Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of
“large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
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 May 29, 2020 was 17,380,108.
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
We are a growth-oriented
company focused on logistics, midstream and oilfield services market segments in the Southwest
United States. Our primary business objective is to grow our operations and create value for our stockholder’s through
organic growth and strategic acquisitions. We have implemented a ‘buy & build’ growth strategy of consolidating
middle market companies and generating organic growth post-acquisition when possible by removing business constraints with strategic
cross-selling of products and services across market segments benefiting us with higher utilization and customers with more efficient
costs.
Our wholly-owned operating
subsidiaries are:
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5J
Oilfield Services LLC
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Momentum
Water Transfer Services.
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Our operating subsidiaries
provide a range of logistics, midstream and oilfield services such as:
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Logistics
and heavy haul of production equipment and infrastructure components such as bridge beams,
cement and heavy equipment,
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Transportation
of midstream compressors,
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Cranes
used to set equipment on compressor stations, pipeline infrastructure and load drilling
rig components,
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Drilling
rig move and relocation for drilling contractors and oil and gas operators,
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Construction
equipment including excavators, tractors and back hoes used to build large cement reinforced
dirt locations of oil and gas drilling pads (multi-well pads), creating and covering
reserve pits and lease roads for operators and service companies,
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Product
sales of degreasers, surfactants and detergents used in industrial and oilfield applications.
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Services
crews that perform mechanic repair and maintenance,
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Product
sales of cleaning equipment used by industrial and oilfield customers, and
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Frac
water management services and oil tool rentals to directional drilling customers.
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We are headquartered in Houston, Texas
with facilities in Odessa, Floresville, Alice, Palestine, Carthage, and Waskom, Texas. Our web sites are www.SMGIndustries.com,
www.5Joilfield.net, www.5JTrucking.net, www.ts-oilfield.com, www.MGCleanersllc.com and www.MomentumWTS.com.
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 2015, our Board of Directors approved a cash distribution to our stockholders
and a share repurchase program. After completion of the cash distribution and the share repurchase program the Company sought a
new growth platform and focused on its current strategy of acquiring and growing operating businesses.
Acquire, grow, buy & build history and focus
On September 19, 2017,
we completed our initial acquisition and 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 “MG Acquisition”). In connection with the MG 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. to reflect our new business focus.
On September 27, 2018,
we acquired more than 800 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs,
including both non-mag and steel units in exchange for the issuance of an aggregate of one million (1,000,000) shares of our common
stock to the sellers.
On December 7, 2018,
we acquired one hundred percent of the issued and outstanding membership interests (“MWTS Membership Interests”) of
Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”) pursuant to which MWTS became our
wholly-owned subsidiary (the “MWTS Acquisition”). In connection with the MWTS Acquisition, we issued 550,000 shares
of our common stock, paid $361,710 in cash to the MWTS members and issued a note payable to the MWTS member in the aggregate amount
of $800,000. Principal and interest on the note shall be repaid in sixty (60) equal monthly payments of $7,500 (“Installment
Payments”) and a final balloon payment for the remaining principal and accrued interest due on the maturity date. The note
bears interest at a rate of 6% per annum.
On June 27, 2019, we
acquired one hundred percent of the issued and outstanding membership interests (“Trinity Membership Interests”) of
Trinity Services LLC, a Louisiana limited liability company (“Trinity”) pursuant to which Trinity became our wholly-owned
subsidiary (the “Trinity Acquisition”). In connection with the Trinity Acquisition, we issued 2,000 shares of our Series
A Convertible Preferred Stock, with a stated value of $1,000 per share, to the sole member of Trinity. The Series A Convertible
Preferred Stock is convertible at a fixed price of $0.50 per share and is convertible into an aggregate of 4,000,000 shares of
the Company’s common stock.
On February 27, 2020,
we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and
5J Trucking LLC (“5J Trucking”), each a Texas limited liability company. The aggregate purchase price of 5J was $27.3
million, consisting of a combination of cash, notes, Series B Convertible Preferred Stock and the assumption and refinance of debt.
In connection with the 5J Acquisition, we issued 6,000 shares of our Series B Convertible Preferred Stock, with a stated value
of $1,000 per share, to the sole member of 5J. The Series B Convertible Preferred Stock is convertible at a fixed price of $1.25
per share and is convertible into an aggregate of 4,800,000 shares of the Company’s common stock.
Domestic United
States Industry Overview by Segment
Heavy Haul and Over
size loan Transportation Segment
A heavy haul or oversize
load is a load that exceeds the standard or ordinary legal size and/or weight limits for a truck to convey on a
specified portion of road, highway or other transport infrastructure. Also, a load that exceeds the per-axle limits,
but not the overall weight limits, is considered overweight. Examples of oversize/overweight loads include construction machines
(cranes, front loaders, backhoes, etc.), wind energy components, production equipment used in energy, midstream compressors, pre-built
homes, power generation components, containers, and construction elements (bridge beams, industrial
equipment).
The legal dimensions
and weights vary between countries and regions. A vehicle which exceeds the legal dimensions usually requires a special permit
which requires extra fees to be paid in order for the oversize/overweight vehicle to legally travel on the roadways. The permit
usually specifies a route the load must follow as well as the dates and times during which the load may travel.
Midstream Services
Segment
According
to Mordor Intelligence Research report titled Pipeline Services Market - Growth,
Trends, and Forecast (2020 - 2025) The market for pipeline services is expected to grow at a CAGR of more than 3.9% during the
forecast period of 2020 – 2025. As of 2019, there were approximately 145,353 miles of pipelines planned and under-construction,
of which 94,773 miles are in the engineering and design phase, while 50,580 are in various stages of construction. The natural
gas pipeline network is expected to grow in parallel to the increase in natural gas demand, which in turn is expected to positively
impact the global pipeline services market in the coming years. Therefore, increasing natural gas pipeline infrastructure is expected
to drive the market over the forecast period.
As the demand for energy produced in North America continues
to grow, the exploration and production would continue to move further towards harsh environments. In particular, the recent discovery
of certain new extraction techniques has opened multiple oil & gas shale regions in extremely remote areas. In the United States,
approximately 70% of crude oil and petroleum products are shipped through pipelines. In 2018, the United States crude oil production
was 10.9 mb/d, an increase by 1.6 mb/d from 2017. Furthermore, it is expected to reach 12.1 mb/d in 2019 and 12.9 mb/d in 2020.
Most of the increased production is expected to be generated from Texas and New Mexico.
Oilfield Services
Segment
Rig Count
In March 2020, the Domestic United States
Rig Count, as measured by Baker Hughes, stood at 772 active rigs, down 24.5% from the highs of 1023 a year ago.
Rig Counts are a measurement of oilfield activity particularly relevant to the drilling market segment, as we provide services
and sell products to drilling rig operator customers. As a result of relatively favorable operating economics for oil and gas companies,
there is a high concentration of rigs and oilfield activity in Texas compared to other areas in the domestic United States. In
March 2020 Texas and adjacent New Mexico (Permian and Delaware basins) had approximately 405 rigs operating, representing about
48% of the entire domestic United States rigs concentrated in these West Texas/New Mexico basins.
5J Trucking and
5J Oilfield Services business description
Our logistics and rig
move company has been a leader in the field of logistics, production heavy haul and drilling rig mobilization for more than twenty
years. 5J has over 100 trucks, 250 trailers, 18 cranes and 25 fork lifts. 5J generates roughly half of its revenues from logistics
and heavy haul including transporting pipeline compressors, production equipment and industrial items such as bridge beam and cement
loads. 5J’s remaining revenue is generated from moving oil and gas drilling rigs in the domestic United States.
Trinity Services
business description
Operating in East Texas
and Northern Louisiana for more than ten years, Trinity builds drilling pad locations, reserve and water pits and lease roads for
oil and gas operators. Trinity owns in excess of 25 motor graders, tractors, excavators, bulldozers and backhoes. Trinity’s
well site services group operates a work-over rig that performs services and repairs to existing producing gas and oil wells in
the same geographic area.
MG Cleaners Products
and Services
Proprietary Products
Our branded products
have proprietary formulations that perform in specific applications. These products include 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, Patterson-UTI, Helmrich & Payne and Cactus Drilling among others. MG’s products
are sold throughout Texas using direct sales employees 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.
SMG Oil Tools –
Rentals
SMG Oil Tools has an inventory of more
than 800 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs both non-mag and
steel units. These tools are available, on a rental basis to drilling contractors and operators who do not own these tools but
outsource to service companies. These tools can be rented on a day rate basis or per job basis.
Momentum Water Transfer
Services – Frac Water Services
Momentum Water Transfer
Services provides high volume water transfer services to frac sites, on behalf of oil and gas operators, utilizing its above ground
temporary infrastructure including miles of lay flat no leak frac hose, high volume pumps and equipment. Oil and gas companies
typically rent this equipment as a service to send water from a source such as a river, lake or frac pond to the well site for
fracing. According to EIA, a typical frac in the areas we provide water transfer services to could require 4.4 million gallons
of water during the drilling of the well. Separate pressure pumping service companies typically arrange for the sand and perform
the frac, while water transfer companies such as ours, are typically hired by an oil and gas operator to send frac water to the
pressure pumping service company performing the frac.
Our Strategies
Buy and Build. Our
strategy involves growth resulting from making acquisitions of private owner/operated lower or middle-market size logistics, mid-stream
and oilfield services companies operating in the Southwest United States with a plan to grow them post-acquisition. Our management
team seeks to identify companies that have good reputations, customers and complementary service lines. We plan for additional
growth post-acquisition of these targets by identifying business constraints which can be removed once acquired by us. These business
constraints typically can be a lack of equipment, working capital, systems, sales force or MSAs and customer agreements. Our strategy
is to seek target companies that, once acquired, can grow organically from removing those constraints, as well as leveraging the
cross-selling opportunities between and among our operating subsidiaries. We believe growth can be obtained by both the acquisition
of revenue generating companies and the subsequent growth post-acquisition. This strategy differs in management’s view from
a “roll up” as we do not look to make acquisitions just for cost saving synergies from elimination of duplicate personnel
etc., but rather by adding personnel, capital and customers for growth. Our first acquisition, MG Cleaners illustrates this strategy
as its revenues approximately doubled for the year ended December 31, 2019 from its September 2017 acquisition date by cross-selling
MG’s products and services to our other subsidiary company clients, adding equipment, systems, and working capital.
Cross-sell Customer
Bases of Acquired Service Companies. We currently have over 200 customers, many of which are leading companies in their respective
fields. Our strategy of cross-selling customer bases of acquired companies allows us to enhance our service offerings and 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,
in June 2019, we acquired a construction and well site services business that brought customers that were active in the Cotton
Valley play and Haynesville Shale area of East Texas allowing us to introduce other complementary products and services to those
customers without the challenge of procuring new Master Service Agreements (MSAs), and without incurring undue sales and marketing
expenses associated with soliciting and securing new customers.
Broaden Service
Offerings to Diversify. We currently believe that our strategy of developing, adding or acquiring lines of service for other
market segments such as heavy haul of infrastructure items, transportation of drilling rigs and crane services for midstream compressor
infrastructure will assist us in diversifying our business and provide a more enhanced services offering for customers seeking
to reduce vendor lists. Our June 2019 acquisition of Trinity Services, which is focused on East Texas gas customers with well pad
construction and work over services, benefitted when we recently acquired a drilling rig mobilization company broadening the scope
of services Trinity Services can provide to its customers. . Currently, our strategy is to further diversify in logistics and midstream
to increase utilization of our assets.
Geographic Resource
Focus. Currently, more than half of the rigs in the domestic United States are located in Texas and adjacent counties within
New Mexico and Louisiana. Due to relatively favorable economics in these resource plays, our strategy of geographic focus allows
us to address this significant portion of the domestic United States market with offices strategically located in Houston, Texas
and facilities in Odessa, Floresville, Alice, Palestine, Carthage, and Waskom, Texas. This strategy permits us to avoid the additional
expense of managing operations in other areas of the US such as North Dakota or New England. Our strategy of focusing on resource
plays in this geographic area generates service activities such as the Haynesville shale, Eagle Ford shale, Permian and Delaware
Basins.
Sales. The Company’s
sales plan includes utilizing employed sales personnel based in our various locations that are engaged to generate new sales for
the company’s operations. Our sales personnel are typically compensated on a fixed base salary plus performance incentives.
Manufacturing.
We manufacturer our MG products in our facility in Carthage, Texas. Raw materials are procured by MG 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.
Marketing Plan.
The Company’s marketing plan focuses around cross-selling the respective customer bases at each operating subsidiary. As
MSAs, or master service agreements, are typically difficult to obtain from customers, utilizing MSAs of our operating companies
allows us to offer more services to our customers.
Management.
The Company’s Chief Executive Officer, Matthew Flemming, is located in Houston, Texas. Mr. Flemming has experience in acquisitions,
management, capital raises and serving as an officer of public companies. He was previously the CEO of HII Technologies (“HII”),
whose relative size and business plan started out similar to ours, as HII 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 an owner operated frac water management company for approximately
$2.3 million in cash, a seller note and stock. Following this initial acquisition, HII completed two more acquisitions as well
as starting up two additional subsidiaries in the power and safety markets of the oilfield service 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 approximately
$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 a Chief Restructuring
Officer, 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 as it 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
as an officer in a public company environment. He has significant experience with our “Buy and Build” strategy, identifying
target oilfield companies and relationships in the oilfield market place that help provide access to products and company acquisition
targets.
Stephen Christian has
been our EVP and head of operations since April 2018. Mr. Christian has served as President of MG Cleaners, LLC since October 2010,
when he acquired MG Cleaners’ membership interests and continues to have operational responsibility for MG, our wholly-owned
subsidiary. Prior to MG, Stephen was employed by one of the largest drilling rig operators in the United States, 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 drilling contractor managers and industry partners. Mr. Christian has been the
President of MG Cleaners since 2010. The Company believes Mr. Christian’s operations experience, industry relationships and
reputation will continue to assist us in our growth.
Geographic Operations
Our headquarters are
in Houston, Texas and our facilities are strategically located including Odessa, Texas for the Permian Basin (which includes the
Midland and Delaware sub-Basins), Palestine, Carthage, and Waskom, Texas for the Haynesville shale and Cotton Valley plays, Floresville
and Alice, Texas addressing the Eagle Ford Shale and Austin Chalk activity. All of our products are made in Texas. Any product
sold outside of our current geographic focus are handled by distribution partners and currently represents an immaterial percentage
of our sales.
Competition
The markets in which
we operate are highly competitive. We provide services and sell our products primarily in the southwest United States. Our competitors
include many large and small transportation, logistics, and midstream /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 in our geographic areas. 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 service, experienced personnel and equipment possible, coupled with 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. Midstream or pipeline
operating companies typically utilize service companies in their construction, build out or maintenance of their infrastructure
they operate and manage. Midstream operators also have cyclical capital spending where area activity and hydrocarbon prices may
have an effect on new project economics that may result in delays or elimination of project expenditures. Heavy haul logistics
and transportation typically includes a material amount of oilfield production equipment as such is cyclical in nature.
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, 2019, three customers
comprised more than 10% of our accounts receivable balance at approximately 25%, 12%, and 11%, respectively. During the twelve-month
period ended December 31, 2019, 3 customers represented more than 10% of our revenues at 15%,13% and 12%, respectively, and no
other customer represented more than 10% of our revenues during this period.
As of December 31, 2018, three customers
comprised more than 10% of our accounts receivable balance at approximately 22%, 18% and 11%, respectively. During the twelve-month
period ended December 31, 2018, two customers represented more than 10% of our revenues at 31% and 19%, respectively, and no other
customer represented more than 10% of our revenues during this period.
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 have four registered trademarks granted to date, and may file for additional
marks in the future.
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 third parties 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.
The Company’s
operations are regulated and licensed by various federal, provincial, state, local and foreign government agencies in the United
States and Canada. In the United States, the Company and its drivers must comply with the safety and fitness regulations of the
DOT and the agencies within the states that regulate transportation, including those regulations relating to drug- and alcohol-testing
and hours-of-service. Weight and equipment dimensions also are subject to government regulations. The Company also may become subject
to new or more restrictive regulations relating to fuel emissions, environmental protection, drivers’ hours-of-service, driver
eligibility requirements, on-board reporting of operations, collective bargaining, ergonomics and other matters affecting safety,
insurance and operating methods. Other agencies, such as the U.S. Environmental Protection Agency (EPA), and the U.S. Department
of Homeland Security (DHS), the U.S. Department of Defense (DOD) and the U.S. Department of Energy (DOE) also regulate the Company’s
equipment, operations, drivers and the environment. The Company conducts operations outside of the United States, and is subject
to analogous governmental safety, fitness, weight and equipment regulations and environmental protection and operating standards,
as well as the Foreign Corrupt Practices Act (FCPA), which generally prohibits United States companies and their intermediaries
from making improper payments to foreign officials for the purpose of obtaining or retaining favorable treatment. Any investigation
of any actual or alleged violations of such laws could also harm the Company’s reputation or have a material adverse impact
on its business, financial condition, results of operations, cash flows and prospects.
The DOT, through the Federal Motor Carrier Safety Administration
(FMCSA), imposes safety and fitness regulations on the Company and its drivers, including rules that restrict driver hours-of-service.
In December 2011, the FMCSA published its 2011 Hours-of-Service Final Rule (the 2011 Rule), requiring drivers to take 30-minute
breaks after eight hours of consecutive driving and reducing the total number of hours a driver is permitted to work during each
week from 82 to 70 hours. The 2011 Rule provided that a driver may restart calculation of the weekly time limits after taking 34
or more consecutive hours off duty, including two rest periods between 1:00 a.m. and 5:00 a.m.; these restrictions are referred
to as the 2011 Restart Restrictions. These 2011 rule changes, including the 2011 Restart Restrictions, became effective on July
1, 2013. However, in December 2014, Congress passed the 2015 Omnibus Appropriations bill, which was signed into law on December
16, 2014. Among other things, the legislation provided relief from the 2011 Restart Restrictions, reverting requirements back to
those in effect before the 2011 Rule became effective, including the more straight forward 34-hour restart period, without need
for two rest periods between 1:00 a.m. and 5:00 a.m.. In December 2014, the FMCSA published a Notice of Suspension summarizing
this suspension of enforcement of the 2011 Restart Restrictions.
The
FMCSA has adopted a data-driven Compliance, Safety and Accountability (the CSA) program as its safety enforcement and compliance
model. The CSA program holds motor carries and drivers accountable for their role in safety by evaluating and ranking fleets and
individual drivers on certain safety-related standards. The CSA program affects drivers because their safety performance and compliance
impact their safety records and, while working for a carrier, will impact their carrier’s safety record. The methodology
for determining a carrier’s DOT safety rating relies upon implementation of Behavioral Analysis and Safety Improvement Categories
(BASIC) applicable to the on-road safety performance of the carrier’s drivers and certain of those rating results are provided
on the FMCSA’s Carrier Safety Measurement System website. As a result, certain current and potential drivers may no longer
be eligible to drive for the Company, the Company’s fleet could be ranked poorly as compared to its peer firms, and the Company’s
safety rating could be adversely impacted. The occurrence of future deficiencies could affect driver recruiting and retention by
causing high-quality drivers to seek employment (in the case of company drivers) or contracts (in the case of owner-operator drivers)
with other carriers, or could cause the Company’s customers to direct their business away from the Company and to carriers
with better fleet safety rankings, either of which would adversely affect the Company’s results of operations and productivity.
Additionally, the Company may incur greater than expected expenses in its attempts to improve its scores as a result of such poor
rankings. Those carriers and drivers identified under the CSA program as exhibiting poor BASIC scores are prioritized for interventions,
such as warning letters and roadside investigations, either of which may adversely affect the Company’s results of operations.
To promote improvement in all CSA categories, including those both over and under the established scoring threshold, the Company
has procedures in place to address areas where it has exceeded the thresholds and the Company continually reviews all safety-related
policies, programs and procedures for their effectiveness and revises them, as necessary, to establish positive improvement. However,
the Company cannot assure you these measures will be effective.
The methodology
used to determine a carrier’s safety rating could be changed by the FMCSA and, as a result, the Company’s acceptable
safety rating could be impaired. In particular, the FMCSA continues to utilize the three safety fitness rating scale—“satisfactory,”
“conditional,” and “unsatisfactory”—to assess the safety fitness of motor carriers and the Company
currently has a “satisfactory” FMCSA rating on 100% of its fleet. However, pursuant to a 2015 federal statutory mandate,
the FMCSA commissioned the National Academy of Sciences (NAS) to conduct a study and report upon the CSA program and its underlying
Safety Measurement System (SMS), which is the FMCSA’s process for identifying patterns of non-compliance and issuing safety-fitness
determinations for motor carriers. In June 2017, the NAS published a report on the subject providing specific recommendations and
concluding, among other things, that the FMCSA should explore a more formal statistical model to replace the current SMS process.
In June 2018, the FMCSA posted its response to the NAS study in a report to Congress, concluding, among other things, that it would
develop and test a new model, the Item Response Theory (IRT), which would replace the SMS process currently used. The FMCSA was
expected to commence small scale testing of the IRT model as early as September 2018, with full scale testing expected to occur
in April 2019 and possible program roll-out expected to occur in late 2019 but the testing schedule has been delayed. The FMCSA’s
June 2018 response is under audit by the DOT Inspector General to assess consistency with the NAS recommendations, and the audit
findings will guide the agency’s actions and timing with respect to testing of the IRT model as a potential replacement for
the SMS, in the event and to the extent that the FMCSA adopts the IRT model in replacement of the SMS or otherwise pursues rulemakings
in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more
stringent standards, then it is possible that the Company and other motor carriers could be adversely affected, as compared to
consideration of the current standards. If the Company were to receive an unsatisfactory CSA score, whether under the current SMS
process, the IRT model, should it be finalized, and adopted, or as a result of some other safety-fitness determination, it could
adversely affect the Company’s business as some of its existing customer contracts require a satisfactory DOT safety rating,
and an unsatisfactory rating could negatively impact or restrict the Company’s operations.
In the
aftermath of the September 11, 2001 terrorist attacks, federal, state and municipal authorities implemented and continue to implement
various security measures, including checkpoints and travel restrictions on large trucks. This could reduce the pool of qualified
drivers, which could require the Company to increase driver compensation or owner-operator contracted rates, limit fleet growth
or allow trucks to be non-productive. Consequently, it is possible that the Company may fail to meet the needs of customers or
may incur increased expenses.
The FMCSA
published a final rule in December 2015 mandating the use of Electronic Logging Devices (ELDs) for commercial motor vehicle drivers
to measure their compliance with hours-of-service requirements by December 18, 2017. The 2015 ELD final rule generally applies
to most motor carriers and drivers who are required to keep records of duty status, unless they qualify for an exception to the
rule, and the rule also applies to drivers domiciled in Canada and Mexico. Under the 2015 final rule, motor carriers and drivers
subject to the rule were required to use either an ELD or an automatic onboard recording device (AOBRD) compliant with existing
regulations by December 18, 2017. However, the AOBRDs may only be used until December 16, 2019, provided those devices were put
into use before December 18, 2017. Starting December 16, 2019, all carriers and drivers subject to the 2015 final rule must use
ELDs. Commencing with the December 18, 2017 effective date, the Company and other motor carriers subject to the 2015 rule are required
to use ELDs or AOBRDs in their operations.
The Company
is subject to various environmental laws and regulations governing, among other matters, the operation of fuel storage tanks, release
of emissions from its vehicles (including engine idling) and facilities, and adverse impacts to the environment, including to the
soil, groundwater and surface water. The Company has implemented programs designed to monitor and address identified environmental
risks. Historically, the Company’s environmental compliance costs have not had a material adverse effect on its results of
operations; however, there can be no assurance that such costs will not be material in the future or that such future compliance
will not have a material adverse effect on the Company’s business and operating results. Additionally, certain of the Company’s
operating companies are Charter Partners in the EPA’s SmartWay Transport Partnership, a voluntary program promoting energy
efficiency and air quality. If the Company fails to comply with applicable environmental laws or regulations, the Company could
be subject to costs and liabilities. Those costs and liabilities may include the assessment of sanctions, including administrative,
civil and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the occurrence of delays
in permitting or performance of projects and the issuance of orders enjoining performance of some or all of its operations in a
particular area. The occurrence of any one or more of such developments could have a material adverse effect on the Company’s
business and operating results.
The Company
also has vehicle maintenance operations at certain of its facilities. The Company’s operations involve the risks of fuel
spillage or seepage into the environment, discharge of contaminants, environmental and natural resource damage, and unauthorized
hazardous material spills, releases or disposal actions, among others. Some of the Company’s operations are at facilities
where soil and groundwater contamination have occurred, and the Company or its predecessors have been responsible for remediating
environmental contamination at some locations. In the past, the Company has also been responsible for the costs of cleanup of cargo
and diesel fuel spills caused during its transportation operations, including as a result of traffic accidents or other events.
If the Company is found to be responsible for such contamination or spills, the Company could be subject to costs and liabilities,
including costs for remediation, environmental natural resource damages and penalties.
The EPA
regulations limiting exhaust emissions became more restrictive in 2010. In 2010, a presidential executive memorandum was signed
directing the National Highway Traffic Safety Administration (NHTSA) and the EPA to develop new, stricter fuel efficiency standards
for, among other vehicles, heavy-duty trucks. In 2011, the NHTSA and the EPA adopted final Phase 1 rules that established the first-ever
fuel economy and greenhouse gas standards for medium-and heavy-duty vehicles. These standards apply to certain combination tractors’
model years 2014 to 2018 and require them to achieve an approximate 20 percent reduction in fuel consumption by model year 2018,
which equates to approximately four gallons of fuel for every 100 miles traveled. Additionally, in October 2016, the EPA and NHTSA
jointly published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road
medium- and heavy-duty vehicles beginning for model year 2019 and extending through model year 2027. The Phase 2 standards build
upon the Phase 1 standards, encouraging wider application of currently available technologies and the development of new and advanced
cost-effective technologies through model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards
will be imposed on new trailers. The Company expects that these Phase 2 standards, if unchanged to make less stringent, will result
in its incurrence of increased costs for acquiring new tractors and for additional parts and maintenance activities to retrofit
its tractors with technology to achieve compliance with such standards. Such increased costs could adversely affect the Company’s
operating results and profitability, particularly if such costs are not offset by potential fuel savings. Additionally, in November
2018, the EPA announced the Cleaner Trucks Initiative (CTI), pursuant to which it plans to issue a rule updating standards for
nitrogen oxide emissions from highway heavy-duty trucks and engines. On January 6, 2020, the EPA issued an Advanced Notice of when
the EPA may finalize the proposed rule and Proposed Rulemaking to implement the CTI program. The Company cannot predict,
however, when the EPA may finalize the proposed rule and the extent to which its operations and productivity will be adversely
impacted, by these or any other new fuel or emission restrictions.
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 315, Houston, Texas, where we lease approximately 1,429 square
feet of office space on a three-year term starting August 1, 2018, at a rate of $2,620 per month. We also have operations facilities
throughout Texas.
Our
Carthage facility is comprised of approximately 2,500 square feet and one acre of property that is leased for $2,500 per month
on a month-to-month basis.
Our
Odessa facility is comprised of approximately 6,500 square feet and 1.5 acres of property that is leased for $8,500 per month and
expires on Jan 22, 2022. We may cancel the lease with 30 days’ notice to our landlord.
Our
Alice facility is comprised of includes an office and warehouse of approximately 1,200 square feet and a two acre yard which is
leased at $2,000 per month. The lease commenced on June 1, 2018 and automatically renews for six month terms unless cancelled by
written notice.
Our
Palestine facility is leased by both 5J Oilfield Services and 5J Trucking subsidiaries have each entered into leases for our Palestine,
Texas location which is comprised of a ten acre yard, 3,000 square feet of offices and shop facilities at a combined cost of $6,750
per month. The five-year term lease expires on February 1, 2025 and has an option to extend the lease for an additional five years.
Our
Floresville facility is comprised of we lease a ten-acre yard with an office and shop facility located in Floresville, Texas. The
Floresville lease is for a term of three-years expiring on April 30, 2023 at a cost of $3,500 per month with an option to renew
for an additional five years.
Our
West Odessa facility is comprised of a nineteen acre yard with office and shop facilities. The West Odessa lease is for a term
of five years expiring on February 1, 2025, with a five year renewal option, at a cost of $4,000 per month.
The
Palestine, Floresville and West Odessa Texas leases are all leased from 5J Properties LLC, controlled by Mr. Frye, the previous
owner and current President of 5J, and an affiliate of our Company.
Our
North Houston logistics terminal lease in Houston, Texas comprises 3.4 acres, which includes office space at a monthly rent of
$6,000 and is a month to month lease.
We
lease a 3,000 square foot residential house in Odessa, Texas for employees that work shifts transferring from other geographic
areas at a monthly cost of $3,200. The lease expires in February of 2021.
Currently,
we believe that our facilities are adequate for our present and future needs.
Legal
Proceedings
In May 2018, MG
Cleaners LLC, a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court for the Western District of
Texas, Houston Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Six former employees
of MG Cleaners, the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserting amongst other things unpaid
overtime wages. The Company adamantly denies these claims.
SMG Industries has
litigated this matter for several months and considered a range of outcomes for this matter and determined that the Company’s
best interest was to settle the matter in full for $60,000, the amount reserved by the Company as its estimated liability. The
matter was settled in full in January 2020 for this reserved amount. As of December 31, 2019, the Company accrued $60,000 related
to this litigation.
From time to time,
we may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter,
in the opinion of management; no other pending or known threatened claims, actions or proceedings against us, or its wholly-owned
subsidiaries are expected to have a material adverse effect on our financial position, results of operations or cash flows. We
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 or investigations.
Other than as disclosed
above, there are no material legal proceedings currently pending or, to our knowledge, threatened against us.
Employees
As of December 31,
2019, we had 52 employees of whom 9 were administrative, 2 were in sales and marketing and 41 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.SMGIndustries.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
The
COVID-19 pandemic has significantly reduced demand for our services, and has had, and may continue to have, a material adverse
impact on our financial condition, results of operations and cash flows.
The
effects of the COVID-19 (coronavirus) pandemic, including actions taken by businesses and governments, have resulted in a significant
and swift reduction in international and U.S. economic activity. These effects have adversely affected the demand for oil and natural
gas, as well as for our services and products. The collapse in the demand for oil caused by this unprecedented global health and
economic crisis, coupled with oil oversupply, has had, and is reasonably likely to continue to have, a material adverse impact
on the demand for our services and products. The decline in our customers’ demand for our services and products has had,
and is likely to continue to have, a material adverse impact on our financial condition, results of operations and cash flows.
While
the full impact of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands
and on our customers, as well as on our operations and employees. These effects have included, and may continue to include, adverse
revenue and cash flow effects; disruptions to our operations; customer shutdowns of oil and gas exploration and production; employee
impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities
of our customers and suppliers.
The
extent to which our operating and financial results are affected by COVID-19 will depend on various factors and consequences beyond
our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the
pandemic; and the speed and effectiveness of responses to combat the virus. COVID-19, and the volatile regional and global economic
conditions stemming from the pandemic, could also aggravate the other risk factors set forth below. COVID-19 may also materially
adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently
consider to present significant risks to our operations.
Inadequate
liquidity could materially and adversely affect our business operations.
We
have significant outstanding indebtedness under our credit facilities. As of December 31, 2019, we had fully drawn the availability
under our credit facility. In addition, we experienced declines in revenues in the fourth quarter of 2019 and the first quarter
of 2020 compared to the prior year’s comparable quarters and have very limited cash flow. Due to this limited liquidity and
decreased cash flow, we may not be able to provide our services, which could lead to continued deterioration in our financial condition.
Our ability to pay interest and principal on our indebtedness and to satisfy our other obligations will depend upon our ability
to achieve increased utilization of our equipment, which is highly influenced by customer's capital expenditure and activity.
We cannot assure that our business will generate sufficient cash flows from operations, or that future capital will be available
to us in an amount sufficient to fund our liquidity needs. We cannot assure you that we will be able to raise capital through debt
or equity financings on terms acceptable to us or at all, or that we could consummate dispositions of assets or operations for
fair market value, in a timely manner or at all. Furthermore, any proceeds that we could realize from any financings or dispositions
may not be adequate to meet our debt service or other obligations then due.
The Master Lease Agreement between
Utica Leaseco, 5J and SMG contains certain restrictive covenants which could limit management’s ability to operate the business
of 5J and is secured by all of the equipment of 5J, and is guaranteed by SMG.
In connection with SMG’s acquisition of 5J, 5J entered
into a master lease agreement with Utica Leaseco, which is guaranteed by SMG. The agreement places many restrictions on 5J, among
other things, its ability to incur additional indebtedness, to create liens or other encumbrances and to sell or otherwise dispose
of its equipment without their prior approval. Any failure to comply with the covenants in the Utica Leaseco master lease agreement
could result in an event of default, which could trigger an acceleration of the related debt. If 5J were unable to repay the debt
upon any such acceleration, Utica Leaseco could seek to foreclose on the 5J assets in an effort to seek repayment under the master
lease agreement. If Utica Leaseco 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. Additionally, we have
guaranteed payments under the Utica Leaseco master lease agreement. On May 18, 2020, being effective April 27, 2020, the
Company entered into its first amendment with Utica Leaseco whereby Utica agreed to lower the monthly payment made by 5J from $331,000
to $150,000 for a six month period starting April 27, 2020. If any such guaranteed payments are not made we will be in default
of the master lease agreement which could cause Utica Leasco to foreclose on the 5J equipment, which could materially adversely
affect our ability to operate our business.
The line of credit facility for 5J
Oilfield Services and 5J Trucking pledges all of the 5J Entities accounts receivable to Amerisource Funding Inc.
In connection with
SMG’s acquisition of 5J, each of 5J Oilfield Services and 5J Trucking entered into a revolving accounts receivable assignment
and term loan financing and security agreement with Amerisource Funding Inc. Pursuant to the terms of the agreement, Amerisource
has been granted a first lien on all of the accounts receivable and other personal property of the 5J Entities, as well as a second
lien on all other property of the 5J Entities. In the event that the 5J Entities were unable to comply with the payment terms of
the Amerisource accounts receivable agreement, Amerisource could foreclose on the 5J Entities assets in an effort to seek repayment
under the terms of the agreement. If Amerisource 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. Additionally,
we have guaranteed the Amerisource financing facility on behalf of our subsidiaries who are the borrowers.
The line of credit facility for MG
Cleaners, Trinity and MWTS/Jake Oilfield contains restrictive covenants which limit management’s discretion to operate the
businesses of certain of our wholly-owned subsidiaries and is secured by all of MG’s assets and substantially all of the
assets of, Trinity, MWTS and Jake Oilfield Solutions, which is wholly-owned by MWTS.
In order to obtain
the line of credit from Catalyst Financial for accounts receivable financing, certain of our wholly-owned subsidiaries agreed to
certain covenants that place certain restrictions in the subsidiaries, among other things, their ability to incur additional indebtedness,
to create liens or other encumbrances, and to sell or otherwise dispose of assets. Any failure to comply with the covenants
included in the Catalyst Financial loan agreements could result in an event of default, which could trigger an acceleration of
the related debt. If our subsidiaries were unable to repay the debt upon any such acceleration, Catalyst Financial could
seek to foreclose on those assets in an effort to seek repayment under the loans. If Catalyst Financial 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. Additionally, we have guaranteed the Catalyst Financial financing facility on
behalf of our subsidiaries’ who are the borrowers.
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 our lines
of credit and term loans are payable monthly and are at rates per annum equal to the prime rate plus a range of 6% or more. The
interest under our credit facilities 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. Our ability to raise new debt or equity capital or
to refinance or restructure our debt at any given time depends, among other things, on the condition of the capital markets and
our financial condition at such time. Also, the terms of existing or future debt or equity instruments could further restrict our
business operations. The inability to finance future growth could materially and adversely affect our business, financial condition
and results of operations.
We are currently
in a very difficult operating environment.
We
face a very difficult operating environment in 2020 with logistics, midstream services and oilfield services as exploration and
production companies significantly cutting back their drilling and completions plans and exerting significant pressure on us to
reduce our prices for the services we provide. We cannot assure that we will raise any such capital on terms acceptable to us,
if at all. Due to our lack of capital we may be forced to curtail operations in some or all of our locations which would materially
and adversely affect our revenues and operations.
Our business
depends on domestic (United States) spending by the crude oil and natural gas industry which suffered significant price volatility
in 2019 and 2020, 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 in 2019 and 2020 have resulted in substantial declines
in capital spending and drilling programs across the industry. As a result of the declines in oil and natural gas prices, many
exploration and production companies have and are expected to substantially reduce drilling and completions programs
at times and have required service providers to make pricing concessions.
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,
OPEC and Russia oil production
decisions,
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cost of exploring for, producing, and delivering oil and natural gas,
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expectations regarding future energy prices,
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advancements in exploration and development technology,
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adoption or repeal of laws regulating oil and gas production in the U.S.,
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imposition or lifting of economic sanctions against foreign companies,
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weather conditions,
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rate of discovery of new oil and natural gas reserves,
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tax policy regarding the oil and gas industry,
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development and use of alternative energy sources, and,
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the ability of oil and gas companies
to generate funds or otherwise obtain external capital for projects and
production operations.
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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.
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 domestic United States oil and gas operators and drilling rig contractors. During fiscal year 2019, three
of our customers accounted for approximately 40% of our total gross revenues, with one customer accounting for 15%, one for 13%
and another accounting for 12%. No other customers exceeded 10% of revenues during 2019. During fiscal year 2018, two of our customers
accounted for approximately 50% of our total gross revenues, with one customer accounting for 31% and another accounting for 19%.
No other customers exceeded 10% of revenues during 2018. These customers do not have any ongoing commitment to purchase our services.
While additional customers have been sourced since December 31, 2019, 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.
We are dependent on third-parties to supply the chemicals
required to manufacture our products.
We do not manufacture
the raw 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 raw 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 affected.
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, our
EVP and President of MG Cleaners, Trinity Services and Momentum Water Transfer, our operating subsidiaries. In connection with
our acquisition of 5J, 5J’s senior management entered into three year employment agreements with 5J, however, the loss of
any such key personnel could result in a disruption to the operations of 5J. 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.
There may be restrictions on the
availability to procure water or adjustments in water sourcing requirements could decrease the demand for services related to our
water business.
Our business includes
water transfer for use to our oil and gas customer activities. Our ability to obtain water we supply may be limited due to reasons
such as extended drought or our inability to obtain or maintain water sourcing permits or other rights. Some state or local government
authorities also may begin to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure
adequate local water supply and quality of water. Any such decrease in the availability of water or demand for water services could
adversely affect our business and results of operations.
Anti-fracking possibilities could
adversely impact our business.
Some states and certain
municipalities have regulated or are considering regulating fracking which obtained, could impact certain of our operations. While
we do not believe that these regulations and contemplated actions have limited or prohibited fracking, and have not impacted our
activities to date, there can be no assurance that these actions, if taken on a wider scale, may not adversely impact our business
operations and revenue.
While our growth strategy includes seeking acquisitions
of other service and logistics companies, we may not be successful in identifying or making any acquisitions in the future. 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 logistics and transportation, midstream and pipeline
services, as well as oilfield 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:
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the business culture of the acquired business may not match well with our culture,
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we may fail to retain, motivate and integrate key management and other employees of the acquired business,
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we may experience problems in retaining customers and integrating customer bases, and
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we may experience complexities associated with managing the combined businesses and consolidating multiple physical locations.
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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:
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Lack of sufficient executive level personnel,
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Increased administrative burden,
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Availability of suitable acquisitions,
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Additional equipment to satisfy customer requirements, and,
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The ability to provide focused service attention to our customers.
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If we are unable to
manage our expected future growth, our business could be materially adversely affected.
Environmental compliance costs and liabilities could reduce
our earnings and available cash for our operations.
We are subject to increasingly
stringent laws and regulations relating to environmental protection and the importation and use of hazardous materials, including
laws and regulations governing air emissions, water discharges and waste management. Government authorities have the power to enforce
compliance with their regulations, and violations are subject to fines, injunctions or both. We incur and expect to continue to
incur capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and
regulations are becoming increasingly complex and expensive to implement. These laws may provide for “strict liability”
for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages
without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and serval strict liability
for remediation of spills and release of hazardous substances.
Stricter enforcement
of existing laws and regulations, new laws and regulations or the imposition of new or increased requirements could require us
to incur costs and penalties, or become the basis of new or increased liabilities that could reduce its revenue and available cash
for operations. The Company believes it is currently in compliance with environmental laws and regulations.
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:
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Personal injury or loss of life,
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Damage to or destruction of property, equipment and the environment, and
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Suspension of operations by our customers.
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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.
Indemnification
of officers and directors may result in unanticipated expenses.
The
Delaware General Corporation Law, our Amended and Restated Certificate of Incorporation and bylaws, and indemnification agreements
between the Company and certain individuals provide for the indemnification of our directors, officers, employees, and agents,
under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they
become a party arising from their association with us or activities on our behalf. We also will bear the expenses of such litigation
for any of our directors, officers, employees, or agents, upon such person’s promise to repay them if it is ultimately determined
that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures
by us that we may be unable to recoup and could direct funds away from our business and products (if any).
Our operations are subject to
cyber-attacks that could have a material adverse effect on our business, consolidated results of operations
and consolidated financial condition.
Our
operations are increasingly dependent on digital technologies and services. We use these technologies for internal purposes, including
data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are
subject to the risk of cyber-attacks. If our systems for protecting against cybersecurity risks prove not to be sufficient, we
could be adversely affected by, among other things: loss of or damage to intellectual property, proprietary or confidential information,
or customer, supplier, or employee data; interruption of our business operations; and increased costs required to prevent, respond
to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees
and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business,
consolidated results of operations and consolidated financial condition.
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 QB Venture Market (herein “OTC 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 May 29, 2020, we had 86 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 ten percent
or greater shareholders collectively own a substantial portion of our outstanding common stock and preferred stock, and as long
as they do, they may be able to control the outcome of stockholder voting.
Our Officers, Directors
and ten percent or greater shareholders are collectively the beneficial owners of approximately 64.6% of the outstanding
shares of our common stock as of the date of this report. As long as our Officers, Directors and ten percent or greater 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 ten percent or greater 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 ten percent or greater shareholders have significant influence over our company, the price
of our common stock could be materially depressed. The Officers, Directors and ten percent or greater 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. Currently, the Company
has issued 2,000 shares of Series A convertible preferred stock in connection with the Trinity Services acquisition in June 2019
and 6,000 shares of Series B convertible preferred stock in connection the acquisition of 5J Trucking and 5J Oilfield Services.
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, 8,000
of which have been issued to date as Series A and Series B 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:
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our developing business,
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relatively low price per share,
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relatively low public float,
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variations in quarterly operating
results,
changes in our cash flow from
operations or earnings estimates,
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general market trends and economic conditions in the industries in which we do business,
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Domestic and international economic,
legal and regulatory factors unrelated to our performance,
the number of holders of our
common stock, and,
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the interest of securities dealers in maintaining a market for our common stock.
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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 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 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.
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Item 1B.
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Unresolved Staff Comments
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None.
Our principal executive office is located at 710 N. Post Oak
Road, Suite 315, Houston, Texas, where we lease approximately 1,429 square feet of office space on a three year term starting August
1, 2018, at a rate of $2,620 per month. We also have facilities throughout Texas. Our Carthage facility is comprised of approximately
2,500 square feet and one acre of property that is leased for $2,500 per month. The Carthage facility is on a month to month basis
and is used for our operations throughout East Texas. 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 increased 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. Our Alice facility includes an office and warehouse of approximately 1,200 square feet and a one acre yard which
is leased at $2,000 per month. The lease is for six months, commencing on June 1, 2018 and automatically renews for six month terms
unless cancelled by written notice. Our 5J Oilfield Services and 5J Trucking subsidiaries both have each entered into leases for
our Palestine, Texas location. The term of the lease is for five years, expiring on February 1, 2025. The aggregate lease amount
is for $6,750 per month, with an option to extend the lease for an additional five years. We lease a ten-acre facility located
in Floresville, Texas. The Floresville lease is for a term of three-years expiring on April 30, 2023 at a cost of $3,500 per month.
We lease a nineteen acre facility in West Odessa, Texas. The West Odessa lease is for a term of five years expiring on February
1, 2025 at a cost of $4,000 per month. The Palestine, Floresville and West Odessa leases are all leased from 5J Properties LLC,
controlled by Mr. Frye the previous owner of 5J and an affiliate of our company. Our logistics terminal lease in Houston, Texas
comprises 3.4 acres at a monthly rent of $6,000 and is a month to month lease.
Currently, we believe
that our facilities are adequate for our present and future needs.
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Item 3.
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Legal Proceedings
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In May 2018,
MG Cleaners LLC, a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court
for the Western
District of Texas, Houston Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Six former
employees of MG Cleaners, the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserting amongst other things
unpaid overtime wages. The Company adamantly denies these claims. We have litigated this matter for several months and considered
a range of outcomes for this matter and determined that management’s best estimated amount to settle this matter is for the
$60,000 accrued on our liabilities in the fiscal year 2019. On January 30, 2020, this matter was settled.
Litigation
From time
to time, we may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above
listed matter, in the opinion of management; no other pending or known threatened claims, actions or proceedings against us are
expected to have a material adverse effect on SMG’s financial position, results of operations or cash flows. We 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 or investigations.
Other than as disclosed above, there are no material
legal proceedings currently pending or, to our knowledge, threatened against us.
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Item 4.
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Mine Safety Disclosures
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Not applicable.
PART III
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Item 10.
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Directors, Executive Officers, and Corporate Governance
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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.
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Name
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Age
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Position
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Matthew C. Flemming
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51
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Chief Executive Officer, Interim Chief Financial Officer and Chairman
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Stephen Christian
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38
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Executive Vice President and Secretary
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Steven E. Paulson
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55
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Director
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Michael A. Gilbert II
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45
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Director
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R. Michael Villarreal
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49
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Director
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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 building to $4.2 million
per month by 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. Christian
has served as Executive Vice President and Secretary of the Company since April 27, 2018. Mr. Christian has served as President
of MG Cleaners, LLC, our wholly-owned subsidiary, since October 2010. Prior to MG, Mr. Christian was employed by the largest drilling
rig operator in the United States, known as Nabors Drilling, a subsidiary of Nabors Industries (NYSE:NBR), from 2004 to 2010, in
various positions rising to Rig Manager. Mr. Christian has significant operational experience and customer relationships in the
drilling market segment and oilfield industry. Mr. Christian was educated at Oklahoma Christian University.
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.
Mr.
Villarreal has served as a Director of the Company since July 2019. Mr. Villarreal is the Founder and President of Flite
Banking Centers, LLC since its inception in 2009. Flite is a leading provider of specialty real estate for the deployment of off-premise
ATMs for financial institutions. Flite is an authorized NCR Solutions provider for intelligent ATM equipment and software. Mr.
Villarreal is responsible for the implementation and execution of Flite’s business strategies, strategic partnerships, capital
fund raising and oversees Flite’s growth initiatives. Mr. Villarreal has negotiated long-term strategic real estate contracts
with Walmart Inc, Albertsons Companies, Starbucks, Inc., Brixmor Properties Group, Weingarten Realty and many other commercial
retail landowners. As president of Flite, Mr. Villarreal has established strategic relationships and long-term contracts with
several U.S. and International Financial Institutions, including JPMorgan Chase, Wells Fargo, Bank of America, BBVA, M&T Bank,
PNC Bank, Regions Bank, and USAA Federal Savings Bank. Prior to establishing Flite, from March 2008 to March 2009, Mr. Villarreal
was the Co-founder and Managing Partner of V.V. Swartz and Co., where he was responsible for the origination and execution of
strategic advisory services, including mergers and acquisitions and private capital placements for micro-cap and small-cap energy
companies. From May 2006 to February 2008, Mr. Villarreal was a Senior Vice President with Morgan Keegan’s energy investment
banking group, where his duties involved origination and execution of public market capital transactions, M&A advisory, private
capital placements, and strategic advisory services. From June 2005 to June 2006, Mr. Villarreal was a Managing Director with
DRG&L where he co-led the firm’s Energy Capital Markets Advisory practices. Mr. Villarreal has over 14 years’
experience as a senior equity research analyst covering oilfield service companies and independent producers. He has held senior
level positions with Morgan Keegan, CIBC World Markets, Dillon Read & Company and Jefferies & Co. Mr. Villarreal received
his B.B.A. in Finance from the University of Houston.
Director Independence and Qualifications
The Board of Directors
has determined that each of Messrs. Paulson, Gilbert and Villarreal 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:
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·
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the Director is, or at any time during the past three years was, an employee of the Company,
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·
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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),
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a family member of the Director is, or at any time during the past three years was, an Executive Officer of the Company,
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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),
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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,
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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.
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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:
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been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences),
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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,
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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,
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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 Victoria 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 that period.
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. Gilbert, Paulson and Villarreal 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.SMGIndustries.com
Audit Committee.
Our Audit Committee is composed of Mr. Villarreal, 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. Villarreal 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:
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assist the monitoring the integrity of our financial statements,
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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,
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review the proposed scope and results of the audit and discuss required communications in connection with the audit,
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review and pre-approve the independent registered public accounting firm’s audit and non-audit services rendered,
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review accounting and financial controls with the independent registered public accounting firm and our financial and accounting staff,
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meet regularly with the independent registered public accounting firm without management present,
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recognize and prevent prohibited non-audit services,
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establish procedures for complaints received by us regarding accounting matters,
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review, pass on the fairness of, and approve “related-party transactions” as required by and in conformance with the rules and regulations of the SEC,
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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,
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prepare the report of the audit committee that SEC rules require to be included in our annual meeting proxy statement.
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Compensation Committee.
Our Compensation Committee is composed of Mr. Gilbert, Mr. Villarreal and Mr. Paulson as Chairman of the committee. The Compensation
Committee reviews its charter periodically. Our Compensation Committee’s primary functions are:
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review and recommend the compensation arrangements for management, including the compensation for our Chief Executive Officer,
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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,
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approve and oversee reimbursement policies for Directors, Executive Officers and key employees,
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administer our stock incentive plan,
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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,
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prepare the report of the compensation committee that SEC rules require to be included in our annual meeting proxy statement.
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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 2019.
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. Villarreal, Mr. Paulson and Mr. Gilbert as Chairman
of the committee. The Nominating and Governance Committee has a charter, which is reviewed periodically.
Our Nominating and
Governance Committee’s primary functions are:
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identify the appropriate size, functioning and needs of and nominate members of the Board,
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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,
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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,
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Oversee the evaluation of the Board and management.
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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 315,
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.SMGIndustries.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.SMGIndustries.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 315, 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 20, 2017,
MG Cleaners, our wholly-owned subsidiary, entered into an employment agreement with Stephen Christian, our Executive Vice President
and Secretary and the President of MG Cleaners. Pursuant to the terms of the agreement, Mr. Christian is currently paid an annual
salary of $170,000 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. Christian’s base salary, Mr. Christian is entitled to bonuses at the discretion
of our Compensation Committee of the Board of Directors.
Certain Relationships
and Related Transactions and Director Independence
The following is a
description of the transactions we have engaged in since January 1, 2019, with our Directors and Officers and beneficial owners
of more than five percent of our voting securities and their affiliates:
On January 11, 2019,
the Company borrowed $100,000 from Aeneas, LC, of which Mr. George Gilman is the sole Trustee, pursuant to a 10% Secured Promissory
Note.
On April 8, 2019, the
$100,000 Secured Promissory Note from Aeneas, LC was converted into 511,370 shares of our common stock which included $2,274 of
accrued interest in the conversion amount.
On May 1, 2019, the
Company borrowed $100,000 from Mary Payne Family Trust, Mr. George Gilman Trustee, pursuant to a 12% interest rate Promissory Note
that matured July 1, 2019. In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a
$0.30 exercise price and a five year term.
On June 17, 2019, the
Company entered into a First Amendment to Mary Payne Family Trust 12% Promissory Note extending the maturity to September 30, 2019
and issued a warrant for the purchase of up to 150,000 shares, having a ten year term and a $0.30 fixed exercise price.
On June 17, 2019 the
Company borrowed $80,000 from George Gilman pursuant to a Promissory Note with a 12% interest rate that matures on September 30,
2019. In connection with this note, we issued a warrant for the purchase of up to 120,000 shares, having a ten year term and a
fixed exercise price of $0.30 per share.
On October 1, 2019,
the Company entered into a First Amendment for the George Gilman $80,000 Promissory Note extending the maturity to March 30, 2020.
In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a ten year term and a fixed
exercise price of $0.15 per share.
On October 1, 2019,
the Company entered into a Second Amendment to the $100,000 Promissory Note for Mary Payne Family Trust, George Gilman, Trustee
that extended the maturity to March 30, 2020. In connection with this note, we issued a warrant for the purchase of up to 120,000
shares, having a ten year term and a fixed exercise price of $0.15 per share.
On December 12, 2019,
the Company borrowed $50,000 from Mary Payne Trust, George Gilman Trustee, pursuant to a 12% Promissory Note that has a term payment
schedule. In connection with this note, the Company issued a warrant for the purchase of up to 75,000 shares, with a $0.15 fixed
exercise price and a ten year term.
On October 1, 2019, the Company entered into
a Second Amendment with the Leo B. Womack Family Trust, Leo Womack Trustee, pursuant to a 10% interest rate Promissory Note to
capitalize all accrued interest of $5,590 to be included as a new principle balance of $45,590 with a new maturity date of June
30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 40,000 shares, having an exercise price
of $0.15 and a 10 year term.
On March 6, 2020, the Company entered into
a First Amendment with Leo Womack, pursuant to a 10% Promissory Note in the principal amount of $100,000 to extend the maturity
date to June 30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 166,667 shares, having
an exercise price of $0.20 and a 10 year term.
On February 27, 2020,
Apex Steven. Madden invested $500,000 into the Company’s convertible note “Stretch Note” offering that closed
in connection with the February 27, 2020 acquisition of 5J Trucking LLC and 5J Oilfield Services LLC (together “5J”).
His investment was funded with $250,000 in cash and the conversion of a previous note held by Mr. Madden originally issued September
2018 of $250,000. The new convertible Stretch Note pays 10% interest quarterly and principal and any interest is due at maturity
in February 2023. The Stretch Note is convertible into our common stock at a fixed exercise price of $0.25 per share anytime while
the note is outstanding at the description of the note holder.
James Frye, who currently
serves as President of our 5J subsidiary, and owns our $6 million Series B Convertible Preferred Stock, also owns or has control
over 5J Properties LLC, an entity that is the lessor to three leases with the 5J Entities. These three leases located in Palestine,
West Odessa and Floresville Texas all have similar five year terms with options for renewal. The current monthly rent for these
leases totals approximately $14,250.
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. Paulson, Gilbert and Villarreal 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.
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Item 11.
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Executive Compensation
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Summary Compensation Table
The following table
shows the total compensation earned during the fiscal years ended December 31, 2019 and 2018 to (1) our Chief Executive Officer,
and (2) our other named executive officers during the fiscal years ended December 31, 2019 and 2018 (collectively, the “named
executive officers”):
Name and principal
position
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Year
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Salary
($)
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Bonus
($)
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Stock
awards ($)
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Option
awards ($)
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Non-equity
incentive
plan
compensation
($)
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Non-qualified
deferred
compensation
earnings
($)
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All other
compensation
($)
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Total
($)
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Matthew Flemming
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2019
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180,000
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|
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12,500
|
|
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|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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|
180,000
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|
|
Chief Executive Officer
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|
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2018
|
|
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|
180,000
|
|
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|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Stephen Christian
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2019
|
|
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155 ,000
|
|
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12 ,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
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120,000
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|
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Executive Vice President and Secretary
and President of MG Cleaners
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|
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2018
|
|
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120,000
|
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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Vanessa Pittman
Controller
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|
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2019
|
|
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|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,000
|
|
|
(1)
|
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
During the year ended
December 31, 2019, each of our non-executive independent directors received 100,000 options to purchase shares of our common stock
for their Board service.
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 meeting.
Equity Compensation of Directors
Our directors are eligible to participate
in our 2018 Stock Option Plan.
Outstanding Equity Awards at 2019 Year
End
There are no outstanding
unexercised options, unvested stock and equity incentive plan awards held by any of our executive officers as of December 31, 2019.
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The following table
sets forth, as of May 20, 2020, 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 May
29, 2020, there were 17,380,108 shares of our common stock issued and outstanding. Except as otherwise listed below, the address
of each person is 710 N. Post Oak Road, Suite 315, Houston Texas 77024.
|
Name
|
|
Amount of
Beneficial
Ownership of Common
Stock (1)
|
|
|
Percent of Common
Stock
|
|
|
Leo Womack (5)
|
|
|
1,173,334
|
|
|
|
6.6
|
%
|
|
George Gilman (6)
|
|
|
2,559,704
|
|
|
|
13.9
|
%
|
|
Newton Dorsett (7)
|
|
|
4,000,000
|
|
|
|
18.7
|
%
|
|
James E. Frye, Jr. (8)
|
|
|
4,800,000
|
|
|
|
21.6
|
%
|
|
Amerisource Leasing Corporation (9)
|
|
|
1,375,000
|
|
|
|
7.5
|
%
|
|
Apex Heritage Investments, LLC (10)
|
|
|
2,750,000
|
|
|
|
14.2
|
%
|
|
Chiron Financial LLC (11)
|
|
|
1,925,000
|
|
|
|
10.3
|
%
|
|
Exit Partners LLC (12)
|
|
|
1,100,000
|
|
|
|
6.1
|
%
|
|
Grey Fox Investments LP (13)
|
|
|
1,375,000
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
Matthew Flemming (2)
|
|
|
1,600,000
|
|
|
|
8.7
|
%
|
|
Stephen Christian (3)
|
|
|
2,158,276
|
|
|
|
11.9
|
%
|
|
Steven Paulson (4)
|
|
|
200,000
|
|
|
|
1.1
|
%
|
|
Michael A. Gilbert II (4)
|
|
|
200,000
|
|
|
|
1.1
|
%
|
|
R. Michael Villarreal (4)
|
|
|
100,000
|
|
|
|
*
|
|
|
All Directors and Executive Officers as a group (5 persons) (1)-(4)
|
|
|
4,258,276
|
|
|
|
21.9
|
%
|
*less than one percent
|
(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. Includes 1,000,000 shares of common stock issuable upon the exercise of options held by Mr. Flemming.
|
|
(3)
|
Includes 750,000 shares of common stock issuable upon exercise of options held by Mr. Christian.
|
|
(4)
|
Includes 100,000 shares of common stock issuable upon exercise of options.
|
|
(5)
|
Includes: (i) 760,000 shares of common stock held by Ramsey Financial Fund One, LLC, of which Leo Womack is the managing member; (ii) 15,000 shares of common stock held by the Leo B. Womack Family Trust, of which Mr. Womack is the Trustee and has sole voting and investment control over the shares, and (iii) 398,334 shares of common stock issuable upon the exercise of options held by Mr. Womack.
|
|
(6)
|
Includes: (i) 550,000 shares of common stock held by Aeneas, LC, of which Mr. Gilman is the manager and has sole voting and investment control over the shares, (ii) 500,000 shares of common stock held by The Mary Payne Family Trust, of which Mr. Gilman is the Trustee and has sole voting and investment control over the shares, (iii) 195,000 shares of common stock issuable upon the exercise of options held by The Mary Payne Trust, and (iv) 803,334 shares of common stock issuable upon the exercise of options held by Mr. Gilman.
|
|
(7)
|
Includes 4,000,000 shares of common stock issuable upon the conversion of 2,000 shares of Series A Convertible Preferred Stock held by Mr. Dorsett.
|
|
|
|
|
|
|
|
(8)
|
Includes 4,800,000 shares of common stock issuable upon the conversion of 6,000 shares of Series B Convertible Preferred Stock held by Mr. Frye.
|
|
(9)
|
Includes 1,000,000 shares of common stock issuable upon the conversion of a promissory note held by Amerisource Leasing Corporation, of which Mr. D. Michael Monk has sole or shared voting and investment control over the shares. The business address of Amerisource Leasing Corporation is 7225 Langtry Street, Houston, Texas 77040.
|
|
(10)
|
Includes 2,000,000 shares of common stock issuable upon the conversion of a promissory note held by Apex Heritage Investments, LLC, of which Mr. Steven H. Madden has sole voting and investment control over the shares. The business address of Apex Heritage Investments, LLC is 9821 Katy Freeway #880, Houston, Texas 77024.
|
|
(11)
|
Includes 1,400,000 shares of common stock issuable upon the conversion of a promissory note held by Chiron Financial LLC, of which Mr. Scott Johnson has sole or shared voting and investment control over the shares. The business address of Chiron Financial LLC is 1305 McKinney, Suite 2800, Houston, Texas 77010.
|
|
(12)
|
Includes 800,000 shares of common stock issuable upon the conversion of a promissory note held by Exit Partners LLC, of which Mr. Mike Stengle has sole voting and investment control over the shares. The business address of Exit Partners LLC is 5600 Tennyson Pkwy #150, Plano, Texas 75024.
|
|
(13)
|
Includes 1,000,000 shares issuable upon the conversion of a promissory note held by Grey Fox Investments LLC, of which Mr. Brady Crosswell has sole voting and investment control over the shares. The business address of Grey Fox Investments LLC is 902 Wild Valley Road, Houston, Texas 77057.
|
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 2019, 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, 2019.
|
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
|
|
|
590,000
|
|
|
$
|
0.47
|
|
|
|
-0-
|
|
|
2018 Stock Option Plan*
|
|
|
50,000
|
|
|
|
0.79
|
|
|
|
1,950,000
|
|
|
Total
|
|
|
640,000
|
|
|
$
|
0.50
|
|
|
|
1,950,000
|
|
*In
February 2020, the Company’s board of directors adopted a board resolution increasing the number of shares available for
issuance under the 2018 Stock Option Plan from 2,000,000 to 4,000,000.
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. In February 2020, our board
of directors approved an amendment to the 2018 Plan to increase the number of shares of common stock that may be issued under the
2018 Plan from 2,000,000 shares to 4,000,000 shares.
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 4,000,000 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, 2019, with our directors and officers and beneficial
owners of more than five percent of our voting securities and their affiliates:
On January 11, 2019,
the Company borrowed $100,000 from Aeneas, LC, of which Mr. George Gilman is the Trustee, pursuant to a 10% Secured Promissory
Note.
On April 8, 2019, the
$100,000 Secured Promissory Note from Aeneas, LC was converted into 511,370 shares of our common stock which included $2,274 of
accrued interest in the conversion amount.
On May 1, 2019, the
Company borrowed $100,000 from Mary Payne Family Trust, Mr. George Gilman Trustee, pursuant to a 12% interest rate Promissory Note
that matured July 1, 2019. In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a
$0.30 exercise price and a five year term.
On June 17, 2019, the
Company entered into a First Amendment to Mary Payne Family Trust 12% Promissory Note extending the maturity to September 30, 2019
and issued a warrant for the purchase of up to 150,000 shares, having a ten year term and a $0.30 fixed exercise price.
On June 17, 2019 the
Company borrowed $80,000 from George Gilman pursuant to a Promissory Note with a 12% interest rate that matures on September 30,
2019. In connection with this note, we issued a warrant for the purchase of up to 120,000 shares, having a ten year term and a
fixed exercise price of $0.30 per share.
On October 1, 2019,
the Company entered into a First Amendment for the George Gilman $80,000 Promissory Note extending the maturity to March 30, 2020.
In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a ten year term and a fixed
exercise price of $0.15 per share.
On October 1, 2019,
the Company entered into a Second Amendment to the $100,000 Promissory Note for Mary Payne Family Trust, George Gilman Trustee
that extended the maturity to March 30, 2020. In connection with this note, we issued a warrant for the purchase of up to 120,000
shares, having a ten year term and a fixed exercise price of $0.15 per share.
On December 12, 2019,
the Company borrowed $50,000 from Mary Payne Trust, George Gilman Trustee, pursuant to a 12% Promissory Note that has a term payment
schedule. In connection with this note, the Company issued a warrant for the purchase of up to 75,000 shares, with a $0.15 fixed
exercise price and a ten year term.
On October 1, 2019, the Company entered into
a Second Amendment with the Leo B. Womack Family Trust, Leo Womack Trustee, pursuant to a 10% interest rate Promissory Note to
capitalize all accrued interest of $5,590 to be included as a new principle balance of $45,590 with a new maturity date of June
30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 40,000 shares, having an exercise price
of $0.15 and a 10 year term.
On March 6, 2020, the Company entered into
a First Amendment with Leo Womack, pursuant to a 10% Promissory Note in the principal amount of $100,000 to extend the maturity
date to June 30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 166,667 shares, having
an exercise price of $0.20 and a 10 year term.
Subsequent to our 2019
Annual Report on Form 10-K, Steven. Madden invested $500,000 into the Company’s convertible note “Stretch Note”
offering that closed in connection with the February 27, 2020 acquisition of 5J Trucking LLC and 5J Oilfield Services LLC (together
“5J”). His investment was funded with $250,000 in cash and the conversion of a previous note held by Mr. Madden originally
issued September 2018 of $250,000. The new convertible Stretch Note pays 10% interest quarterly and principal and any interest
is due at maturity in February 2023. The Stretch Note is convertible into our common stock at a fixed exercise price of $0.25 per
share anytime while the note is outstanding at the description of the note holder.
James Frye, who currently
serves as President of our 5J subsidiary, and owns our $6 million Series B Convertible Preferred Stock, also owns or has control
over 5J Properties LLC, an entity that is the lessor to three leases used by the 5J Entities. These three leases located in Palestine,
West Odessa and Floresville Texas all have similar five year terms with options for renewal. The current monthly rent for these
leases totals approximately $14,250.
|
|
Item 14.
|
Principal Accounting Fees and Services
|
In September 2017,
the Audit Committee of the Board approved the appointment of the firm of MaloneBailey LLP (“Malone”) to serve as our
independent registered public accountant. 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:
|
|
|
2019
|
|
|
2018
|
|
|
Audit Fees (1):
|
|
$
|
91,000
|
|
|
$
|
72,500
|
|
|
Tax Fees (2):
|
|
|
-
|
|
|
|
|
|
|
All Other Fees:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,000
|
|
|
$
|
72,500
|
|
|
|
(1)
|
Audit fees include fees for professional services by Malone in 2019 and 2018 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)
|
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.
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. The Company
original business was the acquisition and stockpile of a rare metal known as Indium used in cell phones and other industrial applications.
The Company eventually sold its stockpile and distributed most of the proceeds to its stockholders via special dividends and share
repurchases.
On September 19, 2017, the
Company entered the domestic oilfield services market and executed an Agreement and Plan of Share Exchange with MG Cleaners LLC,
a Texas based product and services company focused on drilling rig contractors and oilfield customers.
On September 19, 2017, 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 was recorded as an Accounts Payable – Related Party on the balance sheet. On January 30, 2018 the Company changed
its name from SMG Indium Resources Ltd. to its present name SMG Industries Inc.
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.
The Company today is a growth-oriented
midstream, logistics and oilfield services company that operates throughout the domestic Southwest United States. Through its wholly-owned
operating subsidiaries, the Company offers an expanding suite of products and services across the oilfield market segments of drilling,
completions and production.
On February 27, 2020, we entered
into Membership Interest Purchase Agreements for the acquisition of all of the membership interests of each of 5J Oilfield Services
LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas limited liability company (“5J
Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as the “5J Entities”). 5J Oilfield
and 5J Trucking services the drilling rig transportation and midstream heavy haul logistics market segments. 5J’s business
includes transporting midstream compressors, production equipment and infrastructure components such as cement bridge beams with
a fleet of more than 100 trucks, 200 trailers and 15 cranes. MG Cleaners LLC., serves the drilling market segment with proprietary
branded products including detergents, surfactants and degreasers (such as Miracle Blue®) as well as equipment and
service crews that perform on-site repairs, maintenance and drilling rig wash services. SMG's oil tools rental division includes
an inventory of more than 800 bottom hole assembly (BHA) oil tools such as stabilizers, drill collars, crossovers and bit subs
rented to oil companies and their directional drillers. SMG's frac water management division, known as Momentum Water Transfer,
focuses in the completion or fracing market segment providing high volume above ground equipment and temporary infrastructure to
route water used on location for fracing.
On
June 3, 2019, we entered into an Agreement and Plan of Share Exchange dated as of such date (with Trinity Services LLC, a Louisiana
limited liability company (“Trinity”) and the sole member of Trinity (the “Trinity Member”). We completed
the closing of the acquisition of Trinity on June 26, 2019. Trinity Services LLC provides lease roads, location and pad development
using construction equipment to build drilling pad locations and well site services using a work over rig to perform services on
existing wells. SMG Industries, Inc. headquartered in Houston, Texas has facilities in Palestine, Floresville, Waskom, Carthage,
Odessa and Alice, Texas.
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.
NOTE 2 — SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation
The Company prepares its consolidated
financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts
of the Company and its wholly subsidiaries, MG Cleaners, LLC and Momentum Water Transfer Services, LLC Jake Oilfield Solutions
LLC, Big Vehicle & Equipment Company, LLC and Trinity Services, LLC 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 2019, three
of our customers accounted for approximately 40% of our total gross revenues, with customers
each accounting for 15%, 13% and 12% respectively. No other customers exceeded 10% of revenues during 2019. During fiscal
year 2018, two of our customers accounted for approximately 50% of our total gross revenues, with one customer accounting for 31%
and another accounting for 19%. No other customers exceeded 10% of revenues during 2018. Three customers accounted for more than
48% of accounts receivable at December 31, 2019, and three customers accounted for more than 51% of accounts receivable at December
31, 2018. No other customers exceeded 10% of accounts receivable as of December 31, 2019 and 2018. 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.
No vendors exceeded 10% of
accounts payable at December 31, 2019 and 2018.
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, 2019 and 2018, the allowance
for bad debts was $254,483 and $25,000, 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.
Property and Equipment
Property and equipment are 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:
|
Category
|
|
Estimated
Useful Lives
|
|
Building and improvements
|
|
20 years
|
|
Vehicles and trailers
|
|
5 years
|
|
Equipment
|
|
5 -7 years
|
|
Furniture, Fixtures and Other
|
|
3 - 7 years
|
Goodwill, Intangible
Assets, and Long-Lived Assets
Goodwill is carried at cost
and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal year, relying on a
number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace
data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according
to specifications set forth in ASC 350. The Company completed an evaluation of goodwill at December 31, 2019 and determined that
the goodwill should be fully impaired.
The fair value of the Company’s
reporting unit is dependent upon the Company’s estimate of future cash flows and other factors. The Company’s estimates
of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual
future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from the Company’s market
capitalization plus a suitable control premium at date of the evaluation.
The financial and credit market
volatility directly impacts the Company’s fair value measurement through the Company’s weighted average cost of capital
that the Company uses to determine its discount rate and through the Company’s stock price that the Company uses to determine
its market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded.
The Company recognizes an
acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when
it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually
or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment
losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future
cash flows and its carrying amount exceeds its fair value.
The Company’s long-lived
assets, including intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the historical
cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the
undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted
future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference
between the net book value and the fair value of the long-lived asset. During the years ended December 31, 2019 and 2018, the Company
evaluated long lived assets for impairment and recorded impairment losses of $577,766 and $0, respectively.
Revenue Recognition
The Company recognizes revenue
in accordance with ASC Topic 606, Revenue From Contracts With Customers, which was adopted on January 1, 2018 using the modified
retrospective method. Revenues are recognized when control of the promised goods or services is transferred to the customer in
an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services.
Revenue is recognized based on the following five step model:
-
Identification of the contract with a customer
-
Identification of the performance obligations in the contract
-
Determination of the transaction price
-
Allocation of the transaction price to the performance obligations in the contract
-
Recognition of revenue when, or as, the Company satisfies a performance obligation
Product sales are recognized
all of the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is
probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation
whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives
and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is
deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title
and risk of ownership of the product has transferred to the customer. Net revenues comprise gross revenues less customer discounts
and allowances, actual and expected returns. Shipping charges billed to customers are included in net sales. Various taxes on the
sale of products and enrollment packages to customers are collected by the Company as an agent and remitted to the respective taxing
authority. These taxes are presented on a net basis and recorded as a liability until remitted to the respective taxing authority.
Service revenues are recognized
when (or as) the Company satisfies a performance obligation by transferring control of the performance obligation to a customer.
Control of a performance obligation may transfer to the customer either over time or at a point in time depending on an evaluation
of the specific facts and circumstances for each contract, including the terms and conditions of the contract as agreed with the
customer, as well as the nature of the services to be provided. Control transfers over time when the customer is able to direct
the use of and obtain substantially all of the benefits of our work as we perform. This typically occurs when services have no
alternative use and the Company has a right to payment for performance completed to date, including a reasonable profit margin.
The majority of our revenues are recognized at a point in time.
Contract Liabilities
The Company may at times receive
payment at the time customer places an order. Amounts received for undelivered product or services not yet provided are considered
a contract liability and are recorded as deferred revenue. As of December 31, 2019 and 2018, the Company had deferred revenue of
$36,379 and $39,877, respectively, related to unsatisfied performance obligations.
Disaggregation of revenue
The Company disaggregates
revenue between services and products revenue. All revenues are currently in the southern region of the United States.
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Service revenue
|
|
$
|
3,947,518
|
|
|
$
|
1,794,151
|
|
|
Product revenue
|
|
|
2,526,750
|
|
|
|
2,628,285
|
|
|
Total revenue
|
|
$
|
6,474,268
|
|
|
$
|
4,422,436
|
|
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.
During the years ended December
31, 2019 and 2018, the Company recorded non-recurring fair value measurements related to the Trinity Services LLC and Momentum
Water Transfer Services LLC acquisitions. These fair value measurements were classified as Level 3 within the fair value hierarchy.
See Note 10.
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 year ended December 31, 2019, 845,000 of stock options, 1,430,001 of warrants, 4,000,000 shares issuable from Series A Preferred
Stock and 600,000 shares issuable from convertible notes were considered for their dilutive effects. For the year ended December
31, 2018, 640,000 of stock options, 525,001 of stock warrants and 500,000 shares issuable from convertible notes payable were considered
for their dilutive effects.
|
Basic and Diluted Loss
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Net loss
|
|
$
|
(3,984,358
|
)
|
|
$
|
(1,143,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Common Shares:
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
13,824,474
|
|
|
|
10,364,775
|
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
Dilutive shares
|
|
|
13,824,474
|
|
|
|
10,364,775
|
|
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, 2019 and 2018 was estimated on the date of grant using the Black-Scholes-Merton option-pricing
model with the weighted average assumptions in the following table:
|
|
|
2019
|
|
2018
|
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
Expected option term (years)
|
|
5
|
|
5
|
|
Expected volatility
|
|
175%-215%
|
|
158%-159%
|
|
Risk-free interest rate
|
|
1.6%-2.3%
|
|
2.8%-2.9%
|
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.
Reclassification
Certain reclassifications
have been made to the prior year financial statements to conform to the current year presentation.
Recent Accounting
Pronouncement
Effective January 1, 2018,
the Company adopted the provisions of ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of
a Business” (“ASU 2017-01”). ASU 2017-01 provides revised guidance to determine when an acquisition meets the
definition of a business or alternatively should be accounted for as an asset acquisition. ASU 2017-01 requires that, when substantially
all of the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets,
the asset or group of similar identifiable assets does not meet the definition of a business and therefore is required to be accounted
for as an asset acquisition. Transaction costs will continue to be capitalized for asset acquisitions and expensed as incurred
for business combinations. ASU 2017-01 will result in most, if not all, of the Company’s post January 1, 2018 acquisitions
being accounted for as asset acquisitions because substantially all of the fair value of the gross assets the Company acquires
are concentrated in a single asset or group of similar identifiable assets. For asset acquisitions that are “owner occupied”
(meaning that the seller either is the tenant or controls the tenant) the purchase price, including capitalized acquisition costs,
will be allocated to land and building based on their relative fair values with no value allocated to intangible assets or liabilities.
For asset acquisitions where there is a lease in place but not “owner occupied” the Company will allocate the purchase
price to tangible assets and any intangible assets acquired or liabilities assumed based on their relative fair values.
Compensation—Stock
Compensation: On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic
718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment
awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance will apply to nonemployee share-based
transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related
to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid
cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing
model for nonemployee awards. The Company elected to early adopt this standard in the second quarter of 2018. The adoption had
no impact on the Company’s historic financial statements.
In February 2016, the FASB
issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity is 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, The Company adopted this standard on January
1, 2019 using the modified retrospective method. The new standard provides a number of optional practical expedients in transition.
The Company elected the ‘package of practical expedients’, which permitted the Company not to reassess under the new
standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s
available transition practical expedients.
On adoption, the Company recognized
additional operating liabilities of $287,519, with corresponding Right of Use assets of the same amount based on the present value
of the remaining minimum rental payments under current leasing standards for its existing operating leases.
The new standard also provides
practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption for
its leases. For those leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities.
The Company also made an accounting policy election to combine lease and non-lease components of operating leases for all asset
classes.
NOTE 3 – GOING CONCERN
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern, no adjustments to the financial statements have been
made to account for this uncertainty. The Company concluded that the uncertainty surrounding the COVID-19 global pandemic, its
negative working capital and negative cash flows from operating are conditions that raised substantial doubt about the Company’s
ability to continue as a going concern. The Company plans to continue to generate additional revenue (and improve cash
flows from operations) partly related to the Company’s acquisition of an additional operating company in 2020
and partly related to the Company cross-selling additional sales initiatives already implemented with the acquisition’s
additional customer base. In addition, costs at the Company’s frac water division were reduced in 2019 bringing them more
in line with current revenues in that area. The Company believes that loans obtained under the Paycheck Protection Program
in 2020 will be forgiven in accordance with the terms of the program.
NOTE 4 - INVENTORY
Inventory consisted of the
following components as of December 31, 2019 and 2018:
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Raw materials and supplies
|
|
$
|
46,237
|
|
|
$
|
8,690
|
|
|
Finished and purchased products
|
|
|
83,722
|
|
|
|
131,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
129,959
|
|
|
$
|
140,662
|
|
NOTE 5 – LONG-LIVED
ASSETS
Property and equipment
Property and equipment at
December 31, 2019 and 2018 consisted of the following:
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Equipment
|
|
$
|
4,368,196
|
|
|
$
|
1,409,237
|
|
|
Downhole oil tools
|
|
|
671,888
|
|
|
|
700,000
|
|
|
Vehicles
|
|
|
179,867
|
|
|
|
151,497
|
|
|
Furniture, fixtures and other
|
|
|
47,665
|
|
|
|
43,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,267,616
|
|
|
|
2,304,164
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(957,703
|
)
|
|
|
(306,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,309,913
|
|
|
$
|
1,998,009
|
|
Depreciation expense for the
years ended December 31, 2019 and 2018 was $456,227 and $94,943, respectively.
During the year ended December
31, 2019, the Company recorded an impairment charge of $210,298 associated with the downhole oil tools.
During the year ended December
31, 2019, the Company recorded an impairment charge of $12,300 associated with the land and
building in Carthage, Texas recorded in assets held for sale. In October 2019, the Company sold the $30,000 assets held
for sale in Carthage, Texas in exchange for settlement of note payable. See Note 8 for details.
Intangible assets
Intangible assets as of December
31, 2019 are related to the acquisition of the RigHands™ assets and the acquisition of tradenames of Momentum Water Transfer
Services LLC.
Intangible assets at December
31, 2019 and December 31, 2018 consisted of the following:
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
|
Life (yr)
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
RigHands (Trademark and Formula)
|
|
|
15
|
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
MWTS Tradename
|
|
|
10
|
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: impairment
|
|
|
|
|
|
|
(190,000
|
)
|
|
|
-
|
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
(18,758
|
)
|
|
|
(10,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131,242
|
|
|
$
|
329,656
|
|
Amortization expense for the
year ended December 31, 2019 and 2018 was $28,997 and $10,344, respectively. Future amortization of the intangible assets for the
years ended December 31, 2020, 2021, 2022, 2023, 2024 and beyond are $10,000, $10,000, $10,000, $10,000, $10,000 and $81,242, respectively.
During the year ended December
31, 2019, the Company fully impaired its MWTS Tradename intangible asset of $169,417 related to the acquisition of Momentum Water
Transfer Services LLC on December 7, 2018.
Goodwill
During the year ended December
31, 2019, the Company fully impaired its goodwill of $185,751 related to the acquisition of Momentum Water Transfer Services LLC
on December 7, 2018.
NOTE 6 – ACCRUED
EXPENSES AND OTHER LIABILITIES
Accrued expenses as of December
31, 2019 and 2018 included the following:
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
Payroll and payroll taxes payable
|
|
$
|
276,841
|
|
|
$
|
84,916
|
|
|
Sales tax payable
|
|
|
44,964
|
|
|
|
67,124
|
|
|
Interest payable
|
|
|
101,776
|
|
|
|
12,325
|
|
|
Credit cards payable
|
|
|
57,226
|
|
|
|
-
|
|
|
Settlement accrual
|
|
|
60,000
|
|
|
|
-
|
|
|
Other
|
|
|
50,812
|
|
|
|
43,546
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
591,619
|
|
|
$
|
207,911
|
|
NOTE 7 – NOTES PAYABLE
Notes payable included the following as of December
31, 2019 and 2018:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
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
|
|
$
|
-
|
|
|
$
|
180,552
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021
|
|
|
-
|
|
|
|
49,885
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020
|
|
|
10,573
|
|
|
|
25,960
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023
|
|
|
28,000
|
|
|
|
35,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued June 27, 2018, bearing effective interest of 20%, due in daily installments ending April 2019, principal balance $143,965, net of deferred financing costs of $43,412
|
|
|
-
|
|
|
|
143,965
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 7.5% of votes December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000, net of deferred financing costs of $65,446
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued on December 7, 2018 related to the acquisition of Momentum Water Transfer Services LLC, bearing interest of 6% per year and due in monthly installments of $7,500, with a maturity date of December 8, 2023
|
|
|
792,470
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes May 1, 2019, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. Note was extended to March 30, 2020.
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes May 1, 2019, bearing interest of 10% per year, due September 30, 2019.
|
|
|
80,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approximately 8.8% of votes December 12, 2019, bearing interest of 12% per year, due June 3, 2020.
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Various notes payable secured by equipment of Big Vehicle & Equipment Company, LLC, bearing interest ranging from 2.72% to 8% maturing through August 2023.
|
|
|
638,859
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued September 20, 2019, bearing interest of 12% per year, due in monthly installments ending December 2019.
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued November 1, 2019, bearing interest of 18% per year, due in monthly installments ending April 2020.
|
|
|
747,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued July 26, 2019, bearing interest of 7% per year, due in monthly installments ending July 2020
|
|
|
123,818
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable - secured
|
|
|
3,071,220
|
|
|
|
1,535,924
|
|
|
Less discounts
|
|
|
(242,655
|
)
|
|
|
(239,750
|
)
|
|
Less current portion
|
|
|
(1,692,775
|
)
|
|
|
(328,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable - secured, net of current portion
|
|
$
|
1,135,790
|
|
|
$
|
967,846
|
|
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, 2019 and 2018 was $0 and $180,552, respectively.
On August 14, 2017, we refinanced
a 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 February 2, 2017, we refinanced
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.
On January 2, 2018, we financed
a truck with a note to a bank. The $41,481 note has an interest rate of 6.29% and payments of principal and interest are paid monthly.
The note is secured by the truck purchased. This note matures in January 2023.
On December 7, 2018, the Company
issued and sold secured promissory notes in the aggregate principal amount of $300,000 to three separate purchasers. In addition
to the issuance of the Notes an aggregate of 500,000 warrants (“Warrants”) were issued to the purchasers of the Notes.
The Warrants are exercisable for a period of five years and are exercisable at $0.40 per share. Interest on the Notes shall be
paid to the purchasers at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Note is one year after
the issuance date. The Notes are secured by all of the assets of the Company and the assets of MWTS, subject to prior liens and
security interests. The warrants were valued at $203,337 and recorded as a discount to the notes payable. The discount will be
amortized over the life of the notes payable.
On December 7, 2018 the Company
issued a 6% note to the MWTS Member in the amount of $800,000 as part of the purchase price for MWTS. The note requires monthly
payment of $7,500, matures December 8, 2023 and is secured by all the assets of the Company subject to prior security interests.
On January 11, 2019 the Company
issued a $100,000 10% note to a shareholder who controls approximately 8.8%. The note matures on December 7, 2019 and is secured
by a junior lien against the Company assets. In April 2019, the Company issued 511,370 shares of its restricted common stock with
a fair value of $203,525 to settle this $100,000 note payable and $2,274 accrued interest in full. The transaction resulted in
a loss on settlement of $101,251.
In May 2019, the Company issued
a promissory note in the amount of $100,000 with a maturity date of July 1, 2019 to an individual accredited investor. The Company
issued a five-year warrant to purchase 100,000 shares of the Company’s common stock at a fixed price of $0.30. The warrants
were valued $44,091 and recorded as a debt discount that was fully amortized as of December 31, 2019. On June 18, 2019, the Company
issued 150,000 warrants with an exercise price of $0.30 and a term of ten years in exchange for an extension of the maturity date
of the note through September 30, 2019. The warrants were valued at $67,223 and will be amortized over the extension period of
the note. On October 1, 2019, the Company issued 120,000 warrants with an exercise price of $0.15 and a term of ten years in exchange
for a second extension of the maturity date of the note through March 30, 2020. The warrants were valued at $14,330 and will be
amortized over the extension period of the note.
In June 2019, the Company
issued a promissory note in the amount of $80,000 to an individual accredited investor. The Company issued a ten-year warrant to
purchase 120,000 shares of the Company’s common stock at a fixed price of $0.30 per share. The warrants were valued at $53,780
and recorded as a debt discount. As of September 30, 2019, $53,780 was amortized leaving a discount balance of $0. On October 2,
2019, the Company issued 100,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension
of the maturity date of the note through March 30, 2020. The warrants were valued at $11,942 and will be amortized over the extension
period of the note.
On July 26, 2019, the Company
paid a vendor payable that totaled $247,637, by issuing a promissory note in the name of its frac water company Jake Oilfield Solutions
LLC for $123,819. The interest rate was 7% with principal and interest due at maturity July 25, 2020. The remaining balance of
$123,818 was converted into 353,766 shares of SMG’s restricted common stock.
On September 20, 2019, the
Company issued a $200,000 12% promissory note. The note is due and payable in three monthly installments, the first two installments
are interest only and the third and final installment for the balance of the principal and accrued interest is due at maturity
December 20, 2019.
On October 1, 2019, we entered
into a second amendment to a unsecured promissory note to extend the maturity of the secured note held by a stockholder to June
30, 2020 and capitalizing the accrued interest of $4,559 where the total principal of the promissory note is now $44,559. All other
terms of the note remained. In connection with this amendment, we issued a new common stock purchase warrant for 40,000 shares,
with a ten-year term and a fixed exercise price of $0.15 per share and customary other provisions. The warrants were valued at
$4,777 and will be amortized over the extension period of the note. See Notes Payable – Unsecured table below.
On October 4, 2019, we sold
for $30,000 property categorized on our balance sheet as an asset held for sale. This vacant property acquired by MG Cleaners years
earlier is located in Carthage, Texas and not a part of our current operations. The original MG Cleaners seller note was secured
by this property and received the proceeds of this sale of approximately $30,000. The seller note had a balance of $147,608 at
the time of the sale of property. The remainder of the note was retired and paid in full by issuing 400,000 restricted shares of
our common stock. See Note 8 – Stockholders’ Deficit.
On December 12, 2019, the
Company issued a $50,000 12% secured promissory note. The note is due and payable in monthly installments of the principal and
accrued interest with the first payment of $25,000 due on or before December 19, 2019. The remaining balance shall be
paid in $5,000 monthly installments until maturity on June 3, 2020. On December 12, 2019, the Company issued 75,000 warrants with
an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through
June 3, 2020. The warrants were valued at $17,947 and will be amortized over the extension period of the note.
Funding Advance Agreements
– included with secured notes
On June 27, 2018, the Company
re-financed and paid off a prior liability due to a funding company. The new facility had an original principal balance of $347,500.
Payments of principal and interest are paid daily. This note matured in May 2019 and was paid in full. During the year ended December
31, 2019, $43,411 of debt discount was amortized to interest expense.
Future maturities of debt as of December 31, 2019
are as follows:
|
2020
|
|
|
$
|
1,935,430
|
|
|
2021
|
|
|
|
284,306
|
|
|
2022
|
|
|
|
222,613
|
|
|
2023
|
|
|
|
628,871
|
|
|
2024
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
3,071,220
|
|
Notes Payable – Unsecured
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Financed insurance premium, Note Payable issued on June 8, 2018, bearing interest of 6.5% per year and due in monthly installments ending April 1, 2019
|
|
$
|
-
|
|
|
$
|
31,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Financed insurance premium, Note Payable issued on October 2, 2019, bearing interest of 5.5% per year and due in monthly installments ending July 31, 2020
|
|
|
75,576
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured note payable with a shareholder who controls approximately 7.5% of votes. Note issued on August 10, 2018 for $40.000, due December 30, 2018 (extended to June 30, 2020) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced and due on demand
|
|
|
44,559
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured advances from the sellers of Momentum Water Transfer Services LLC, non-interest bearing and due on demand
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured note with vendor, issued a $135,375 10% promissory note due at October 30, 2019. The note was issued in exchange for of settlement of accounts payable.
|
|
|
85,375
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Financed insurance premium, Note Payable issued on October 1, 2019, bearing interest of 6.5% per year and due in monthly installments ending July 28, 2020
|
|
|
73,554
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable - unsecured
|
|
|
314,064
|
|
|
|
131,126
|
|
|
Less discount
|
|
|
(3,185
|
)
|
|
|
-
|
|
|
|
|
|
310,879
|
|
|
|
131,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(310,879
|
)
|
|
|
(131,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable - unsecured, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes Payable (Related Party)
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. The note bears interest at the rate
of 5% per year and is payable in 36 equal monthly installments of $4,496. As of December 31, 2019 and December 31, 2018, $98 and
$101,220 remains outstanding with $0 and $54,307, respectively included as a current liability.
During the year ended December
31, 2019, Stephen Christian advanced $97,016 to the Company and was repaid $188,036 by the Company, and received $18,545 of noncash
advances from the Company. As of December 31, 2019 and December 31, 2018, $98 and $8,443 remained outstanding, respectively, with
no specific repayment terms or stated interest rate.
Capital Lease Liability
During the year ended December
31, 2018 the Company entered into a capital lease arrangement to purchase various equipment to be used in operations. Title to
the equipment will be transferred to the Company at the completion of the lease payments. The Company purchased $146,354 of equipment
payable through May 2020. A down payment of $20,607 was due at inception followed by 23 monthly payments of $5,972 and a final
payment of $13,172. As of December 31, 2018, $94,280 remained outstanding with $53,728 included as a current liability. See Note
12 for more information on finance leases following the adoption of ASC 2016-02.
Accounts Receivable Financing
Facility (Secured Line of Credit)
On May 11, 2017, SMG Industries, Inc., formerly 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 the Crestmark Bank line of credit was $0 and $593,888
as of December 31, 2019 and December 31, 2018, respectively.
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 ended December 31, 2019, the Company received total cash proceeds
of $2,340,922 and repaid $3,023,808 of the Line of Credit via Crestmark Bank withholding amount collected in our lock-box. In addition,
Crestmark withheld $88,998 to pay for interest and fees. Net payments made during the year ended December 31, 2019 on this
facility were $593,888.
During the year ended December
31, 2018, the Company received total cash proceeds of $4,170,699 and repaid $4,011,508 of the Line of Credit via Crestmark Bank
withholding amount collected in our lock-box. In addition, Crestmark withheld $80,722 to pay for interest and fees. Net proceeds
received during the year ended December 31, 2018 on this facility were $239,913.
On June 19, 2019, each of
MG Cleaners LLC (“MG”), Trinity Services LLC (“Trinity”) and Jake Oilfield Solutions LLC (“Jake”),
each of which is a wholly-owned subsidiary of the Company, entered into separate revolving accounts receivable financing facilities
(collectively the “AR Facility”) with Catalyst Finance L.P. (“Catalyst”). The AR Facility was funded on
June 27, 2019. The new AR Facility with Catalyst was used to pay off the Crestmark facility in full. The AR Facility provides for
the Company, through MG, Trinity and Jake, to have access to up to 90% of the net amount of eligible receivables (as defined in
the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of MG, Trinity and Jake
to Catalyst and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 2.25% in excess
of the prime rate reported by the Wall Street Journal per annum, plus a financing fee equal to 0.20% of the receivable balance
every 15 days, with a maximum cumulative rate of 1.6%. There are no origination fees, monitoring or early termination fees.
The AR Facility can be terminated by the Company with thirty days written notice. The Company is a guarantor of the financing facility
and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility.
On June 27, 2019, an accounts
receivable financing company funding a total of $1,317,304 pursuant to the AR facility. Of the amounts funded $500,000 was paid
directly to the seller of Trinity, $43,219 was used to pay off notes payable of MG Cleaners, $714,239 was used to pay off the Crestmark
liability and the remaining $59,846 was deposited to the Company’s bank account.
The balances under the above
lines of credit was $845,036 and $593,888 as of December 31, 2019 and December 31, 2018, respectively.
Convertible Notes Payable
On September 28, 2018, the Company entered into a secured note
purchase agreement with an individual investor for the purchase and sale of a convertible promissory note (“Convertible Note”)
in the principal amount of $250,000. The Convertible Note is convertible at any time after the date of issuance into shares of
the Company’s common stock at a conversion price of $0.50 per share. Interest on the Note shall be paid to the investor at
a rate of 8.5% per annum, paid on a quarterly basis, and the maturity date of the Convertible Note is two years after the issuance
date. The Convertible Note is secured by all of the assets of the Company, subject to prior liens and security interests. The Company
evaluated the Convertible Note and determined is a conventional convertible instrument. As a result, a beneficial conversion feature
was calculated as $100,000 at the time of issuance and recorded as a discount. During the years ended December 31, 2019 and 2018,
$48,995 and $11,970 of the discount was amortized, respectively.
In April 2019, the Company
issued a convertible promissory note in the amount of $50,000 to an individual investor. The note bears an interest rate of 8 ½
%, payable in cash quarterly, matures in two years and is convertible at any time into shares of the Company’s common stock
at a fixed conversion price of $0.50 (fifty cents) per share. The Company evaluated the Convertible
Note and determined it is not a conventional convertible instrument.
NOTE 8 – STOCKHOLDERS’ DEFICIT
Year ended December 31,
2018
During the year ended December
31, 2018, the Company issued 1,390,000 common shares for proceeds of $278,000 from accredited investors. Expenses of $1,957 were
incurred related to raising these funds are recorded as a cost of capital.
During the year ended December
31, 2018, the Company issued 25,500 common shares in settlement of accounts payable of $12,000 resulting in a loss on settlement
of $3,290.
During the year ended December
31, 2018, the Company issued a total of 80,000 common shares to three consultants for services. The fair value of the shares of
$60,500 will be recognized over the service period ranging from six months to one-year. During the year ended December 31, 2018
$28,604 of expense was recognized.
On September 28, 2018, in
connection with an asset purchase agreement the Company issued an aggregate of 1,000,000 shares of its common stock to the sellers.
The assets consist of approximately 850 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers
and bit subs, including both non-mag and steel units. The Company plans to rent these assets to customers. The transaction was
valued at $700,000 based on the fair value of the common shares on the date of issuance and will be depreciated over the estimated
asset life of ten years.
Year ended December 31,
2019
During
the year ended December 31, 2018, the Company issued a total of 80,000 common shares to three consultants for services. During
the year ended December 31, 2019, the Company recognized expense of $31,896 related to these services. In May 2019,
the Company issued a total of 200,000 common shares to consultants for services. During the year ended December 31, 2019,
the Company recognized expense of $246,099 related to these services.
During the year ended December
31, 2019, the Company issued 393,312 shares of its restricted common stock in settlement of $138,012 of liabilities. The fair value
of the common stock issued was $124,688 resulting in a gain on settlement of $13,328.
During the year ended December
31, 2019, the Company issued 1,436,000 shares of its restricted common stock for proceeds of $359,000 from accredited investors.
In April 2019, the Company
issued 511,370 shares of its restricted common stock with a fair value of $203,525 to settle $100,000 note payable and $2,274 accrued
interest in full. The transaction resulted in a loss on settlement of $101,251.
On October 1, 2019, we entered into a second amendment to a secured promissory note to extend the maturity of the secured note
held by a stockholder to June 30, 2020 and capitalizing the accrued interest of $4,559 where the total principal of the promissory
note is now $44,559. All other terms of the note remained. In connection with this amendment, we issued a new common stock purchase
warrant for 40,000 shares, with a ten-year term and a fixed exercise price of $0.15 per share and customary other provisions.
On October 4, 2019, we sold
property categorized on our balance sheet as an asset held for sale for $30,000 of cash proceeds. This vacant property acquired
by MG Cleaners years earlier is located in Carthage, Texas and not a part of our current operations. The original MG Cleaners seller
note was secured by this property and the sellers of MG Cleaners received the proceeds of this sale of approximately $30,000. The
seller note had a balance of $147,608 at the time of the sale of property. The remainder of the note was retired and paid in full
by issuing 400,000 restricted shares of our common stock with a fair value of $99,200. The Company recognized a $18,408 gain on
the settlement of note payable.
On October 17, 2019, we issued
30,000 shares of our restricted common stock with a fair value of $6,000 in settlement of accounts payable. No gain or loss was
recognized on the settlement of accounts payable.
Preferred Stock – Series A Convertible
Preferred stock
On June 4, 2019 the company
filed a Certificate of Designation of Preferences, Rights and Limitations of 3% Series “A” Convertible Preferred Stock
to create a new class of stock in connection with its pending acquisition. This Series A Convertible Preferred stock has designated
2,000 shares, has a stated value of $1,000 per share and was delivered to the seller of Trinity Services LLC at closing. As of
December 31, 2019, the Company has accrued $30,740 in dividends for the Series A preferred stock.
The Series A Preferred Stock
shall, with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of the Corporation,
rank senior to all classes of Common Stock and to each other class of Capital Stock of the Corporation or series of Preferred Stock
of the Corporation existing or hereafter created. The Series A Preferred Stock shall pay a three percent (3%) annual dividend on
the outstanding Series A Preferred Stock, all of which shall be accrued until the Series A Preferred Stock has been converted.
At any time from issuance,
the stated value of each outstanding share of Series A Preferred Stock, plus accrued dividends thereon, shall be convertible (in
whole or in part), at the option of the Holder into shares of the Company’s Common Stock at a fixed conversion price of $0.50
per share on the date on which the Holder notices a conversion.
All outstanding shares of
Series A Preferred Stock shall automatically convert into shares of the Company’s Common Stock upon the earlier to occur
of: (i) twelve months after the date of issuance of the Series A Preferred Stock; or (ii) six months after the date of issuance
of the Series A Preferred Stock, provided that (a) all shares of the Company’s Common Stock issued upon conversion may be
sold under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing
price of the Company’s Common Stock has been at least of $0.60 per share during the twenty (20) trading days prior to the
date of conversion.
The Holders shall have the
right to receive notice of any meeting of holders of Common Stock or Series A Preferred Stock and to vote upon any matter submitted
to a vote of the holders of Common Stock or Series A Preferred Stock, on an as-converted basis. Except as otherwise expressly set
forth in the Certificate of Incorporation (including this Certificate of Designation), the Holders shall vote on each
matter submitted to them with the holders of Common Stock and all other classes and series of Capital Stock entitled to vote on
such matter, taken together as a single class, if any.
NOTE 9 – STOCK OPTIONS AND WARRANTS
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
|
Outstanding, December 31, 2017
|
|
|
510,000
|
|
|
$
|
318,150
|
|
|
|
$0.24-3.29
|
|
|
$
|
0.57
|
|
|
Granted
|
|
|
150,000
|
|
|
|
114,500
|
|
|
|
$0.75-0.79
|
|
|
$
|
0.76
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled, forfeited or expired
|
|
|
(20,000
|
)
|
|
|
(55,850
|
)
|
|
|
$2.45-3.29
|
|
|
$
|
2.79
|
|
|
Outstanding, December 31, 2018
|
|
|
640,000
|
|
|
$
|
376,800
|
|
|
|
$0.24-2.18
|
|
|
$
|
0.50
|
|
|
Granted
|
|
|
325,000
|
|
|
|
141,250
|
|
|
|
$0.25-0.79
|
|
|
$
|
0.43
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled, forfeited or expired
|
|
|
(120,000
|
)
|
|
|
(77,850
|
)
|
|
|
$0.37-2.18
|
|
|
$
|
1.54
|
|
|
Outstanding, December 31, 2019
|
|
|
845,000
|
|
|
$
|
440,200
|
|
|
|
$0.24-2.00
|
|
|
$
|
0.45
|
|
|
Exercisable, December 31, 2019
|
|
|
886,667
|
|
|
$
|
376,167
|
|
|
|
$0.24-2.00
|
|
|
$
|
0.42
|
|
Summary of stock option information
is as follows:
On July 26, 2019 the Company
issued 100,000 common stock options to each of the three independent directors with a total fair value of $87,825. The options
vest immediately, have an exercise price of $0.45 and a five-year term. During the year ended December 31, 2019, the Company recognized
option expense of $87,825.
On October 17, 2019, we issued
30,000 shares of our restricted common stock and 25,000 fully vested common stock options with a five-year term and exercisable
at $0.25 for accounting consulting services with a fair value of $3,677. During the year ended December 31, 2019, the Company recognized
option expense of $3,677.
In May 2018 the Company issued
100,000 stock warrant with an exercise price of $0.75 that vest in twelve equal monthly tranches following issuance. The warrants
expire five years after issuance. Option expense of $51,567 will be recorded over the vesting term.
In July 2018, the Company
granted 50,000 stock options to a consultant with a five-year term and an exercise price of $0.79. The options vest annually over
a three-year period with the first one-third vesting July 10, 2019. Option expense of $34,736 will be recorded over the vesting
term.
The weighted average remaining
contractual life is approximately 3.03 years for stock options outstanding on December 31, 2019. At December 31, 2019 and 2018
there was $0 and $84,000 in intrinsic value of outstanding stock options, respectively. During the year ended December 31, 2019
and 2018 share based compensation expense of $154,003 and $53,053 was recognized, respectively.
Summary Stock warrant information
is as follows:
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|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
Outstanding, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
525,001
|
|
|
|
218,750
|
|
|
|
$0.40-$0.75
|
|
|
$0.42
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Outstanding, December 31, 2018
|
|
|
525,001
|
|
|
|
218,750
|
|
|
|
$0.40-$0.75
|
|
|
$0.42
|
|
Granted
|
|
|
905,000
|
|
|
|
211,250
|
|
|
|
$0.15-$0.30
|
|
|
$0.30
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Outstanding, December 31, 2019
|
|
|
1,430,001
|
|
|
$
|
430,000
|
|
|
|
$0.15-$0.75
|
|
|
$0.30
|
|
Exercisable, December 31, 2019
|
|
|
1,430,001
|
|
|
$
|
430,000
|
|
|
|
$0.15-$0.75
|
|
|
$0.30
|
In May 2019, the Company granted
100,000 stock warrants to a debt holder with five-year terms and an exercise price of $0.30. The warrants are fully vested at the
time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from:
Stock price, $0.45, Exercise price, $0.30, Term 5 years, Volatility 199%, Discount rate, 2.3%. During the year ended December 31,
2019, the fair value of $44,091 was recoded as a note payable discount and was fully amortized over the life of the note payable.
In June 2019, the Company
granted 270,000 stock warrants to a debt holder with ten-year terms and an exercise price of $0.30. The warrants are fully vested
at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging
from: Stock price, $0.45, Exercise price, $0.30, Term 10 years, Volatility 175% %, Discount rate, 2.1%. During the year ended December
31, 2019, the fair value of $121,004 was recoded as a note payable discount and was fully amortized over the life of the note payable.
In September 2019, the Company
granted 200,000 stock warrants to a debt holder with five-year terms and an exercise price of $0.25. The warrants are fully vested
at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging
from: Stock price, $0.17, Exercise price, $0.25, Term 5 years, Volatility 206%, Discount rate, 1.7%. During the year ended December
31, 2019, the fair value of $33,155 was recoded as a note payable discount and was fully amortized over the life of the note payable.
In October 2019, the Company
granted 260,000 stock warrants to three debt holders with ten-year terms and an exercise price of $0.15. The warrants are fully
vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions
ranging from: Stock price, $0.12, Exercise price, $0.15, Term 10 years, Volatility 179%, Discount rate, 1.7%. During the year ended
December 31, 2019, the fair value of $31,049 was recoded as a note payable discount and will be amortized over the life of the
note payable.
In December 2019, the Company
granted 75,000 stock warrants a debt holder with ten-year terms and an exercise price of $0.15. The warrants are fully vested at
the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging
from: Stock price, $0.24, Exercise price, $0.15, Term 10 years, Volatility 182%, Discount rate, 1.9%. During the year ended December
31, 2019, the fair value of $17,947 was recoded as a note payable discount and will be amortized over the life of the note payable.
The weighted average remaining
contractual life is approximately 6.38 years for stock warrants outstanding on December 31, 2019. At December 31, 2019
and 2018 there was $30,150 and $35,000 in intrinsic value of outstanding stock warrants, respectively.
NOTE 10 – ACQUISITION
Trinity Services LLC
On June 3, 2019 we entered
into an Agreement and Plan of Share Exchange dated as of such date (the “Trinity Exchange Agreement”) with Trinity
Services LLC, a Louisiana limited liability company (“Trinity”) and the sole member of Trinity (the “Trinity
Member”). We completed the closing of the acquisition of Trinity on June 26, 2019 (“Closing Date”). On the Closing
Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and outstanding membership interests
of Trinity (“Trinity Membership Interests”) from the Trinity Member pursuant to which Trinity became our wholly owned
subsidiary (“Trinity Acquisition”). In accordance with the terms of the Trinity Exchange Agreement, and in connection
with the completion of the Acquisition, on the Closing Date we: (i) issued 2,000 shares of our 3% Series A Secured Convertible
Preferred Stock (“Preferred Stock”), stated value $1,000 per share, (ii) paid $500,000 in cash to the Trinity Member,
and (iii) assumed approximately $841,000 in notes related to equipment owned by Trinity (“Purchase Price”).
The Preferred Stock is convertible
at $0.50 per share at any time after the issuance thereof and is secured by all of the unencumbered assets of Trinity. All outstanding
shares of Preferred Stock shall automatically convert into shares of the Company’s common stock upon the earlier to occur
of: (i) twelve months after the date of issuance of the Preferred Stock; or (ii) six months after the date of issuance of the Preferred
Stock, provided that (a) all shares of the Company’s common stock issued upon conversion of the Preferred Stock may be sold
under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing
price of the Company’s common stock has been at least of $0.60 per share during the twenty (20) trading days prior to the
date of conversion.
All of the shares of Preferred Stock, and
the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition are restricted
securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).
Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2)
of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value of $2,000,000.
The fair value of the Preferred Stock was based on the Black-Scholes model with the following key assumptions ranging from: Stock
price $0.50, Exercise price $0.42, Term 3 years, Volatility 36% and Discount rate of 1.7%.
The acquisition of Trinity
is being accounted for as a business combination under ASC 805. The following information summarizes the purchase consideration
and allocation of the fair values assigned to the assets at the purchase date:
|
Purchase Price:
|
|
|
|
|
|
Cash, net
|
|
$
|
500,000
|
|
|
Preferred stock issued
|
|
|
1,939,000
|
|
|
Total purchase consideration
|
|
$
|
2,439,000
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,195,534
|
|
|
Cost in excess of billings
|
|
|
31,303
|
|
|
Property and equipment
|
|
|
2,887,441
|
|
|
Right of use assets – operating leases
|
|
|
87,900
|
|
|
Accounts payable and accrued expenses
|
|
|
(834,363
|
)
|
|
Right of use assets – operating leases
|
|
|
(87,900
|
)
|
|
Notes payable
|
|
|
(840,915
|
)
|
|
Total purchase consideration
|
|
$
|
2,439,000
|
|
The
Company’s consolidated revenue and net loss for the year ended December 31, 2019 include revenue of $1,878,369 and net loss
of $244,762 related to the operations of Trinity since the acquisition date.
Momentum Water Transfer Services
On
December 7, 2018 (“Closing Date”), we entered into an Agreement and Plan of Share Exchange dated as of such date (the
“Exchange Agreement”) with Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”)
and the sole member of MWTS (the “MWTS Member”). On the Closing Date, pursuant to the Exchange Agreement, we acquired
one hundred percent (100%) of the issued and outstanding membership interests of MWTS (“MWTS Membership Interests”)
from the MWTS Member pursuant to which MWTS became our wholly owned subsidiary (“MWTS Acquisition”). In accordance
with the terms of the Exchange Agreement, and in connection with the completion of the Acquisition, on the Closing Date we issued
550,000 shares of our common stock, par value $0.001 per share, paid $308,000 in cash, issued a short term payable of $53,710 that
is due on demand and issued a 6% note to the MWTS Member in the amount of $800,000 in exchange for all of the issued and outstanding
MWTS Membership Interests.
The Company’s
consolidated revenue and net loss for the year ended December 31, 2018 includes $48,577 and $67,132 related to the operations of
MWTS since the acquisition date.
Unaudited Pro Forma Financial Information
The
following schedule contains pro-forma consolidated results of operations for the years ended December 31, 2019 and 2018 as if the
Trinity acquisition occurred on January 1, 2018 and as if the MWTS Acquisition had occurred on January 1, 2017. The pro forma results
of operations are presented for informational purposes only and are not indicative of the results of operations that would have
been achieved if the acquisition had taken place on January 1, 2018, or of results that may occur in the future.
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Revenue
|
|
$
|
9,403,929
|
|
|
$
|
4,580,791
|
|
|
Operating loss
|
|
|
(3,321,714
|
)
|
|
|
(1,367,528
|
)
|
|
Net loss
|
|
|
(3,910,325
|
)
|
|
|
(1,668,407
|
)
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.13
|
)
|
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
On October 31, 2017, and made
effective as of 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 and EVP of SMG. 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. In May 2019, the Company adjusted the pay to $14,167 per month.
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.
On October 2, 2019 we entered
into a premium finance note on behalf of Trinity’s insurance renewal for its $125,377 annual premium. At execution, $21,009
was paid down with ten equal payments for the remainder and a 5.5% per annum interest rate.
On October 28, 2019 we entered
into a premium finance note on behalf of the Company for its insurance renewal for its $114,993 annual premium. At execution, $21,073
was paid down with ten equal payments for the remainder and a 6.5% per annum interest rate.
Litigation
In May 2018, MG Cleaners LLC,
a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court for the Western District of Texas, Houston
Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Five former employees of MG Cleaners,
the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserts amongst other things unpaid overtime wages. The
Company adamantly denies these claims.
On January 2, 2020, the Company
signed a settlement and release agreement with the Plaintiffs. The Plaintiffs release MG Cleaners and its affiliates,
agents, and employees from all claims or demands alleged by the Plaintiffs. Per the agreement, MG Cleaners agreed to pay the Plaintiffs
$60,000 in two installments. As of December 31, 2019, the Company had $60,000 accrued for this settlement.
From time to time, SMG may
be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in
the opinion of management; no other 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.
NOTE 12 – LEASES
The Company has operating
and finance leases for sales and administrative offices, motor vehicles and certain machinery and equipment. The Company’s
leases have remaining lease terms of 1 year to 4 years. For purposes of calculating operating lease liabilities,
lease terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those
options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons,
such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability.
The Company's lease agreements do not contain any material restrictive covenants.
The components of lease cost
for operating and finance leases for the year ended December 31, 2019 were as follows:
|
|
|
Year Ended
|
|
|
|
|
December 31, 2019
|
|
|
Lease Cost
|
|
|
|
|
|
Operating lease cost
|
|
$
|
256,415
|
|
|
Finance lease cost
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
40,349
|
|
|
Interest on lease liabilities
|
|
|
16,572
|
|
|
Total finance lease cost
|
|
$
|
56,921
|
|
|
Short-term lease cost
|
|
$
|
633,601
|
|
|
Variable lease cost
|
|
|
-
|
|
|
Sublease income
|
|
|
-
|
|
|
Total lease cost
|
|
$
|
946,937
|
|
Supplemental cash flow information
related to leases was as follows:
|
|
|
Year Ended
|
|
|
|
|
December 31, 2019
|
|
|
Other Lease Information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
160,634
|
|
|
Operating cash flows from finance leases
|
|
$
|
16,351
|
|
|
Financing cash flows from finance leases
|
|
$
|
66,470
|
|
The following table summarizes
the lease-related assets and liabilities recorded in the consolidated balance sheets at December 31, 2019:
|
Lease Position
|
|
December 31, 2019
|
|
|
Operating Leases
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
266,158
|
|
|
Right of use liability operating lease short term
|
|
$
|
113,479
|
|
|
Right of use liability operating lease long term
|
|
|
164,679
|
|
|
Total operating lease liabilities
|
|
$
|
278,158
|
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
Equipment
|
|
$
|
190,241
|
|
|
Accumulated depreciation
|
|
|
(38,691
|
)
|
|
Net Property
|
|
$
|
124,463
|
|
|
Long-term debt due within one year
|
|
|
47,382
|
|
|
Long-Term Debt
|
|
|
24,315
|
|
|
Total finance lease liabilities
|
|
$
|
71,697
|
|
The Company utilizes the incremental
borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.
|
Lease Term and Discount Rate
|
|
December 31, 2019
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
|
Operating leases
|
|
|
3.6
|
|
|
Finance leases
|
|
|
1.6
|
|
|
Weighted-average discount rate
|
|
|
|
|
|
Operating leases
|
|
|
13.0
|
%
|
|
Finance leases
|
|
|
9.0
|
%
|
The following table provides
the maturities of lease liabilities at December 31, 2019:
|
|
|
Operating
|
|
|
Finance
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Maturity
of Lease Liabilities at December 31, 2019
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
146,937
|
|
|
$
|
53,476
|
|
|
2021
|
|
|
106,861
|
|
|
|
15,769
|
|
|
2022
|
|
|
47,673
|
|
|
|
10,404
|
|
|
2023
|
|
|
26,000
|
|
|
|
1,287
|
|
|
2024
|
|
|
10,000
|
|
|
|
-
|
|
|
2025 and thereafter
|
|
|
-
|
|
|
|
-
|
|
|
Total future undiscounted lease payments
|
|
$
|
337,471
|
|
|
$
|
80,936
|
|
|
Less: Interest
|
|
|
(59,313
|
)
|
|
|
(9,239
|
)
|
|
Present value of lease liabilities
|
|
$
|
278,158
|
|
|
$
|
71,697
|
|
At December 31, 2019, the
Company had no additional leases which had not yet commenced.
Future minimum lease payments
for operating leases accounted for under ASC 840, "Leases," with remaining non-cancelable terms in excess of one year
at December 31, 2018 were as follows:
|
Minimum Lease Commitments at December 31, 2018
|
|
|
|
|
2019
|
|
$
|
145,940
|
|
|
2020
|
|
|
39,940
|
|
|
2021
|
|
|
18,340
|
|
|
2022
|
|
|
-
|
|
|
2023
|
|
|
-
|
|
|
Total
|
|
$
|
204,220
|
|
During the year ended December
31, 2019, the Company entered into two new leases for forklifts that were determined to be finance leases under ASC 842. One lease
is for a period of three years, with monthly payments of $671 and the second lease is for a period of 48 months with monthly payments
of $644. The Company capitalized an asset and right of use finance lease liability of $43,888 related to these finance leases.
The Company also entered into
two new operating leases for two vehicles. Each lease is for a period of four years, with monthly payments of $875 per vehicle.
The Company recognized initial right of use assets and right of use operating lease liabilities of $65,266 in total for these vehicles.
The Company also acquired an operating lease for office and warehouse space as part of the Trinity Acquisition and recognized a
right of use asset and operating lease liability of $87,900 as part of the purchase price accounting. This lease is for a term
of 60 months with a monthly payment of $2,000.
NOTE 13 – RELATED
PARTY TRANSACTIONS
On September 19, 2017, in
connection with the acquisition of MG Cleaners, we issued 4,578,276 shares and agreed to pay $300,000 in cash to its Managing MG
Member 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. As of December31, 2019 and December 31, 2018 amounts due under
this arrangement are $0 and $21,000, respectively.
The Company engaged the services
of a Director, Mr. John Boylan, effective February 11, 2019, whereby Mr. Boylan was paid as a consultant to the Company in connection
with its mergers and acquisition work, whereby Mr. Boylan provided us with mergers and acquisition support including economic analysis,
financial modeling and due diligence. Mr. Boylan was paid $13,000 per month for his services. In June 2019 Mr. Flemming, Mr. Boylan
and Mr. Christian were each awarded a bonus of $12,500 related to their efforts in closing the Trinity acquisition.
On July 30, 2019 the Company appointed
R. Michael Villarreal to the Board of Directors filling the position left by the passing in early July 2019 of Director John Boylan.
The Company appointed Mr. Boylan Board member Emeritus status in honor of his service to the Company.
NOTE 14 – INCOME TAXES
The components of income taxes are as follows,
in thousands:
|
|
|
For the Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Current income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred income tax expense (benefit)
|
|
|
-
|
|
|
|
(245,000
|
)
|
|
Valuation allowance
|
|
|
-
|
|
|
|
245,000
|
|
|
Income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The components of deferred tax assets are as follows,
in thousands:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
749,000
|
|
|
$
|
414,000
|
|
|
Income not currently incurred
|
|
|
(77,000
|
)
|
|
|
(13,000
|
)
|
|
Total
|
|
|
672,000
|
|
|
|
401,000
|
|
|
Valuation allowance
|
|
|
(672,000
|
)
|
|
|
(401,000
|
)
|
|
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. At December 31, 2019, the Company
has net operating losses available for the 20-year carryforward of approximately $749,000 (the use of $3,415,000 of
prior year losses being mitigated due to the Section 382 limitation) and $4,716,000 available to be carried forward indefinitely.
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. Due to CARES Act, for years prior to December 31, 2020, the 80% taxable income
offset has been eliminated and the 5-year carryback of NOL’s generated in 2018 through 2020 has been reinstated. After January
1, 2021, NOL’s can only be carried forward and the 80% Federal taxable income limitation applies. 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, to account for future changes in tax law.
NOTE 15 –
SUBSEQUENT EVENTS
On January 23, 2020, Trinity
Services issued a secured promissory note for $1,272,780, which includes precomputed interest of $210,018. The note is due and
payable in thirty six monthly installments of $35,355 commencing on March 25, 2020 and the final installment is due on February
25, 2023. The note is secured by machinery and equipment owned by SMG.
On February 27, 2020 we entered
into Membership Interest Purchase Agreements for the acquisition of all of the membership interests of each of 5J Oilfield Services
LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas limited liability company (“5J
Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as the “5J Entities”) (the “Transaction”).
The total purchase price for the 5J Entities was $27.3 million. Due to the recent timing of the acquisition, the Company is currently
in the process of determining the fair value of the net assets acquired and liabilities assumed.
Pursuant to the terms of the
5J Oilfield Membership Interest Purchase Agreement (“5J Oilfield Agreement”), we acquired 100% of the issued and outstanding
membership interests from the sole member of 5J Oilfield (“5J Oilfield Member”), pursuant to which 5J Oilfield has
become a wholly-owned subsidiary of SMG Industries Inc. Pursuant to the terms of the 5J Oilfield Agreement, we have: (i) paid the
5J Oilfield Member $6,840,000 in cash; (ii) issued 6,000 shares of our 5% Series B Convertible Preferred Stock (“Preferred
Stock”), stated value $1,000 per share; (iii) assumed or refinanced the obligation for truck notes owed by 5J and its affiliates
in the principal amount of $1,034,000 and paid off a community line of credit balance as of closing in the amount of $5.86 million;
and (iv) caused 5J Oilfield to issue a note (“Seller Note”) to the 5J Oilfield Member in the principal amount of $2,000,000
(“5J Oilfield Purchase Price”).
The Series “B”
Preferred Stock issued in connection with the acquisition of the 5J Entities is convertible at $1.25 per share at any time after
its issuance and shall automatically convert into shares of the Company’s common stock, par value $.001 per share, three
years from the date of issuance. The Company shall pay a quarterly dividend of 5% per annum to the holder of the Preferred Stock,
subject to certain conditions related to the EBITDA of the 5J Entities. In the event that the consolidated quarterly EBITDA of
the 5J Entities is not in excess of the aggregate fixed monthly payments made to Amerisource (defined below) and Utica (defined
below), the 5J Oilfield Member will have the option of accruing the dividend, or converting such amount due into shares of the
Company’s common stock at the market price at such time. The holder of the Preferred Stock shall vote on all matters presented
to the Company’s common stockholders on an as converted basis. All of the shares of Preferred Stock, and the shares of the
Company’s Common Stock underlying the Preferred Stock, issued in connection with the Transaction are restricted securities,
as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares
were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities
Act and the rules and regulations promulgated thereunder.
The 10% Secured Promissory
Note issued to the 5J Oilfield Member as part of the 5J Oilfield Purchase Price has a three-year term and all outstanding principal
and accrued interest is due and payable on February 27, 2023. Interest shall be paid monthly commencing in March 2020 and principal
payments shall be made on a quarterly basis, commencing at the end of the second quarter ending June 30, 2020. Principal payments
shall be made subject to the 5J Entities availability under the Amerisource AR Facility (defined below). This note and the payment
thereof shall be secured by all of 5J Oilfield’s accounts receivable, subject to a prior security interest in the Company’s
accounts receivable by Amerisource Funding, Inc. Additionally, the Company has agreed to guaranty all of the obligations due under
the note. Notwithstanding the foregoing, principal payments under the note will not be made by 5J Oilfield prior to the maturity
date if the 5J Oilfield EBITDA for the trailing twelve (12) month period does not equal or exceed a 1-1 ratio to 5J Oilfield’s
debt service payments to Amerisource (defined below) and Utica (defined below) pursuant to the terms of each of Amerisource Financing
(defined below) and the Utica Financing (defined below).
Pursuant to the terms of the
5J Trucking Membership Interest Purchase Agreement (“5J Trucking Agreement”), we acquired 100% of the issued and outstanding
membership interests from the members of 5J Trucking (“5J Trucking Members”), pursuant to which 5J Trucking has become
a wholly-owned subsidiary of SMG Industries Inc. Pursuant to the terms of the 5J Trucking Agreement, in exchange for the membership
interests, SMGI refinanced the obligation for notes owed by 5J and its affiliates in the principal amount of $5,564,000 (“5J
Trucking Purchase Price”).
In connection with the acquisition
of the 5J Entities, on February 27, 2020, the 5J Entities entered into a Master Lease Agreement with Utica Leaseco LLC (“Utica”)
pursuant to which Utica refinanced substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 (“Utica
Financing”) which amount was financed based on 75% of the net forced liquidation value of the equipment. The Company used
a portion of the proceeds from the Utica Financing to pay the cash portion of the Purchase Price of the 5J Entities.
Pursuant to the terms of the Utica Financing, the 5J Entities
will pay a monthly fee to Utica for a period of 51 months, with a cash payment due at the end of the lease term in the amount of
$831,880. The 5J Entities own all of the assets financed pursuant to the Utica Financing, subject to Utica’s security interest
in all of the equipment of the 5J Entities pursuant to the terms of the security agreement. Each of the Company and Matthew Flemming,
its CEO, have entered into guaranty agreements with Utica, whereby they have guaranteed all of the obligations of the 5J Entities
under the Utica Master Lease Agreement, pursuant to the guaranty agreements.
On February 27, 2020, the
5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource
Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”).The Amerisource
Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”),
(ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving
line of credit up to $10,000,000 (“AR Facility”).
The AR Facility has been issued
in an amount not to exceed $10,000,000, with the maximum availability limited to 85% of the eligible accounts receivable (as defined
in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities
and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime
rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35%
assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving
loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by
the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0%) of the then maximum
account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0%) of the then
maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the
Amerisource Financing.
The Amerisource Equipment
Loan in the amount of $1,401,559 is secured by certain equipment pledged as collateral, has a term of thirty-six (36) months during
which the 5J Entities shall make equal monthly payments of principal and interest, bears an interest rate of prime rate plus five
and one-quarter percent (5.25%) and an origination fee equal to one and one-half percent (1.5%) of the loan amount.
The Bridge Facility has a
term of six (6) months during which the 5J Entities shall make equal monthly payments of principal and interest. In connection
with the Bridge Facility, the 5J Entities paid an upfront facility fee of five percent (5%) of the total Bridge Facility amount
at closing.
On February 27, 2020, the
Company entered into a loan agreement with Amerisource Leasing Corporation for the sale of a 10% convertible promissory note in
the principal amount of $1,600,000 (“Amerisource Note”) to Amerisource (“Amerisource Loan Agreement”).
The Amerisource Note matures on February 27, 2023 and is convertible into shares of the Company’s common stock at a conversion
price of $0.25 per share. The interest rate on the Amerisource Note increases to 11% per annum on February 27, 2021 and to 12%
per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s
common stock were issued to the noteholder in connection with the sale of the Amerisource Note. The Amerisource Note may be prepaid
at any time by the Company on 10 days-notice to the noteholder without penalty.
On February 28, 2020, the
Company issued 2,025,000 common stock options to 5J and SMG employees. The options vest equally over a three-year period starting
on February 28, 2021.The stock options have an exercise price of $0.30 and a five-year term.
On March 6, 2020, we entered
two separate amendments for $100,000 secured promissory notes to extend the maturity of the secured notes held by stockholders
to June 30, 2020. All other terms of the note remained. In connection with the amendments, we issued two new common stock purchase
warrants for 166,667 shares each, with a ten-year term and a fixed exercise price of $0.20 per share and customary other provisions.
On March 6, 2020, Trinity
Services, LLC entered into a line of credit agreement with Red River Bank. The revolving line of credit provides for a maximum
balance of $200,000, accrues interest at 5.750% annually, and matures on March 6, 2021.Trinity will pay this loan in full immediately
upon Red River’s demand. If no demand is made, Trinity will pay this loan in one payment of all outstanding principal plus
all unpaid interest at maturity.
In April 2020, 5J Oilfield
Services LLC was informed by Hancock Whitney Bank, its lender, that they received approval from the U.S. Small Business Administration
(“SBA”) to fund 5J’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”)
created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered
by the SBA. In connection with the PPP Loan, 5J has entered into a two-year promissory note. Per the terms of the PPP Loan, 5J
will receive total proceeds of $3,148,100 from the Hancock Whitney Bank. In accordance with the requirements of the CARES Act,
5J intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on April 22,
2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck
Protection Program as administered by the SBA under the CARES Act.
In April and May 2020, SMG
Industries, Inc., Trinity Services, LLC, Jake Oilfield Solutions, LLC and MG Cleaner, LLC (the “Companies”) were informed
by their lender, Prosperity Bank (the “Bank”), that the Bank received approval from the U.S. Small Business Administration
(“SBA”) to fund the Companies’ request for loans under the SBA’s Paycheck Protection Program (“PPP
Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
administered by the SBA. In connection with the PPP Loans, the Companies have entered into two-year promissory notes. Per the terms
of the PPP Loans, SMG will receive total proceeds of $72,500, Trinity will receive total proceeds of $195,000, Jake will receive
total proceeds of $21,200 and MG will receive total proceeds of $190,000 from the Bank. In accordance with the requirements of
the CARES Act, the Companies intend to use the proceeds from the PPP Loans primarily for payroll costs. The PPP Loans are scheduled
to mature on April 20, 2022 for SMG, April 28, 2020 for Trinity and May 1, 2022 for Jake and MG. The loans have a 1.00% interest
rate and are subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered
by the SBA under the CARES Act.
Unaudited Pro Forma Financial
Information
The following schedule contains
pro-forma consolidated results of operations for the years ended December 31, 2019 and 2018 as if the 5J Acquisition and Trinity
acquisition occurred on January 1, 2018 and as if the MWTS Acquisition had occurred on January 1, 2017. The pro forma results of
operations are presented for informational purposes only and are not indicative of the results of operations that would have been
achieved if the acquisitions had taken place on the dates noted above, or of results that may occur in the future.
|
|
|
2019
|
|
|
2018
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Revenue
|
|
$
|
64,073,002
|
|
|
$
|
72,937,686
|
|
|
Operating income (loss)
|
|
|
(8,311,860
|
)
|
|
|
1,513,018
|
|
|
Net income (loss) attributable to common shareholders
|
|
|
(9,977,719
|
)
|
|
|
1,673,981
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.72
|
)
|
|
$
|
0.15
|
|
In early March 2020, crude
oil prices declined significantly in response to the worldwide oil demand concerns due to the economic impacts of COVID-19 which
also negatively impacted numerous other industries, domestic and international. These trends, including a potential economic downturn
and any potential resulting direct and indirect negative impact to the Company, cannot be determined, but are expected to have
a material prospective impact to the Company’s operations, cash flows and liquidity.