the Audit Committee of the Board approved the appointment of the firm of Malone & Bailey LLP (“Malone”) to serve
as our independent registered public accountant for the year ended December 31, 2017. The independent registered public accountant’s
report of Cohn Reznick LLP (“Cohn Reznick”) on our financial statements as of and for the year ended December 31,
2016 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. The Audit Committee may consider whether it is appropriate, either for this fiscal year or in the future,
to consider the selection of other independent registered public accounting firms.
Audit Fees.
The following table summarizes fees payable for services provided to us by our independent registered public accounting firm,
which were pre-approved by the Audit Committee:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Audit Fees (1):
|
|
$
|
53,000
|
|
|
$
|
|
|
Audit Fees (2)
|
|
|
-
|
|
|
$
|
45,000
|
|
Tax Fees (3):
|
|
|
-
|
|
|
|
6,000
|
|
All Other Fees:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,000
|
|
|
$
|
51,000
|
|
|
(1)
|
Audit fees include fees for professional
services by Malone in 2017 rendered for the audits of the financial statements of the
Company, quarterly reviews, consents and assistance with the review of documents filed
with the SEC.
|
|
(2)
|
Audit fees include fees for professional
services by Cohn Reznick in 2016 rendered for the audits of the financial statements
of the Company, quarterly reviews, consents and assistance with the review of documents
filed with the SEC.
|
|
(3)
|
Tax fees include fees for tax services,
including tax compliance.
|
The Audit Committee
of the Board has established its preapproval policies and procedures, pursuant to which the Audit Committee approves audit and
tax services provided by our independent auditors. Consistent with the Audit Committee’s responsibility for engaging our
independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee
approves proposed fee estimates for these services. Pursuant to these procedures, the Audit Committee approved the foregoing audit
and tax services provided by Malone and Cohn Reznick.
Changes In and
Disagreements with Accountants on Accounting and Financial Disclosure.
None.
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an
integral part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
The accompanying notes are an integral
part of these consolidated financial statements
NOTES TO FINANCIAL STATEMENTS
Note 1 — Organization and Nature of Business
Organization and Nature of Business
SMG Industries Inc. (the “Company”
or “SMG”) is a corporation established pursuant to the laws of the State of Delaware on January 7, 2008. On September
19, 2017 SMG entered into an Agreement and Plan of Share Exchange with MG Cleaners LLC. On January 30, 2018 the Company changed
its name from SMG Indium Resources Ltd. to the current name of SMG Industries Inc.
SMG acquired one hundred percent of the
issued and outstanding membership interests of MG Cleaners LLC pursuant to which MG Cleaners LLC became our wholly-owned subsidiary.
In connection with the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen
Christian, payable with $250,000 at closing and the remaining $50,000 paid upon the completion of the Company’s sale of
a minimum of $500,000 of its securities in a private offering to investors. The $50,000 liability is recorded as an Accounts Payable
– Related Party on the balance sheet.
The merger was accounted for as a reverse
acquisition with MG Cleaners LLC being treated as the accounting acquirer. As such, the historical information for all periods
presented prior to the merger date relate to MG Cleaners LLC. Subsequent to the merger date, the information relates to the consolidated
entities of SMG with its subsidiary MG Cleaners LLC.
In connection with the acquisition, net
cash received was $21,164, and costs incurred were $378,807 including professional fees for legal and accounting services, as
well as registration and filing fees.
The Company is an emerging growth oilfield
service company focused on the drilling rig operator market segment in the domestic United States pursuant to which we offer the
following products and services: (i) product sales for the oilfield industry focused on drilling rig wash, oilfield cleaning,
industrial cleaning, fleet and equipment cleaning; (ii) equipment sales for the oilfield industry; (iii) parts sales for our installed
base on equipment, including water guns, hoses and fittings, and (iv) service crews for the oilfield industry related to cleaning
and repairing drilling rigs on location.
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 subsidiary, all of which have a fiscal year end of December 31. All intercompany accounts, balances
and transactions have been eliminated in the consolidation.
Use of Estimates in Financial Statement
Preparation
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Acquisition Accounting
The Company’s acquisitions are accounted
for under the acquisition method of accounting whereby purchase price is allocated to tangible and intangible assets acquired
and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair value of
the net assets acquired is recorded as goodwill. The statements of operations for the fiscal years presented include the results
of operations for each of the acquisitions from the date of acquisition.
Customer Concentration and Credit Risk
During fiscal year 2017, two of our customers
accounted for approximately 52% of our total gross revenues, with one customer accounting for 34% and another accounting for 18%.
No other customers exceeded 10% of revenues during 2017. During fiscal year 2016, two of our customers accounted for approximately
35% of our total gross revenues, with one customer accounting for 23% and another accounting for 12%. No other customers exceeded
10% of revenues during 2016. Two customers accounted for more than 64% of accounts receivable at December 31, 2017, and four customers
accounted for more than 72% of accounts receivable at December 31, 2016. No other customers exceeded 10% of accounts receivable
as of December 31, 2017 and 2016. The Company believes it will continue to reduce the customer concentration risks by engaging
new customers and increasing activity of existing less active customers and smaller, newer customer relationships. While the Company
continues to acquire new customers in an effort to grow and reduce its customer concentration risks, management believes these
risks will continue for the foreseeable future.
Five vendors accounted for more than 60%
of accounts payable at December 31, 2017, and three vendors accounted for more than 36% of accounts payable at December 31, 2016.
No other vendors exceeded 10% of accounts payable at December 31, 2017 and 2016.
The Company maintains demand deposits
with commercial banks. At times, certain balances held within these accounts may not be fully guaranteed or insured by the U.S.
federal government. The uninsured portion of cash are backed solely by the assets of the underlying institution. As such, the
failure of an underlying institution could result in financial loss to the Company.
Cash and Cash Equivalents
Cash equivalents include all highly liquid
investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are comprised of unsecured
amounts due from customers. The Company carries its accounts receivable at their face amounts less an allowance for bad debts.
The allowance for bad debts is recognized based on management’s estimate of likely losses per year, based on past experience
and review of customer profiles and the aging of receivable balances. As of December 31, 2017 and 2016, the allowance for bad
debts was $10,695 and $21,134, respectively.
Inventory
Inventory, consisting of raw materials,
work in progress and finished goods, is valued at the lower of the inventory’s costs or market, using the first in, first
out method to determine the cost. Management compares the cost of inventory with its market value and an allowance is made to
write down inventory to net realized value, if lower, which resulted in impairment loss recognized of $0 and $24,905 in 2017 and
2016, respectively.
Property and Equipment
Property and equipment is valued at cost.
Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of
equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives
of the assets as follows:
|
|
Estimated
|
Category
|
|
Useful
Lives
|
|
|
|
Building and improvements
|
|
20 years
|
Vehicles and trailers
|
|
5 years
|
Equipment
|
|
5 -7 years
|
Furniture, Fixtures and Other
|
|
3 - 7 years
|
Revenue Recognition
Revenue is recognized when all of the
following criteria are met: 1) persuasive evidence of an arrangement, 2) delivery has occurred, 3) the price is fixed and determinable,
and 4) collectability is reasonably assured. MG recognizes revenues after a service has been performed and completed and the customer
has assigned a work ticket, or, a product sale has been shipped to a customer. Typically the Company receives verbal orders from
customers for services to be rendered.
Cost of Revenues
Cost of revenue includes all direct expenses
incurred to produce the revenue for the period. This includes, but is not limited to, raw materials, direct employee cost, direct
contract labor, transportation costs, equipment rental, equipment maintenance, and fuel. Cost of revenues are recorded in the
same period as the resulting revenue.
Employee Benefits
Wages, salaries, bonuses and social security
contributions are recognized as an expense in the year in which the associated services are rendered by employees. Any unused
portion of accrued sick or vacation leave expires on December 31 of each year and is not eligible to be carried over to the following
year.
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 long-term debt approximate fair value since the related rates of interest approximate
current market rates.
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
|
|
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.
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. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For the years
ended December 31, 2017 and 2016, 500,000 and 377,500 of stock options were considered for their dilutive effects, respectively.
Basic and Diluted Income (Loss)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(731,080
|
)
|
|
$
|
178,015
|
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Shares:
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
3,423,150
|
|
|
|
1,408,276
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
3,423,150
|
|
|
|
1,408,276
|
|
Income Taxes
Income taxes are accounted under the asset-and-liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between
the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The portion of
any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording
a valuation allowance. A valuation allowance has been established against all of the deferred tax assets, as it is more likely
than not that these assets will not be realized given the Company’s expected operating losses. The Company recognizes the
effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions
are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgement occurs. The Company recognizes potential interest and penalties, if any,
related to income tax positions as a component of the provision for income taxes on the statements of operations.
Share-Based Payment Arrangements
The Company measures the cost of employee
services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value
of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for
the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized
until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton
option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying
options vest.
The fair value of each option granted
during the years ended December 31, 2017 and 2016 was estimated on the date of grant using the Black-Scholes-Merton option-pricing
model with the weighted average assumptions in the following table:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected option term (years)
|
|
|
5
|
|
|
|
5
|
|
Expected volatility
|
|
|
127.52
|
%
|
|
|
13
|
%
|
Risk-free interest rate
|
|
|
2.06
|
%
|
|
|
1.22
|
%
|
The expected term of options granted represents
the period of time that options granted are expected to be outstanding. The expected volatility was based on the volatility in
the trading of the Company’s common stock. The assumed discount rate was the default risk-free five-year interest rate provided
by Bloomberg L.P.
Recent Accounting Pronouncements
The Financial Accounting Standards Board,
or FASB, has issued Accounting Standards Update No. 2014-09, Revenue from contracts with Customers (Topic 606), or ASU 606. ASU
606 provides guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers in an amount that supersedes most current revenue recognition guidance. This guidance requires us to recognize
revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. We are required to adopt ASU 606 at the beginning of our first
quarter of fiscal 2018. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance
obligations to customers and significant judgments in measurement and recognition. We will implement the new standard using the
modified retrospective approach effective January 1, 2018. We do not expect the adoption of this guidance to have a material impact
on our consolidated financial statements within any accounting period presented.
In February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity will be required to recognize right-of-use assets
and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. For public companies, ASU No. 2016-02 is effective for annual reporting periods
beginning after December 15, 2018, including interim reporting periods within that reporting period, and requires a modified retrospective
adoption, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on
the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
”Compensation
- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
.
”
The amendments
in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting
for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.
The Company adopted the new guidance on January 1, 2017. The primary impact of adoption was the recognition of excess tax benefits
in our provision for income taxes rather than paid-in capital. However, as the Company has a full valuation allowance against
its deferred tax asset, a corresponding adjustment was recorded to increase the valuation allowance.
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2017-17”) to simplify the presentation of deferred
income taxes. ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. ASU 2015-17 is effective for financial statements issued for fiscal years beginning after December 15,
2016, and interim periods within those fiscal years. The Company has adopted the provisions of Update 2016-15 and determined that
there is no impact on its financial statements.
In August 2014, the FASB issued ASU 2014-15,
“Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.”
The amendments in this ASU are intended to provide guidance on the responsibility
of reporting entity management. Specifically, this ASU provides guidance of management related to evaluating whether there is
substantial doubt about the reporting entity’s ability to continue as a going concern and about related financial statement
note disclosures. Although the presumption that a reporting entity will continue to operate as a going concern is fundamental
to the preparation of financial statements, prior to the issuance of this ASU, there was no guidance in U.S. generally accepted
accounting principles (U.S. GAAP) related to the concept. Due to the lack of guidance in U.S. GAAP, practitioners and their clients
often faced challenges in determining whether, when, and how a reporting entity should disclose the relevant information in its
financial statements. As a result, the FASB issued this guidance to require management evaluation and potential financial statement
disclosures. This ASU will be effective for financial statements with periods ending after December 15, 2016. The Company adopted
the ASU during the year and performed going concern evaluations for its 2017 fiscal year-end financial statements.
NOTE 3 – 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 and related to the merger transaction completed in September 2017. As a result substantial doubt about
the Company’s ability to continue as a going concern is alleviated.
NOTE 4 - INVENTORY
Inventory consisted of the following components
at December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
25,863
|
|
|
$
|
-
|
|
Work in process
|
|
|
-
|
|
|
|
-
|
|
Finished and purchased products
|
|
|
116,190
|
|
|
|
10,948
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
142,053
|
|
|
$
|
10,948
|
|
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment at December 31,
2017 and 2016 consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
-
|
|
|
$
|
10,000
|
|
Building and improvements
|
|
|
-
|
|
|
|
91,500
|
|
Vehicles and trailers
|
|
|
243,131
|
|
|
|
278,462
|
|
Equipment
|
|
|
159,196
|
|
|
|
130,946
|
|
Other
|
|
|
16,607
|
|
|
|
16,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418,934
|
|
|
|
527,518
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(300,155
|
)
|
|
|
(302,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,779
|
|
|
$
|
224,587
|
|
Depreciation expense for the years ended
December 31, 2017 and 2016 was $72,161 and $77,458, respectively.
During the year ended December 31, 2017,
the Company decided to sell the land and building in Carthage, Texas and determined that this property met the criteria for assets
held for sale in September 2017. The market listing price for these assets was below the net book value at the time of reclassification,
resulting in the recognition of assets held for sale of $42,300 and impairment expense of $27,366. The Company expects these assets
to sell in the second or third quarter of 2018.
NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses as of December 31, 2017
and 2016 included the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Salaries payable
|
|
$
|
22,079
|
|
|
$
|
6,372
|
|
Payroll taxes payable
|
|
|
2,775
|
|
|
|
91,962
|
|
Sales tax payable
|
|
|
7,325
|
|
|
|
10,793
|
|
Interest payable
|
|
|
2,273
|
|
|
|
11,646
|
|
Credit cards payable
|
|
|
-
|
|
|
|
10,323
|
|
Inventory purchases payable
|
|
|
23,440
|
|
|
|
75,539
|
|
Other
|
|
|
11,686
|
|
|
|
24,888
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
69,578
|
|
|
$
|
231,523
|
|
NOTE 7 – NOTES PAYABLE
Notes payable included the following as
of December 31, 2017 and 2016:
|
|
December 31,
|
|
|
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 ending September 25,
2022
|
|
$
|
228,947
|
|
|
$
|
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 August 14, 2017, bearing interest of 7.25% per year, due in monthly
installments ending August 1, 2021
|
|
|
63,752
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly
installments ending August 20, 2020
|
|
|
41,777
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued June 6, 2016, bearing effective interest of 28.50%, due in periodic
installments
|
|
|
-
|
|
|
|
54,466
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued December 18, 2017, bearing effective
interest of 29.8%, due in daily installments ending October 2018, net of deferred financing costs of $88,233
|
|
|
188,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
522,976
|
|
|
|
509,635
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(264,615
|
)
|
|
|
(275,446
|
)
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
258,361
|
|
|
$
|
234,189
|
|
On October 15, 2010, the former managing
member of MG Cleaners 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 SMG, and said property is no longer occupied. The balance of this note at December 31,
2017 was $228,947.
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 year ended December 31, 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. The refinanced amount is identical to the remaining
principal balance under the previous loan, thus no gain or loss has been recognized.
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. On August 14, 2017, our company refinanced this note payable 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. The
refinanced amount is identical to the remaining principal balance under the previous loan, thus no gain or loss has been recognized.
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. The refinanced amount
is identical to the remaining principal balance under the previous loan, thus no gain or loss has been recognized.
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 $54,466 on December 31, 2016. On May 31, 2017, the Company paid off this financing arrangement in connection with closing
the Crestmark Accounts Receivable Financing Facility.
Accounts Receivable Financing Facility
(Secured Line of Credit)
On May 11, 2017, SMG Indium Resources
Ltd. (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. The balance of this second line of
credit was $353,975 as of December 31, 2017.
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
the accounts receivable purchase agreement for $46,512, pay off of past due IRS taxes totaling $70,898, and pay off of one other
accrued liability of $4,831. Total payments to debt and accrued liabilities at Crestmark closing were $172, 241.
As part of our arrangement with Crestmark
Bank our customers pay accounts receivable directly to a lock-box. Crestmark Bank is then paid back for prior advances on
the Company’s Eligible Receivables. During the year ending December 31, 2017, the Company received total cash proceeds
of $1,496,669 and repaid $1,314,935 of the Line of Credit via Crestmark Bank withholding amount collected in our lock-box.
Net proceeds received during the year
ending December 31, 2017 on this facility were $181,734.
Funding Advance Agreements
On April 7, 2017 SMG Indium Resources
Ltd. (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 collection of future receipts received by seller, collectively “Future Receipts”
until Seller has received the Purchased Amount of $143,000. This transaction is accounted for as a short term secured loan net
of deferred financing costs of $44,765 recognized on the date of incurrence. Deferred financing costs amortized and recognized
as interest expense during the year ended December 31, 2017 were $44,765. The loan was paid in full on November 8, 2017.
On August 10, 2017 SMG Indium Resources
Ltd. (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 collection of future receipts received by seller, collectively “Future Receipts”
until Seller has received the Purchased Amount of $67,100. This transaction is accounted for as a short term secured loan, with
deferred financing costs of $15,950 recognized on the date of incurrence. Deferred financing costs amortized and recognized as
interest expense during the year ended December 31, 2017 were $15,950. The loan was paid in full on December 14, 2017.
On December 18, 2017 SMG Indium Resources
Ltd. (the “Seller”) received $195,000 in return for an assignment and transfer to Libertas Funding LLC of a specified
percentage of the proceeds of each collection of future receipts received by seller, collectively “Future Receipts”
until Seller has received the Purchased Amount of $278,000. This transaction is accounted for as a short term secured loan, with
deferred financing costs of $83,000 recognized on the date of incurrence. Deferred financing costs amortized and recognized as
interest expense during the year ended December 31, 2017 were $2,767.
Future maturities of debt as of December 31, 2017 are as follows:
|
|
Debt
|
|
2018
|
|
$
|
618,590
|
|
2019
|
|
|
73,704
|
|
2020
|
|
|
72,486
|
|
2021
|
|
|
72,748
|
|
2022
|
|
|
39,423
|
|
|
|
|
|
|
Totals
|
|
$
|
876,951
|
|
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
As discussed in Note 1 – Background
and Basis of Presentation, effective September 19, 2017, SMG (formerly an inactive shell) entered into a reverse acquisition transaction
with MG Cleaners LLC. In conjunction with the transaction the Company was recapitalized, resulting in the capital structure outlined
below. The historical number of common shares presented in our financial statements were converted to post merger shares on a
1 to 1 basis. As part of the recapitalization net assets of $21,474 were acquired including $21,164 of cash.
Prior to the reverse acquisition transaction,
MG Cleaners LLC sold 3,170,000 membership interest units for $3,170. At the conclusion of the merger the former owners of SMG
held 2,094,569 of common stock while the former owners of MG Cleaners LLC owned 4,578,276 shares of common stock.
The following shares of common stock were
issued subsequent to the reverse acquisition:
- 432,345
shares of common stock for services valued at $211,320.
- 20,000
shares of common stock for assets valued at $5,000.
- 1,740,000
shares of common stock for cash proceeds of $348,000.
NOTE 9 – STOCK OPTIONS
Summary stock option information is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
564,999
|
|
|
$
|
2,588,693
|
|
|
$
|
1.78-7.50
|
|
|
$
|
4.58
|
|
Granted
|
|
|
300,000
|
|
|
|
72,000
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited and cancelled
|
|
|
(477,499
|
)
|
|
|
(2,381,143
|
)
|
|
$
|
3.55-7.50
|
|
|
$
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
387,500
|
|
|
|
279,550
|
|
|
$
|
0.24-3.40
|
|
|
$
|
0.73
|
|
Granted
|
|
|
150,000
|
|
|
|
64,500
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
(27,500
|
)
|
|
|
(25,900
|
)
|
|
$
|
2.52-3.48
|
|
|
$
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
510,000
|
|
|
$
|
318,150
|
|
|
$
|
0.24-3.29
|
|
|
$
|
0.57
|
|
In November 2017 the Company issued 150,000
stock options with an exercise price of $0.37 that vest in three equal tranches on in November 2018, 2019 & 2020. As of December
31, 2017, this issuance represents the only unvested options. Option expense of $41,840 will be recorded over the remaining vesting
term.
In connection with the acquisition discussed
in Note 1, MG Cleaners LLC assumed the above options that were previously issued by SMG as of December 31, 2016.
The weighted average remaining contractual
life is approximately 3.6 years for stock options outstanding on December 31, 2017. At December 31, 2017 and 2016, there was $232,500
and $0, respectively, in intrinsic value of outstanding stock options.
NOTE 10 – COMMITMENTS AND CONTINGENCIES.
Litigation
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 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, 2017, the Company was
engaged in one month to month lease which requires a 90 day termination notice. Rent expense for the year ended December 31, 2017
and 2016 for these leases amounted to $30,000 and $49,332, respectively.
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 was for a period of 3 years and expired on July 15, 2020, but was terminated on January 11, 2018. Rent
expense for the year ended December 31, 2017 and 2016 for these leases amounted to $16,500 and $0, respectively. This lease was
cancelled with mutual consent effective January 2018.
On January 22, 2018, MG Cleaners, the
Company’s subsidiary entered into a two year lease for a 6,500 square foot building on approximately 1.5 acres in Odessa
Texas providing for three lease extensions totaling six additional years. The initial rent is $6,500 per month and increases to
$8,500 per month at the seventh month of the lease. After the first year anniversary, the Lessee may cancel the lease with 30
days’ notice to Lessor. Lease extensions are at the discretion of the Lessee and have increases. The Company is responsible
for the repair, maintenance, and insurance of the facility.
Future maturities of required payments
under capital and operating leases as of December 31, 2017 are as follows:
|
|
Operating Leases
|
|
2017
|
|
$
|
24,000
|
|
2018
|
|
|
36,000
|
|
2019
|
|
|
36,000
|
|
2020
|
|
|
19,500
|
|
2021
|
|
|
-
|
|
|
|
|
|
|
Totals
|
|
$
|
115,500
|
|
NOTE 11 – RELATED PARTY TRANSACTIONS
During the year ended December 31, 2017
(prior to the acquisition) and 2016, the former managing member of MG made contributions to the Company totaling $110,081 and
$71,898, respectively.
During the year ended December 31, 2017
(prior to the acquisition) and 2016, the Company made distributions to the former managing member of MG totaling $192,507 and
$239,993, respectively.
On September 19, 2017, in connection with
the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen Christian, payable
with $250,000 at closing and the remaining $50,000 paid upon the completion of the Company’s sale of a minimum of $500,000
of its securities in a private offering to investors. The $50,000 is still due as of December 31, 2017.
On September 21, 2017, the company issued
81,695 common shares to its former CFO for payment of services provided. The shares were valued at $28,593 and are included in
the total shares of common stock for services disclosed in Note 7.
On October 31, 2017, and made effective
September 20, 2017, the Company entered into an employment agreement with Stephen Christian, the former Managing Member, and current
President, of our subsidiary MG Cleaners LLC. The term is for three years with a monthly salary of $8,333 for the first six months
of the effective date and $10,000 a month thereafter. Other terms include payment of Mr. Christian’s health care insurance,
use of a company truck and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Christian
six months’ severance pay.
On October 31, 2017, and made effective
October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief Executive Officer. The term
is for three years with a monthly salary of $15,000 for the period. The terms of the agreement also include providing health care,
auto allowance of $750 per month if a car is not provided by the Company, and other customary benefits. Termination without cause,
as defined in the agreement, grants Mr. Flemming six months’ severance pay. As of December 31, 2017 Mr. Flemming is owed
$45,585 related to prior expenses paid on behalf of the Company.
NOTE 12 – INCOME TAXES
The components of income taxes are as
follows, in thousands:
|
|
For the Year Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Current income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred income tax expense (benefit)
|
|
|
(40,000
|
)
|
|
|
-
|
|
Valuation Allowance
|
|
|
40,000
|
|
|
|
-
|
|
Income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
For the year ended December 31, 2016 and
for the eight and a half months ended September 19, 2017, the Company reported for income tax purposes as a disregarded entity,
income and expenses passed through to the sole owner's individual income tax return. The deferred tax asset table below includes
$130,000 of net operating loss carryforwards related to the historic business of SMG Indium Resources Ltd before the merger with
MG Cleaners as discussed in Note 1.
Reconciliation between the provision for
income taxes, computed by applying the statutory Federal income tax rate of 21% to net income before income taxes, and the actual
income tax expense follows
|
|
For the Year Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Federal income tax provision at statutory rates
|
|
|
34.00
|
%
|
|
|
0.00
|
%
|
Reduction due to tax law change
|
|
|
-13.00
|
%
|
|
|
0.00
|
%
|
Valuation Allowance
|
|
|
-21.00
|
%
|
|
|
0.00
|
%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The components of deferred tax assets are as follows, in thousands:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
170,000
|
|
|
$
|
-
|
|
Expenses not currently deductible
|
|
|
9,000
|
|
|
|
-
|
|
Total
|
|
|
179,000
|
|
|
|
-
|
|
Valuation allowance
|
|
|
(179,000
|
)
|
|
|
-
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
A valuation allowance is provided when
it is more likely than not that a portion or all of the deferred tax asset will not be realized. The differences between book
income and tax income relate principally to revenue recognition and to differences between accelerated methods of depreciation
allowed on income tax returns and straight-line methods of depreciation used for book purposes. The valuation allowance for 2017
was applied to offset the deferred tax assets in recognition of the uncertainty that such benefits will be realized as a result
of the change in ownership of more than 50% through the reverse acquisition of the oilfield company in September 2017. Pursuant
to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of a company’s net operating loss
may be limited if the company experiences a change in ownership of more than fifty percent within a three-year period. Such change
occurred in September 2017. Net operating losses prior to the date of change, available to offset future taxable income, are limited
by IRC Section 382. At December 31, 2017, the company has net operating losses available for the 20-year carryforward of approximately
$809,000, $2,805,000 being lost due to the Section 382 limitation.
The New Tax Act, signed into law on December
22, 2017 made significant changes to the Internal Revenue Code. These changes include of corporate tax rate decrease from 35%
to 21% effective for tax years beginning after December 31, 2017. Additionally, the NOL carryforward period for new NOLs will
change from 20 succeeding taxable years to an indefinite period. With the elimination of the alternative minimum tax, NOLs for
taxable years beginning after December 31, 2017, can offset 80% of Federal taxable income. Since the Company is using the asset
and liability method of accounting for income taxes and because deferred tax assets and liabilities are measured using enacted
tax rates applied to taxable income in the years in which temporary differences are expected to reverse, the Company is revaluing
the net deferred assets, fully offset by a valuation allowance, after December 31, 2017.
The Company’s Federal and state
income tax returns are subject to audit for all open years, starting with 2014 year.
NOTE 13 – SUBSEQUENT EVENTS
Common Stock
During the first quarter of 2018, the
Company issued 1,140,000 restricted common stock for proceeds of $228,000 from accredited investors.
Lease Agreement
On January 22, 2018, MG Cleaners, the
Company’s subsidiary entered into a two year lease for a 6,500 square foot building on approximately 1.5 acres in Odessa
Texas providing for three lease extensions totaling six additional years. The initial rent is $6,500 per month and increases to
$8,500 per month at the seventh month of the lease. After the first year anniversary, the Lessee may cancel the lease with 30
days’ notice to Lessor. Lease extensions are at the discretion of the Lessee and have increases. The Company is responsible
for the repair, maintenance, and insurance of the facility.
Product Acquisition
On February 12, 2018, the Company’s
wholly-owned subsidiary, MG Cleaners LLC (“
MG
”) entered into an Intellectual Property Sale Agreement (“
Agreement
”)
with Stephen Christian, MG’s President, for the purchase of RigHands™ an industrial strength hand cleaner product
line. RigHands™ is a trademarked branded product which is focused on the oilfield and industrial markets. MG issued a promissory
note to Mr. Christian for the purchase price in the amount of $150,000. In connection with the Agreement, Mr. Christian agreed
that he shall promptly, from time to time, fully inform and disclose to MG in writing all inventions, copyrightable material,
designs, improvements and discoveries of any kind which Mr. Christian now has made, conceived or developed (including prior to
the date of this Agreement), or which Mr. Christian may later make, conceive or develop, during the period of Mr. Christian’s
employment with MG, which pertain to or relate to MG’s business or any of the work or business carried on by MG. In addition
to the foregoing, the Agreement sets forth that all Inventions shall be the sole and exclusive property of MG, whether or not
fixed in a tangible medium of expression. Mr. Christian also assigned all rights in all Inventions and in all related patents,
copyrights and trademarks, trade secrets and other proprietary rights therein to MG. Mr. Christian further agreed that any copyrightable
material shall be deemed to be “works made for hire” and that MG shall be deemed the author of such works under the
United States Copyright Act, provided that in the event and to the extent such works are determined not to constitute “works
made for hire”, Mr. Christian has irrevocably assigned and transferred to MG all right, title and interest in such works.
14C Information Statement
On March 6, 2018 the Company filed and
Information Statement with the Securities and Exchange Commission stating that it had obtained the written consent of a majority
of stockholders as of the record date January 30, 2018, to change the name of the company to “SMG Industries, Inc.”
and to adopt a new incentive stock option plan with 2,000,000 shares authorized, subject to the Company’s Board and any
other required approvals. This stock plan replaces the old plan and any of its remaining shares. The name change to SMG Industries
Inc. went effective April 2, 2018.
Former CFO
On March 19, 2018, Meggen Rhodes resigned
from her position as chief financial officer of the Company. In connection with Ms. Rhodes’ resignation, Ms. Rhodes indicated
to the Company that such resignation was not the result of any disagreement related to the operations, policies or practices of
the Company and was for personal reasons.