Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes
x
No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10K. Yes
¨
No
x
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 aggregate market value of the registrant’s
common stock held by non-affiliates computed by reference to the price at which the common stock was last sold as of June 30,
2018 was $7,520,433.
The number of shares of the registrant’s
common stock outstanding as of April 1, 2019 was 12,860,520.
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.
In light of these
assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual
Report on Form 10-K or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or the date of
the document incorporated by reference in this Annual Report on Form 10-K, as applicable. We are not under any obligation, and
we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information,
future events or otherwise except as may be required by applicable law. All subsequent forward-looking statements attributable
to the Company or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained
or referred to in this section. We urge readers to carefully review and consider the various disclosures we make in this report
and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors
that may affect our business including the risk factors included herein under Item 1A “Risk Factors.”
PART I
We are a growth-oriented
oilfield services company that operates throughout the Southwest United States. Through our wholly-owned operating subsidiaries,
we offer an expanding suite of products and services across the market segments of drilling, completions and production. 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. Our SMG 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 directional drillers. Our frac water management
division, known as Momentum Water Transfer Services, focuses on the completion or fracing market segment providing high volume
above ground equipment and temporary infrastructure to route water used on location for fracing.
We are headquartered
in Houston, Texas with facilities in Carthage, Odessa and Alice, Texas. Our web sites are
www.SMGIndustries.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 acquiring an operating business.
Oilfield Services 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. (should we discuss value recorded for this deal?)
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.
Industry Overview
In March 2019, the
Domestic United States Rig Count, as measured by Baker Hughes, stood at 1,027, up 154% from the May 2016 lows of 404. Rig Counts
are a measurement of oilfield activity particularly relevant to the drilling market segment, as we 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 2019 Texas and adjacent
New Mexico (Permian and Delaware basins) had approximately 610 rigs operating, representing about 65% of the entire domestic United
States rigs concentrated in these West Texas/New Mexico basins.
The Completions (or
fracing) market segment was 18,500 wells in 2018 according to Westwood Global Energy. According to the Texas Railroad Commission
10,986 wells were completed in Texas in 2018. World Oil estimates that well completion in Texas will be approximately 12,301 in
2019. Drilled uncompleted wells, referred to as DUCs or ‘fraclog’, domestically was at an all-time high of 8,576 wells
as of February, 2019 in the domestic United States according to EIA.
According to a 2018
MarketsandMarkets report, the Oilfield Services Market was valued at $103.26 Billion in 2017 and is expected to grow globally
at a CAGR of 3.35% through 2022. Increases in oil and gas exploration, exploring new oilfield reserves, shale gas exploration
are major driving forces to the increase in activities to the oilfield services market.
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 in the East Texas market (based in Carthage, Texas) and in the West Texas
market (based in Odessa, Texas) with distributors/suppliers handling other areas.
Service Crews
MG’s service
crews consist of Company employees who perform drilling rig wash and mechanical repair services for drilling rig operator customers.
MG’s rig wash crews typically consist of four employees using company equipment that clean a drilling rig prior to its transport
to another location. Mechanic crews generate service revenues by performing onsite repairs of centrifugal pumps, mud agitators
and related equipment. MG’s mechanic service crews also operate at MG’s East and West Texas facilities for non-time
critical jobs.
In other examples,
customers prefer to outsource cleaning and repair services where our service crews become strategic to MG’s business solving
customer problems and using our products during service.
Equipment and Parts
Sales
Other customers prefer
to purchase equipment and perform their own maintenance on their equipment, using a variety of our cleaning products. Through
long-standing relationships with manufacturers, we sell equipment and related parts to our customers which strategically promote
our future product sales. We currently offer a full line of industrial and oilfield pressure washers along with compressors, heaters,
water pumps and combination units. We also sell spare parts to customers who have purchased equipment, which include pressure
washer water guns, hoses and fittings.
Rentals
Some drilling rig
operators, oil company operators and other oilfield companies rent our rig wash equipment trailer units that are comprised of
pressure washers, heating equipment, water containment units and related components. These rental revenues typically come in five
to seven day rental cycles, and MG charges a day rate for this equipment.
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 to day basis to a month to month basis.
In February 2019,
we entered into an exclusive rental agreement with Christopher Equipment and Rentals, LLC ("CER") of Odessa, Texas.
Under the terms of the agreement, SMGI contributed more than 800 down hole oil tools which include steel and non-mag stabilizers,
roller reamers, collars, bit subs and crossovers to CER for its exclusive use to rent these bottom hole assembly (BHA) tools to
directional drillers and other oilfield customers in the Permian Basin. Pursuant to the agreement, an additional 400 similar oil
tools were contributed to CER from an affiliate business to CER to create a broad offering of down hole rental fleet for customers
to use in their unconventional drilling applications. As a marketing and rental partner to us, CER will manage all aspects of
the down hole tool business including sourcing customers, delivering rental oil tools, repair and customer service. Pursuant to
this agreement, CER will pay a royalty on rental revenues to the Company in the amount of eleven percent of its net sales once
payment is received. The agreement is for three years, with permission-based extensions possible, and requires CER to make minimum
royalties payments to the Company to preserve the agreement's exclusivity.
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 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 management. Our strategy is to seek target companies that,
once acquired, can grow substantially from removing those constraints. We believe growth rates can be enhanced 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 have almost doubled since September 2017 by adding equipment, systems and working capital.
Cross-sell Customer
Bases of Acquired Oilfield Service Companies.
We currently have over 50 customers, many of which are leading companies in
their respective areas. 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, on December 7, 2018, we acquired a frac water transfer company that brought customers that were active
in the Eagle Ford Shale area of South Texas allowing us to introduce MG Cleaners products and services to those customers without
the challenge of procuring new Master Service Agreements (MSAs), and without incurring the typical sales and marketing expenses
associated with soliciting and securing new customers.
Broaden Service
Offerings Across the Market Segments of Drilling, Completions and Production
. We currently believe that our strategy of developing,
adding or acquiring lines of service for other market segments such as fracing with Completions and well site services for Production
applications will assist us in diversifying our business and provide a more enhanced services offering for customers seeking to
reduce vendor lists. Our initial acquisition of MG Cleaners focusing in the Drilling segment benefitted when we acquired a frac
water company focusing in the Completions segment. Currently, our strategy is to increasingly expand services across these market
segments on behalf of our customers.
Geographic and
Unconventional 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 a few facilities and
offices strategically located in Houston, Odessa, Carthage and Alice, 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 unconventional
resource plays in this geographic area generates service activities in Haynesville shale, Eagle Ford shale, Permian and Delaware
Basins. According to EIA, 90% of the oilfield activity in the domestic United States is for unconventional resources such as shale
plays.
Sales.
The
Company’s sales plan includes continuing to support its East Texas direct sales presence and establishing a direct sales
force in West Texas to complement the distribution and supply channels already present in that area. This will be led by a recently
hired strategic employee who has a significant number of customer and sales contacts. We also have meaningful sales through distributors
and supply firms that benefit from their customers’ requests for our products. Any demand for the Company’s products
outside the state of Texas are typically fulfilled through a distribution supply channel.
Manufacturing.
MG manufacturers its products in its facility in Carthage, Texas. Raw materials are procured by the Company and the proprietary
formulas for our brands are utilized throughout the process. Mixing tanks and other process equipment are used to make the products.
The final product is then stored in large gravity-fed containers onsite or in transportation quantities such as totes or gallons.
Third party shipping and distribution companies are currently utilized for certain shipments of product to West Texas. We may
install manufacturing capabilities in our Odessa, Texas facility as activity increases in that market area.
Marketing Plan.
The Company’s marketing plan focuses around supporting its product brands such as Miracle Blue®, Luma Brite™,
and Wicked Green® as well as supporting its direct sales force. MG participates in industry trade shows, sponsorships and
community events that allow its products to be featured. Social media, including LinkedIn, is utilized to facilitate awareness
and discussion groups focused around these product cleaning applications. The Company’s web site has been updated recently
to create higher relevance for our target market customers and promote testimonials of our products and equipment. For our service
crews, the marketing plan is to increase crew counts in West Texas market area so as to increase availability and service hours.
Market Segment
Description.
The Company views the oilfield services market in three principal segments: Drilling, Completions and Production.
MG’s position in the market is to focus on the Drilling segment. In our opinion, the Drilling market is very elastic resulting
in its segment being the first to recover on industry up-cycles.
Market Activity.
In any given unconventional well typically drilled in Texas, the completion and fracturing costs can be two to three times
the cost of drilling. Therefore, a trend has developed over recent years referred to as "fraclog”, illustrating the
number of Drilled Uncompleted Wells (DUCs). According to the United States Energy Information Administration (EIA), DUC’s
total 8,576 in the domestic US, in February 2019. As industry economics improve, the Company believes that the Completions market
segment could become more attractive. Today, however, MG believes the Drilling market segment is where we should focus our resources
and attention. The Production market segment has been relatively steady, compared to Drilling and Completion, as wells already
online which are maintaining positive economics can support operations and continued production.
The Company currently
believes the price of oil and gas may stay at present levels for several years therefore, we believe our focus and positioning
on the drilling market segment is critical to the Company’s future profitability.
Management
.
The Company’s Chief Executive Officer, Matthew Flemming, is located in Houston, Texas. Mr. Flemming has experience in acquisitions,
management, capital raises and public company environments. He was previously a CEO of HII Technologies (“HII”) when
it was a small public company with approximately $300,000 in cash, no debt and plans to enter the oilfield services business through
an initial platform acquisition. HII had no revenues prior to its first acquisition in September 2012, when it acquired AES Water
Solutions for approximately $2.3 million in cash, a seller note and stock. Following this initial acquisition, HII completed two
more acquisitions as well as 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 the largest drilling rig operator in the United States, known as Nabors Drilling,
a subsidiary of Nabors Industries (NYSE:NBR), as a Rig Manager from 2004 to 2010. Over the six years he was employed by Nabors,
Mr. Christian developed a strong reputation with Nabors’ employees and industry partners. He purchased MG Cleaners in 2010
and has operated the business as its President since its acquisition. The Company believes Mr. Christian’s 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), Carthage, Texas for Haynesville and Cotton Valley plays, and Alice, Texas addressing the Eagle
Ford Shale and Austin Chalk activity. All of our products are made in Texas. Any products sold outside of our current geographic
focus is 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 in the southwest United States. Our competitors include
many large and small oilfield service companies. In addition, the business segments in which we compete are highly fragmented.
We believe that the principal competitive factors in the markets we serve are: reputation for service and technical expertise,
equipment and personnel capacity, work force competency, efficiency, safety record and price. Our branded products compete against
other cleaning products, surfactants and degreasers, some of which are branded retail and some industrial. Because of our dealer
status with certain equipment, we do not frequently compete for equipment sales on selected items 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. 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, 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
As of December 31,
2017, two customers comprised more than 10% of our accounts receivable balance at approximately 44% and 20%, respectively. During
the twelve-month period ended December 31, 2017, two customers represented more than 10% of our revenues at 34% and 18%, respectively,
and no other customer represented more than 10% of our revenues during this period.
Seasonality
Weather conditions
affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural
gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results
of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis.
Raw Materials
The Company purchases
a wide variety of raw materials, parts and components that are made by other manufacturers and suppliers for our use. The Company
is not dependent on any single source of supply for those parts, supplies or materials and we believe that such parts, supplies
and materials are readily available from multiple sources. We do not foresee significant price fluctuations in our raw material
costs.
Intellectual
Property
We do not have any
patents on our current products and do not intend to file any patents on such products. We protect our trademarks and may from
time to time file for registration of those trademarks.
We currently protect
our trade secrets and in-house intellectual property through contractual arrangements, including confidentiality, non-competition
and non-disclosure agreements with employees, and will continue to use such contractual arrangements in the future to help protect
our proprietary intellectual property.
Government
Regulation
We
are not currently subject to any direct regulation by any government agency, other than regulations generally applicable to businesses.
General
business regulations include the packaging, labeling, distribution, advertising and sale of our chemical products, such as those
we sell, are subject to regulation by one or more federal agencies, principally the Federal Trade Commission, or FTC, and to a
lesser extent the Consumer Product Safety Commission.
Federal
agencies, primarily the FTC, have a variety of procedures and enforcement remedies available to them, including the following:
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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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addition, certain state agencies have similar authority. These federal and state agencies have in the past used these remedies
in regulating participants in the industry, including the imposition by federal agencies of civil penalties. We cannot assure
you that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action
taken against us, will not result in a material adverse effect on our operations.
We
cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect
such additional regulation, when and if it occurs, would have on our business in the future. Such additional regulation could
require, however, any or all of the actions listed below, which could have a material adverse effect on our operations:
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the reformulation of certain products to meet new
standards,
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the recall or discontinuance of certain products,
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additional record keeping,
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expanded documentation of the properties of certain products,
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revised, expanded or different labeling, or
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additional scientific substantiation.
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Property
Our
principal executive office is located at 710 N. Post Oak Road, Suite 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 offices located
in Carthage, Odessa and Alice, 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.
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 management’s
best estimated amount to settle this matter is for $40,000 (forty thousand dollars) expected to be settled during the fiscal year
2019. As such, management believes it is appropriate to accrue for this on our year end 2018 financial statements.
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 or investigations.
Other than as disclosed
above, there are no legal proceedings currently pending or, to our knowledge, threatened against us.
Employees
As of December 31,
2018, we had 53 employees of whom 9 were administrative, 3 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
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 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. During fiscal year 2017, two of our customers accounted for approximately
52% of our total gross revenues, with one customer accounting for 34% and another accounting for 18%. No other customers exceeded
10% of revenues during 2017. These customers do not have any ongoing commitment to purchase our services. While additional
customers have been sourced since December 31, 2017, significant customer concentration still exists. The loss of or a sustained
decrease in demand by these customers could result in a substantial loss of revenues and could have a material adverse effect
on our results of operations. In addition, should these large customers default in their obligations to pay, our results
of operations and cash flows could be adversely affected.
Our business
depends on domestic (United States) spending by the crude oil and natural gas industry which has suffered significant negative
price volatility since July 2014, and such volatility may continue; our business has been, and may in the future be, adversely
affected by industry and financial market conditions that are beyond our control.
We depend on our customers’
ability and willingness to make operating and capital expenditures to explore, develop and produce crude oil and natural gas in
the United States. Customers’ expectations for future crude oil and natural gas prices, as well as the availability of capital
for operating and capital expenditures, may cause them to curtail spending, thereby reducing demand for our services and equipment.
Major declines in oil and natural gas prices from July 2014 (when WTI prices were at approximately $100 per barrel) through 2015
resulted in substantial declines in capital spending and drilling programs across the industry in which we operate. As a result
of the declines in oil and natural gas prices, most exploration and production companies shut down or substantially reduced drilling
programs. Any significant decline in oil and natural gas prices or a significant decline in the North American rig count could
have a material adverse effect on our business.
Industry conditions
and specifically the market price for crude oil and natural gas are influenced by numerous domestic and global factors over which
the Company has no control, such as the supply of and demand for oil and natural gas, domestic and worldwide economic conditions,
weather conditions, political instability in oil and natural gas producing countries, and merger and divestiture activity among
oil and natural gas producers. The volatility of the oil and natural gas industry and the consequent impact on commodity prices
as well as exploration and production activity could adversely impact the level of drilling and activity by some of our customers.
Where declining prices lead to reduced exploration and development activities in the Company’s market areas, the reduction
in exploration and development activities also may have a negative long-term impact on the Company’s business. Continued
decline in oil and natural gas prices may result in increased pressure from our customers to make pricing concessions in the future
and may impact our borrowing arrangements with our principal bank.
There has also been
significant political pressures for the United States economy to reduce its dependence on crude oil and natural gas due to the
perceived impacts on climate change. These activities may make oil and gas investment and production
less attractive.
Higher oil and gas
prices do not necessarily result in increased drilling activity because our customers’ expectation of future prices also
drives demand for drilling services. Oil and gas prices, as well as demand for the Company’s services, also depend upon
other factors that are beyond the Company’s control, including the following:
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Supply and demand for crude oil and natural gas,
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political pressures against crude oil and natural gas exploration
and production,
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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.
New cleaning technologies and products may render our
products and services obsolete.
As technology continues
to develop, our clients and our competitors may develop or discover new cleaning technologies that are superior to, or more cost
effective than, the cleaning products and services we provide. In the event that any such technologies are developed, and we are
unable to adapt to such new products or services, our business could be materially adversely 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, and Momentum Water Transfer, our operating subsidiaries. . 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.
The line of credit with Crestmark
Bank contains restrictive covenants which limit management’s discretion to operate the businesses of our wholly-owned subsidiaries
and is secured by all of MG’s assets and substantially all of the assets of MWTS and Jake Oilfield Solutions, which is wholly-owned
by MWTS.
In order to obtain
the line of credit from Crestmark Bank, 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 Crestmark Bank 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, Crestmark Bank could seek to foreclose on those assets in an effort
to seek repayment under the loans. If Crestmark Bank were successful, we would be unable to conduct our business as it is
presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.
Additionally, we have guaranteed the Crestmark Bank 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 on the
line of credit and term loan from Crestmark Bank is payable monthly and is at a rate per annum equal to the prime rate plus 7.50%,
per annum (provided that at no time shall be less than 11.5%). The interest under the Crestmark Credit Facility will fluctuate
over time, and if the prime rate significantly increases, our interest expense will increase. This could have a material
adverse effect on our results of operations.
We may need additional financing to further our business
plans.
We may require additional
funds to finance our business development projects. We may not be successful in raising additional financing as and when
needed. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, our operating results and
prospects could be adversely affected.
We may not realize all of the anticipated
benefits of our acquisitions, joint ventures or divestitures, or these benefits may take longer to realize than expected.
Our business strategy
includes growth through the acquisitions of other businesses in the areas of drilling, completions or production business segments.
We may not be able to continue to identify attractive acquisition opportunities or successfully acquire those opportunities
that are identified. There is always the possibility that even if there is success in integrating our current or future
acquisitions into the existing operations, we may not derive the benefits, such as administrative or operational synergy or earnings
obtained, that were expected from such acquisitions, which may result in the commitment of capital resources without the expected
returns on the capital. The competition for acquisition opportunities may increase which in turn would increase our cost
of making further acquisitions or causing us to curb our activities of making additional acquisitions.
In pursuing our business
strategy, from time to time we evaluate targets and enter into agreements regarding possible acquisitions, divestitures and joint
ventures. To be successful, we conduct due diligence to identify valuation issues and potential loss contingencies, negotiate
transaction terms, complete transactions and manage post-closing matters such as the integration of acquired businesses. Our due
diligence reviews are subject to the completeness and accuracy of disclosures made by third parties. We may incur unanticipated
costs or expenses following a completed acquisition, including post-closing asset impairment charges, expenses associated with
eliminating duplicate facilities, litigation, and other liabilities.
The risks associated
with our future acquisitions also include the following:
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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.
Risks Related to Our Securities
There is a limited trading market for our shares. You
may not be able to sell your shares if you need money.
Our common stock is
traded on the OTC Pink Market, an inter-dealer automated quotation system for equity securities. During the thirty days
preceding filing of this report, the average daily trading volume of our common stock was approximately 1,280 shares traded per
day, on average, and currently is thinly traded. As of March 29, 2019, we had 85 record holders of our common stock (not
including an indeterminate number of stockholders whose shares are held by brokers in “street name”). There
has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely. We consider our
common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the
common stock. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid
market and limited public float for our common stock.
We are subject to the penny stock rules and these rules
may adversely affect trading in our common stock.
Our common stock is
a “low-priced” security under rules promulgated under the Securities Exchange Act of 1934. In accordance with
these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document
which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s
rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination
approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience
and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases
the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases
transaction costs for sales and purchases of our common stock as compared to other securities.
Transfers of our securities may
be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual
state laws. These restrictions may make it difficult or impossible to sell shares in those states.
Transfers of our common
stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions,
commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not
be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue
sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant
state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities.
These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for
our securities to be a limited one.
Our Officers, Directors and significant
shareholders collectively own a substantial portion of our outstanding common stock, and as long as they do, they may be able
to control the outcome of stockholder voting.
Our Officers, Directors
and significant shareholders are collectively the beneficial owners of approximately 47.2% of the outstanding shares of our common
stock as of the date of this report. As long as our Officers, Directors and significant shareholders collectively own a
significant percentage of our common stock, our other shareholders may generally be unable to affect or change the management
or the direction of our company without the support of our Officers, Directors and significant shareholders. As a result,
some investors may be unwilling to purchase our common stock. If the demand for our common stock is reduced because our
Officers, Directors and significant shareholders have significant influence over our company, the price of our common stock could
be materially depressed. The Officers, Directors and significant shareholders will be able to exert significant influence
over the outcome of all corporate actions requiring stockholder approval, including the election of Directors, amendments to our
certificate of incorporation and approval of significant corporate transactions.
We have the ability to issue additional
shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment
to be diluted.
Our Certificate of
Incorporation authorizes the Board of Directors to issue up to 25,000,000 shares of common stock and up to 1,000,000 shares of
preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options
to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any
additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of
diluting your investment.
By issuing preferred stock, we may be able to delay,
defer or prevent a change of control.
Our Certificate of
Incorporation permits us to issue, without approval from our shareholders, a total of 1,000,000 shares of preferred stock. Our
Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares
of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible
that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued,
may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our
common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights
of the holders of our common stock.
Our stock price is volatile.
The trading price
of our common stock has been and continues to be subject to fluctuations. The stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other
companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors. Significant
volatility in the market price of our common stock may arise due to factors such as:
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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,
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general trends in the industries in which we do business,
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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
Pink Market reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no
exchange requirements are imposed. Dealers may dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the
equally sudden collapse of the market price for shares of our common stock.
There is a limitation in connection with the editing
and canceling of orders on the OTC Markets.
Orders for OTC Pink
Market securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be
submitted to, received and processed by the OTC Markets. Due to the manual order processing involved in handling OTC Markets
trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one's order. Consequently, one
may not be able to sell its shares of our common stock at the optimum trading prices.
Increased dealer compensation could adversely affect
our stock price.
The dealer's spread
(the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our
Common Stock on the OTC Markets if the stock must be sold immediately. Further, purchasers of shares of our Common Stock
may incur an immediate "paper" loss due to the price spread. Moreover, dealers trading on the OTC Markets may
not have a bid price for shares of our Common Stock on the OTC Markets. Due to the foregoing, demand for shares of our Common
Stock on the OTC Markets may be decreased or eliminated.
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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 1429 square
feet of office space at a rate of $2,620 per month. We also have offices located in Carthage, Odessa and Alice, Texas. Our Carthage
facility is comprised of a 2,500 square foot building and one acre of property that is leased for $2,500 per month. The Carthage
lease is on a month to month basis and is used for our operations throughout East Texas. 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 the landlord. Lease extensions
are at our discretion and require rent increases. The Company is responsible for the repair, maintenance and insurance of the
facility. Our Alice office services our South Texas operations. The facilities include an office, warehouse and laydown yard which
we lease at a rate of $2,000 per month. The Alice facility is leased for six months, commencing on June 1, 2018 and automatically
renews for six month periods until terminated with written notice.
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.
SMG Industries has
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 $40,000 (forty thousand dollars) expected to be settled during the fiscal year
2019. As such, management believes it is appropriate to accrue for this on our year end 2018 financial statements.
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 or investigations.
Other than as disclosed above, there are no 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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50
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Chief Executive Officer, Interim Chief Financial Officer and Chairman
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Stephen Christian
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37
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Executive Vice President and Secretary
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John P. Boylan
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52
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Director
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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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44
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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 to $4.2
million by its peak in December 2014. In 2015, HII experienced significantly reduced customer activity and oil & gas pricing
levels creating an industry down-turn pressuring its covenants with its debt with its senior lenders. In July 2015, HII’s
senior lender declared HII in default of its senior credit facility and as a result the lender did not continue to release funds
pursuant to the terms of the credit facility. As a result, HII was unable to continue to fund its operations or satisfy its reporting
obligations with the SEC subsequent to its March 31, 2015 Form 10-Q filing. On September 18, 2015, HII Technologies filed voluntary
petitions for reorganization under Chapter 11 of Title 111 of the U.S. Code in the United States Bankruptcy Court for the Southern
District of Texas Victorian Division. On April 15, 2016, Mr. Flemming resigned as an officer and director of HII and the bankruptcy
court entered an order confirming HII Technologies’ Plan of Reorganization. This plan became effective on May 20, 2016.
On July 13, 2016, HII’s registration was revoked by the Securities and Exchange Commission (“SEC”) pursuant
to Section 12(j) of the Securities Exchange Act of 1934. The revocation of HII’s registration was the result of proceedings
instituted by the SEC, which HII accepted and consented to without admitting or denying the findings of the SEC. The SEC’s
findings included that HII filed a Chapter 11 petition with the Bankruptcy court and that HII failed to comply with Exchange Act
Section 13(a) and Rules 13a-1 and 13a-13.
Prior thereto, from
2009 to 2011, Mr. Flemming was Chief Financial Officer of Hemiwedge Industries Inc. a proprietary valve technology company with
oilfield applications that was sold in 2011. From 2005 to 2009, Mr. Flemming was Chief Financial Officer of Shumate Industries,
Inc., an oilfield manufacturing company and successor of Excalibur. Previous to that, from 2001 to 2005, Mr. Flemming was Chief
Financial Officer of Excalibur Industries, Inc. an industrial and energy related manufacturer and fabrication company. From June
1999 to March 2001, he served as Chief Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held technology
company. From January 1994 to May 1999, Mr. Flemming served as Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately
held national specialty products company that he founded. Mr. Flemming received a Bachelor of Arts in Finance from
the University of Houston.
Mr. 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), as
a Rig Manager from 2004 to 2010. Mr. Christian was educated at Oklahoma Christian University.
Mr. Boylan
has served as a Director of the Company since the completion of our acquisition of MG. Mr. Boylan was formerly the Chairman, Chief
Executive Officer and President of Houston American Energy Corp. (NYSE MKT: HUSA) from April 2015 to June 2018 and served as a
director of that company beginning in 2006. Since 2008, Mr. Boylan has owned and operated EJC Ventures, LP, a financial and management
consulting firm providing executive and financial management, asset management, corporate finance, risk management, complex financial
reporting, crisis management, turnaround services and pre- and post-bankruptcy management services to the oil and gas industry.
Mr. Boylan has served as interim chief executive officer, interim chief financial officer and in other interim management roles
with private and publicly traded oil and gas companies, including operators in pre- and post-bankruptcy. Mr. Boylan’s pre-
and post-bankruptcy services expose him to being an officer of companies entering Chapter 11 from time to time, as this is an
activity and service that he provides as part of his normal business operations through EJC Ventures. Mr. Boylan holds a BBA with
a major in Accounting from the University of Texas and an MBA with majors in Finance, Economics and International Business from
New York University.
Mr.
Paulson
has served as a Director of the Company since the completion of our acquisition of MG. Mr. Paulson has been a
director of TOR Minerals International Inc. (“TOR Minerals”) since 2008. TOR Minerals is a global producer of high
performance, specialty mineral products focused on product innovation and technical support. Mr. Paulson has served as the President
and Chief Executive Officer of Contech Control Services, an electrical and automation engineering/design services and construction
firm since December 2014. Previously, Mr. Paulson served as President and Director of The Automation Group, or TAG, a national
engineering firm focused in process automation, from 1996 until its sale to Emerson Electric in December 2007. Following the sale,
he continued to serve as a consultant to Emerson and TAG until November 2012. Mr. Paulson received his Bachelors of Science in
Electrical Engineering from Texas A&M University.
Mr. Gilbert
has served as a Director of the Company since the completion of our acquisition of MG. Mr. Gilbert is the co-founder and
has been the Managing Partner of Sable Power and Gas LLC (“Sable”), an energy management services and advisory company
since 2008. Prior to co-founding Sable, Mr. Gilbert was Senior Director of Gexa Energy, a retail electricity provider for residential
and commercial customers from 2006 to 2008. From 2001 to 2006, Mr. Gilbert served several roles in energy trading and asset management
at Citibank, Citigroup Energy and Reliant Energy. Mr. Gilbert’s experience includes energy management strategy, energy trading,
risk management, data management, wholesale origination and structuring power and gas contracts for firm clients. Mr. Gilbert
holds a Bachelor of Science degree from Texas A&M University.
Director Independence
and Qualifications
The Board of Directors
has determined that each of Messrs. Boylan, Paulson and Gilbert qualifies as an “independent director.” Because our
common stock is not currently listed on a national securities exchange, we have used the definition of “independence”
of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director”
is a person other than an officer or employee of the Company or any other individual having a relationship with the Company that,
in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director. The NASDAQ listing rules provide that a director cannot be independent if:
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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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·
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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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·
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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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·
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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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·
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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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·
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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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·
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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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·
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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 Victorian Division. On April 15, 2016, the bankruptcy court entered an order confirming the Debtors’ Plan of Reorganization
and the plan became effective on May 20, 2016. Mr. Flemming, who is currently an officer and member of our Board of Directors,
was an officer and director of each of the Debtors during those periods.
Since 2008, Mr. Boylan
has owned and operated EJC Ventures, LP, a financial and management consulting firm providing executive and financial management,
asset management, corporate finance, risk management, complex financial reporting, crisis management, turnaround services and
pre- and post-bankruptcy management services to the oil and gas industry. Mr. Boylan has served as interim chief executive officer,
interim chief financial officer and in other interim management roles with private and publicly traded oil and gas companies,
including operators in pre- and post-bankruptcy. Mr. Boylan’s pre- and post-bankruptcy services expose him to being an officer
of companies entering Chapter 11 from time to time, as this is an activity and service that he provides as part of his normal
business operations through EJC Ventures.
Family Relationships
There are no family
relationships among the individuals comprising our Board of Directors, management and other key personnel.
Board Composition
Our certificate of
incorporation, as amended, and bylaws provide that the authorized number of Directors may be changed only by resolution of the
Board. We currently have four Directors with each Director serving a one-year term which will expire at our next annual meeting
of stockholders. At each annual meeting of stockholders, the successors to the current Directors will be elected to serve until
the next annual meeting following the election.
Director Independence
Our Board has reviewed
the materiality of any relationship that each of our Directors has with us, either directly or indirectly. Based on this review,
the Board has determined that Messrs. Boylan, Gilbert and Paulson are “independent directors” under the NASDAQ independence
standards.
Board Committees
Our Board currently
has three standing committees: Audit Committee, Nominating and Governance Committee, and a Compensation Committee, each of which
is described below. All standing committees operate under charters that have been approved by the Board. Copies of the charters
of the Audit Committee, Compensation Committee and the Nominating and Governance Committee can be found on our Internet site
www.SMGIndustries.com
Audit Committee.
Our Audit Committee is composed of Mr. Boylan, Mr. Gilbert and Mr. Paulson. All members of our Audit Committee are independent
as defined in the NASDAQ rules. In addition, the Board of Directors has determined that Mr. Boylan satisfies the SEC’s criteria
for an “audit committee financial expert.” Our Audit Committee oversees our corporate accounting, financial reporting
practices and the annual audit and quarterly reviews of the financial statements. For this purpose the Audit Committee has a charter
(which is reviewed periodically) and performs several functions.
The Audit Committee’s
primary functions are:
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assist theBoard in 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 NASDAQ or 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. Boylan, Mr. Gilbert and Mr. Paulson. The Compensation Committee reviews
its charter periodically. Our Compensation Committee’s primary functions are:
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·
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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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·
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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 2018.
Non-executive director
compensation is determined by the entire Board after review and approval by the Compensation Committee.
Nominating and
Governance Committee.
Our Nominating and Governance Committee is composed of Mr. Boylan, Mr. Gilbert and Mr. Paulson.
The Nominating and Governance Committee has a charter, which is reviewed periodically.
Our Nominating and
Governance Committee’s primary functions are:
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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 paid an annual salary
of $120,000 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, 2018, with our Directors and Officers and beneficial owners
of more than five percent of our voting securities and their affiliates:
On December 7, 2018,
the Company borrowed $100,000, pursuant to a 10% Secured Promissory Note, from Leo Womack. The note provides for monthly interest
payments to Mr. Womack and the entire principal and accrued interest is due on December 7, 2019. In connection with the issuance
of the note, the Company issued an aggregate of 166,667 warrants exercisable at a price of $0.40 per share to Mr. Womack. The
warrants are exercisable immediately and expire on December 7, 2023.
On December 7, 2018,
the Company borrowed $100,000, pursuant to a 10% Secured Promissory Note, from George Gilman. The note provides for monthly interest
payments to Mr. Gilman and the entire principal and accrued interest is due on December 7, 2019. In connection with the issuance
of the note, the Company issued an aggregate of 166,667 warrants exercisable at a price of $0.40 per share to Mr. Gilman. The
warrants are exercisable immediately and expire on December 7, 2023.
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.
During February,
2019, the Company retained the services of Mr. John Boylan, a director of the Company, pursuant to which the Company agreed to
pay Mr. Boylan $13,333 per month for consulting services related to the Company’s mergers and acquisition strategy. The
services will be provided to the Company on a month-to-month basis.
The Board of Directors
has adopted a Related Party Transaction Policy for the review of related person transactions. Under these policies and procedures,
the audit committee reviews related person transactions in which we are or will be a participant to determine if they are fair
and beneficial to the Company. Financial transactions, arrangements, relationships or any series of similar transactions, arrangements
or relationships in which a related person has or will have a material interest and that exceeds the lesser of: (i) $120,000,
and (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, in
the aggregate per year are subject to the audit committee’s review. Any member of the Audit Committee who is a related person
with respect to a transaction under review may not participate in the deliberation or vote requesting approval or ratification
of the transaction. Transactions that are subject to the policy include any transaction, arrangement or relationship (including
indebtedness or guarantees of indebtedness) in which the Company is a participant with a related person. The related person may
have a direct or indirect material interest in the transaction. It is Company policy that the audit committee shall approve any
related party transaction before the commencement of the transaction. However, if the transaction is not identified before commencement,
it must still be presented to the audit committee for their review and ratification. For more information regarding related party
transactions, see the section entitled “Certain Relationships and Related Transactions” below.
Director Independence
Our Board of Directors
has determined that Messrs. Boylan, Paulson and Gilbert are “independent” as defined under the standards set forth
in Rule 5605 of the NASDAQ Stock Market Rules. In making this determination, the Board of Directors considered all
transactions set forth under “Certain Relationships and Related Transactions.”
Legal Proceedings
To the best of our
knowledge, none of our Directors or Executive Officers has been convicted in a criminal proceeding, excluding traffic violations
or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted
in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed
without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,”
none of our Directors, Director nominees, or Executive Officers has been involved in any transactions with us or any of our Directors,
Executive Officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the
Commission.
|
|
Item 11
.
|
Executive Compensation
|
Summary Compensation Table
The following table
shows the total compensation earned during the fiscal years ended December 31, 2018 and 2017 to (1) our Chief Executive Officer,
and (2) our other named executive officers during the fiscal years ended December 31, 2018 and 2017 (collectively, the “named
executive officers”):
Name and principal
position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
awards($)
(4)
|
|
|
Option
awards($)
(4)
|
|
|
Non-equity
incentive
plan
compensation
($)
|
|
|
Non-qualified
deferred
compensation
earnings ($)
|
|
|
All other
compensation
($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew Flemming
|
|
|
2018
|
|
|
|
180,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,000
|
|
|
Chief Executive Officer
|
|
|
2017
|
|
|
|
116,385
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen Christian
|
|
|
2018
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120,000
|
|
|
Executive
Vice President and Secretary and President of MG Cleaners
|
|
|
2017
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Meggen Rhodes
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Former Chief Financial Officer
(1)
|
|
|
2017
|
|
|
|
26,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,340
|
|
|
|
42,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ailon Z. Grushkin
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Former Chief Executive Officer
(2)
|
|
|
2017
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary E. Paetzol
|
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Former Chief Financial Officer
(3)
|
|
|
2017
|
|
|
|
45,000
|
|
|
|
-
|
|
|
|
55,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
(1)
|
Ms. Rhodes resigned as the Chief Financial Officer
of the Company on March 19, 2018.
|
|
|
(2)
|
Mr. Grushkin resigned as an officer and director of the Company
on September 19, 2017. In 2017, management services were provided under an agreement with Nano-Cap Advisors LLC
where Ailon Z. Grushkin is the sole member.
|
|
|
(3)
|
Ms. Paetzold resigned as an officer of the Company on September
19, 2017. During 2017 (through September 19, 2017), the Company had an arrangement with Ms. Paetzold that provided
for cash compensation of $60,000 per year.
|
|
|
(4)
|
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, 2018, we did not compensate any of our non-executive, independent directors 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.
The Company has engaged
the services of Mr. John Boylan effective February 11, 2019, whereby Mr. Boylan will be paid as a consultant to the Company in
connection with its mergers and acquisition strategy, whereby Mr. Boylan shall provide us with mergers and acquisition support
including economic analysis, financial modeling and due diligence. Mr. Boylan will be paid $13,000 per month for his services.
Equity Compensation of Directors
Our directors are eligible to participate
in our 2018 Stock Option Plan.
Outstanding Equity Awards at 2018 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,
2018.
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
|
The following table
sets forth, as of March 29, 2019, 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 April 1, 2019, there were 12,860,520 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
|
|
|
|
|
|
|
|
|
|
|
Raging Capital Master Fund Ltd.(4)
|
|
|
782,498
|
|
|
|
6.1
|
%
|
|
Raging Capital Management LLC(5)
|
|
|
782,498
|
|
|
|
6.1
|
%
|
|
William Martin(6)
|
|
|
783,884
|
|
|
|
6.1
|
%
|
|
Ramsey Financial Fund One LLC (7)
|
|
|
760,000
|
|
|
|
5.9
|
%
|
|
Leo Womack (8)
|
|
|
1,032,367
|
|
|
|
7.9
|
%
|
|
George Gilman (9)
|
|
|
1,216,667
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
|
Matthew Flemming(2)
|
|
|
600,000
|
|
|
|
4.7
|
%
|
|
Stephen Christian
|
|
|
1,408,276
|
|
|
|
10.9
|
%
|
|
John Boylan(3)
|
|
|
225,000
|
|
|
|
1.7
|
%
|
|
Steven Paulson
|
|
|
100,000
|
|
|
|
*
|
|
|
Michael A. Gilbert II
|
|
|
100,000
|
|
|
|
*
|
|
|
All Directors and Executive Officers as a group (5 persons) (1)(2)(3)
|
|
|
2,433,276
|
|
|
|
18.9
|
%
|
*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.
|
|
|
(3)
|
Includes 225,000 shares of common stock
held by EJC Ventures of which Mr. Boylan is the control person.
|
|
|
(4)
|
Based on Schedule 13D filed with the Securities
and Exchange Commission on May 4, 2016 by Raging Capital Master Fund, LTD. (“Raging Group”) includes 782,498
shares held by Raging Capital Master Fund, Ltd. William C. Martin is the Managing Member of Raging Capital Management, LLC
the General Partner of Raging Capital Master Fund, Ltd. William C. Martin retains 100% equity ownership in Raging Capital
Management, LLC. Also includes 1,386 shares held by William C. Martin SEP IRA.
|
|
|
(5)
|
Includes 782,498 shares held by Raging
Capital Master Fund Ltd. Raging Capital Management, LLC is the General Partner of Raging Capital Master Fund Ltd. William
C. Martin is the Chairman, Chief Investment Officer and Managing Member of Raging Capital Management, LLC.
|
|
|
(6)
|
RCM Indium, LLC, a Delaware limited liability
company, whose members include Raging Capital Fund (QP), LP and Raging Capital Management, LLC, whose sole member is William
C. Martin. However, RCM Indium, LLC does not have any ownership rights to any common Stock owned by Mr. Martin.
|
|
|
(7)
|
Ramsey Financial Fund One, LLC’s
managing member is Leo B. Womack who has sole voting and investment control over the shares.
|
|
|
(8)
|
Includes: (i) 760,000 shares of common
stock held by Ramsey Financial Fund One, LLC, of which Leo Womack is the managing member; (ii) 50,000 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, (iii) 43,800 shares of common stock held by Gulf Equities Profit Sharing Plan, Leo Womack administrator, of
which Mr. Womack has sole voting and investment control over the shares, and (iv) 166,667 shares of
common stock issuable upon the exercise of options held by Mr.
Womack.
|
|
|
(9)
|
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, and (iii) 166,667 shares of common stock issuable upon the exercise of options held
by Mr. Gilman.
|
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 2018, 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, 2018.
|
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 securityholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Long-Term Incentive Compensation Plan
|
|
|
590,000
|
|
|
$
|
.47
|
|
|
|
-0-
|
|
|
2018 Stock Option Plan
|
|
|
50,000
|
|
|
|
.79
|
|
|
|
1,950,000
|
|
|
Total
|
|
|
640,000
|
|
|
$
|
.50
|
|
|
|
1,950,000
|
|
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.
The Purpose
of the Plan
. The purpose of the 2018 Plan is to provide additional incentive to the directors, officers, employees
and consultants of the Company who are primarily responsible for the management and growth of the Company. Each option shall be
designated at the time of grant as either an incentive stock option (an “ISO”) or as a non-qualified stock option
(a “NQSO”).
The Board of
Directors believes that the ability to grant stock options to employees which qualify for ISO treatment provides an additional
material incentive to certain key employees. The Internal Revenue Code requires that ISOs be granted pursuant to an option plan
that receives stockholder approval within one year of its adoption. The Company adopted the Plan in order to comply with this
statutory requirement and preserve its ability to grant ISOs.
The benefits
to be derived from the 2018 Plan, if any, are not quantifiable or determinable.
Administration
of the Plan
. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the “Administrator”). The
Board of Directors shall appoint and remove members of the Compensation Committee in its discretion in accordance with applicable
laws. In compliance with Rule 16b-3 under the Exchange Act and Section 162(m) of the Internal Revenue Code (the “Code”),
the Compensation Committee shall, in the Board of Director's discretion, be comprised solely of “non-employee directors”
within the meaning of said Rule 16b-3 and “outside directors” within the meaning of Section 162(m) of the Code. Notwithstanding
the foregoing, the Administrator may delegate non-discretionary administrative duties to such employees of the Company as it deems
proper and the Board of Directors, in its absolute discretion, may at any time and from time to time exercise any and all rights
and duties of the Administrator under the Plan.
Subject to the
other provisions of the Plan, the Administrator shall have the authority, in its discretion: (i) to grant options; (ii) to determine
the fair market value of the Common Stock subject to options; (iii) to determine the exercise price of options granted; (iv) to
determine the persons to whom, and the time or times at which, options shall be granted, and the number of shares subject to each
option; (v) to interpret the Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vii) to
determine the terms and provisions of each option granted (which need not be identical), including but not limited to, the time
or times at which options shall be exercisable; (viii) with the consent of the optionee, to modify or amend any option; (ix) to
defer (with the consent of the optionee) the exercise date of any option; (x) to authorize any person to execute on behalf of
the Company any instrument evidencing the grant of an option; and (xi) to make all other determinations deemed necessary or advisable
for the administration of the Plan. The Administrator may delegate non-discretionary administrative duties to such
employees of the Company as it deems proper.
Shares
of Stock Subject to the Plan
. Subject to the conditions outlined below, the total number of shares of stock which may be issued
under options granted pursuant to the Plan shall not exceed 2,000,000 shares of Common Stock, $.001 par value per share.
The number of
shares of Common Stock subject to options granted pursuant to the Plan may be adjusted under certain conditions. If
the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination
or reclassification, appropriate adjustments shall be made by the Board of Directors in (i) the number and class of shares of
stock subject to the Plan, and (ii) the exercise price of each outstanding option; provided, however, that the Company shall not
be required to issue fractional shares as a result of any such adjustments. Each such adjustment shall be subject to
approval by the Board of Directors in its sole discretion.
In the event
of the proposed dissolution or liquidation of the Company, the Administrator shall notify each optionee at least thirty days prior
to such proposed action. To the extent not previously exercised, all options will terminate immediately prior to the
consummation of such proposed action; provided, however, that the Administrator, in the exercise of its sole discretion, may permit
exercise of any options prior to their termination, even if such options were not otherwise exercisable. In the event
of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive,
or in the event of a sale of all or substantially all of the assets of the Company in which the Stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all options shall be assumed or equivalent options shall be substituted
by the successor corporation (or other entity) or a parent or subsidiary of such successor corporation (or other entity); provided,
however, that if such successor does not agree to assume the options or to substitute equivalent options therefor, the Administrator,
in the exercise of its sole discretion, may permit the exercise of any of the options prior to consummation of such event, even
if such options were not otherwise exercisable.
Participation
.
Every person who at the date of grant of an option is an employee of the Company or of any Affiliate (as defined below) of the
Company is eligible to receive NQSOs or ISOs under the Plan. Every person who at the date of grant is a consultant
to, or non-employee director of, the Company or any Affiliate (as defined below) of the Company is eligible to receive NQSOs under
the Plan. The term “Affiliate” as used in the Plan means a parent or subsidiary corporation as defined
in the applicable provisions (currently Sections 424(e) and (f), respectively) of the Code. The term “employee”
includes an officer or director who is an employee of the Company. The term “consultant” includes persons
employed by, or otherwise affiliated with, a consultant.
Option Price.
The
exercise price of a NQSO shall be not less than 85% of the fair market value of the stock subject to the option on the date of
grant. To the extent required by applicable laws, rules and regulations, the exercise price of a NQSO granted to any
person who owns, directly or by attribution under the Code (currently Section 424(d)), stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of any Affiliate (a “10% Stockholder”) shall in no
event be less than 110% of the fair market value of the stock covered by the option at the time the option is granted. The
exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be
less than the fair market value of the stock covered by the option at the time the option is granted. The exercise
price of an ISO granted to any 10% Stockholder shall in no event be less than 110% of the fair market value of the stock covered
by the Option at the time the Option is granted.
Term of the
Options.
The Administrator, in its sole discretion, shall fix the term of each option, provided that the maximum
term of an option shall be ten years. ISOs granted to a 10% Stockholder shall expire not more than five years after the date of
grant. The Plan provides for the earlier expiration of options in the event of certain terminations of employment of the holder.
Restrictions
on Grant and Exercise
. Except with the express written approval of the Administrator, which approval the Administrator is
authorized to give only with respect to NQSOs, no option granted under the Plan shall be assignable or otherwise transferable
by the optionee except by will or by operation of law. During the life of the optionee, an option shall be exercisable
only by the optionee.
Termination
of the Plan.
The Plan shall become effective upon adoption by the Board of Directors; provided, however, that no option
shall be exercisable unless and until written consent of the Stockholders of the Company, or approval of Stockholders of the Company
voting at a validly called Stockholders’ meeting, is obtained within twelve months after adoption by the Board of Directors. If
such Stockholder approval is not obtained within such time, options granted pursuant to the Plan shall be of the same force and
effect as if such approval was obtained except that all ISOs granted pursuant to the Plan shall be treated as NQSOs. Options may
be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities
laws. The Plan shall terminate within ten years from the date of its adoption by the Board of Directors.
Termination
of Employment.
If for any reason other than death or permanent and total disability, an optionee ceases to be employed
by the Company or any of its Affiliates (such event being called a “Termination”), options held at the date of Termination
(to the extent then exercisable) may be exercised in whole or in part at any time within three months of the date of such Termination,
or such other period of not less than thirty days after the date of such Termination as is specified in the Option Agreement or
by amendment thereof (but in no event after the expiration date of the option (the “Expiration Date”)); provided,
however, that if such exercise of the option would result in liability for the optionee under Section 16(b) of the Exchange Act,
then such three-month period automatically shall be extended until the tenth day following the last date upon which optionee has
any liability under Section 16(b) (but in no event after the Expiration Date). If an optionee dies or becomes permanently
and totally disabled (within the meaning of Section 22(e)(3) of the Code) while employed by the Company or an Affiliate or within
the period that the option remains exercisable after Termination, options then held (to the extent then exercisable) may be exercised,
in whole or in part, by the optionee, by the optionee's personal representative or by the person to whom the option is transferred
by devise or the laws of descent and distribution, at any time within twelve months after the death or twelve months after the
permanent and total disability of the optionee or any longer period specified in the Option Agreement or by amendment thereof
(but in no event after the Expiration Date). “Employment” includes service as a Director or as a Consultant. For
purposes of the Plan, an optionee's employment shall not be deemed to terminate by reason of sick leave, military leave or other
leave of absence approved by the Administrator, if the period of any such leave does not exceed 90 days or, if longer, if the
optionee's right to reemployment by the Company or any Affiliate is guaranteed either contractually or by statute.
Amendments
to the Plan.
The Board of Directors may at any time amend, alter, suspend or discontinue the Plan. Without the consent
of an optionee, no amendment, alteration, suspension or discontinuance may adversely affect outstanding options except to conform
the Plan and ISOs granted under the Plan to the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance shall require stockholder approval unless (i) stockholder approval is required to preserve
incentive stock option treatment for federal income tax purposes or (ii) the Board of Directors otherwise concludes that stockholder
approval is advisable.
Tax Treatment
of the Options
. Under the Code, neither the grant nor the exercise of an ISO is a taxable event to the optionee
(except to the extent an optionee may be subject to alternative minimum tax); rather, the optionee is subject to tax only upon
the sale of the Common Stock acquired upon exercise of the ISO. Upon such a sale, the entire difference between the
amount realized upon the sale and the exercise price of the option will be taxable to the optionee. Subject to certain
holding period requirements, such difference will be taxed as a capital gain rather than as ordinary income. Optionees who receive
NQSOs will be subject to taxation upon exercise of such options on the spread between the fair market value of the Common Stock
on the date of exercise and the exercise price of such options. This spread is treated as ordinary income to the optionee,
and the Company is permitted to deduct as an employee expense a corresponding amount. NQSOs do not give rise to a tax
preference item subject to the alternative minimum tax.
New Plan Benefits
Future grants and
awards under the 2018 Plan, which may be made to Company executive officers, directors, consultants and other employees, are not
presently determinable.
Information Regarding Options Granted
No grants and awards
under the 2018 Plan have been made to Company executive officers, directors, consultants and other employees. Such
grants and awards will be made at the discretion of the Compensation Committee or the Board of Directors in accordance with the
compensation policies of the Compensation Committee.
|
|
Item 13.
|
Certain Relationships and Related Transactions
and Director Independence
|
The
following is a description of the transactions we have engaged in since January 1, 2018, with our directors and officers and beneficial
owners of more than five percent of our voting securities and their affiliates:
On December 7, 2018,
the Company borrowed $100,000, pursuant to a 10% Secured Promissory Note, from Leo Womack. The note provides for monthly interest
payments to Mr. Womack and the entire principal and accrued interest is due on December 7, 2019. In connection with the issuance
of the note, the Company issued an aggregate of 166,667 warrants exercisable at a price of $0.40 per share to Mr. Womack. The
warrants are exercisable immediately and expire on December 7, 2023.
On December 7, 2018,
the Company borrowed $100,000, pursuant to a 10% Secured Promissory Note, from George Gilman. The note provides for monthly interest
payments to Mr. Gilman and the entire principal and accrued interest is due on December 7, 2019. In connection with the issuance
of the note, the Company issued an aggregate of 166,667 warrants exercisable at a price of $0.40 per share to Mr. Gilman. The
warrants are exercisable immediately and expire on December 7, 2023.
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.
In February,
2019, the Company retained the services of Mr. John Boylan, a director of the Company, pursuant to which the Company agreed to
pay Mr. Boylan $13,333 per month for consulting services related to the Company’s mergers and acquisition strategy. The
services will be provided to the Company on a month-to-month basis.
|
|
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 for the year ended December 31, 2017. The independent registered public accountant’s
report of Cohn Reznick LLP (“Cohn Reznick”) on our financial statements as of and for the year ended December 31,
2016 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. The Audit Committee may consider whether it is appropriate, either for this fiscal year or in the future,
to consider the selection of other independent registered public accounting firms.
Audit Fees.
The following table summarizes fees payable for services provided to us by our independent registered public accounting firm,
which were pre-approved by the Audit Committee:
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Audit Fees (1):
|
|
$
|
72,500
|
|
|
$
|
53,000
|
|
|
Tax Fees (2):
|
|
|
-
|
|
|
|
|
|
|
All Other Fees:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,500
|
|
|
$
|
53,000
|
|
|
|
(1)
|
Audit fees include fees for professional services by Malone
in 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.
In connection with the acquisition,
net cash received was $21,164, and costs incurred were $378,807 including professional fees for legal and accounting services,
as well as registration and filing fees.
The Company today is a growth-oriented
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.
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 approximately 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. SMG Industries, Inc. headquartered in Houston, Texas has
facilities in 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 subsidiary, all of which have a fiscal year end of December 31. All intercompany accounts, balances
and transactions have been eliminated in the consolidation.
Use of Estimates
in Financial Statement Preparation
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Acquisition Accounting
The Company’s acquisitions
are accounted for under the acquisition method of accounting whereby purchase price is allocated to tangible and intangible assets
acquired and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair
value of the net assets acquired is recorded as goodwill. The statements of operations for the fiscal years presented include
the results of operations for each of the acquisitions from the date of acquisition.
Customer Concentration and Credit Risk
During fiscal year 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. During fiscal year 2017, two of our
customers accounted for approximately 52% of our total gross revenues, with one customer accounting for 34% and another
accounting for 18%. No other customers exceeded 10% of revenues during 2017. Three customers accounted for approximately 51%
of accounts receivable at December 31, 2018, and two customers accounted for more than 64% of accounts receivable at December
31, 2017. No other customers exceeded 10% of accounts receivable as of December 31, 2018 and 2017. 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 individually accounted
for over 10% of accounts payable at December 31, 2018, and five vendors accounted for more than 60% of accounts payable at December
31, 2017 No other vendors exceeded 10% of accounts payable at December 31, 2018 and 2017.
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, 2018 and 2017, the allowance
for bad debts was $25,000 and $10,695, 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 is valued
at cost. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions
of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives
of the assets as follows:
|
|
|
Estimated
|
|
Category
|
|
Useful Lives
|
|
Building and improvements
|
|
20 years
|
|
Vehicles and trailers
|
|
5 years
|
|
Equipment (including Downhole Oil Tools)
|
|
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, 2018 and determined that
there was no impairment.
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. Long lived assets were evaluated for
impairment and no impairment losses were incurred during the years ended December 31, 2018 and 2017, respectively.
Revenue Recognition
For the year ended December
31, 2017
The Company records revenue
when all four of the following criteria are met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery of
the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectability is reasonably
assured.
The Company recognizes sales
when products are delivered or services rendered to the customer. Postage and handling charges billed to customers are also recognized
as sales upon shipment of the related equipment. Shipping terms are generally FOB destination, and title passes to the customer
at the time and place of delivery or purchase by customers at a retail location. The company does no consignment sales. The customer
has no cancellation privileges after shipment or upon purchase at our locations, other than customary rights of return. The Company
excludes sales tax collected and remitted to various states from sales and cost of sales. Sales from items sold through the Company’s
locations are recognized at the time of sale.
Revenue received from online
sales are recognized when products are delivered to the customer.
For the year ended December
31, 2018
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, 2018 and 2017, the Company had deferred revenue
of $39,877 and $0, respectively, related to unsatisfied performance obligations. These performance obligations were satisfied
during the first quarter of 2019.
Disaggregation of revenue
The Company disaggregates revenue
between services and products revenue. All revenues are currently in the southern region of the United States.
|
|
|
2018
|
|
|
2017
|
|
|
Service revenue
|
|
$
|
1,794,151
|
|
|
$
|
648,561
|
|
|
Product revenue
|
|
|
2,628,285
|
|
|
|
1,817,336
|
|
|
Total revenue
|
|
$
|
4,422,436
|
|
|
$
|
2,465,897
|
|
Cost of Revenues
Cost of revenue includes all
direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, raw materials, direct employee
cost, direct contract labor, transportation costs, equipment rental, equipment maintenance, and fuel. Cost of revenues are recorded
in the same period as the resulting revenue.
Employee Benefits
Wages, salaries, bonuses and
social security contributions are recognized as an expense in the year in which the associated services are rendered by employees.
Any unused portion of accrued sick or vacation leave expires on December 31 of each year and is not eligible to be carried over
to the following year.
Fair Value of Financial
Instruments
The carrying value of short-term
instruments, including cash, accounts payable and accrued expenses, and short-term notes approximate fair value due to the relatively
short period to maturity for these instruments. The long-term debt approximate fair value since the related rates of interest
approximate current market rates.
Fair value is defined as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes
a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:
Level 1: inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2: inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the
assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3: inputs to the valuation
methodology are unobservable and significant to the fair value
The Company does not have any
assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
Basic and Diluted Net Loss per Share
The Company presents both basic
and diluted net loss per share on the face of the statements of operations. Basic net loss per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give
effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants,
and using the treasury-stock method. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For
the year ended December 31, 2018, 640,000 of stock options, 525,001 of warrants and 500,000 shares issuable from convertible
notes payable were considered for their dilutive effects. For the year ended December 31, 2017, 510,000 of stock options were
considered for their dilutive effects.
|
Basic and Diluted Income (Loss)
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(1,143,378
|
)
|
|
$
|
(731,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Dilutive Shares:
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
10,364,775
|
|
|
|
3,423,150
|
|
|
Net dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
|
Dilutive shares
|
|
|
10,364,775
|
|
|
|
3,423,150
|
|
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. The Company adopted ASU 2018-07 in the second quarter of 2018 which aligns
the accounting for share-based payment awards issued to employees and nonemployees.
The fair value of each option
granted during the years ended December 31, 2018 and 2017 was estimated on the date of grant using the Black-Scholes-Merton option-pricing
model with the weighted average assumptions in the following table:
|
|
|
2018
|
|
|
2017
|
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Expected option term (years)
|
|
|
5
|
|
|
|
5
|
|
|
Expected volatility
|
|
|
158%-159%
|
|
|
|
127.52%
|
|
|
Risk-free interest rate
|
|
|
2.8%-2.9%
|
|
|
|
2.06%
|
|
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
Pronouncements
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 will be required to recognize right-of-use
assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers
specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose
qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the
amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU No. 2016-02 is effective for annual
reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period, and requires
a modified retrospective adoption, with early adoption permitted. The Company adopted this standard on January 1, 2019. The new
standard provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical
expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification,
lease classification and initial direct costs; the use of hindsight.; and all of the new standard’s available transition
practical expedients. While the Company continues to assess all of the effects of adoption, the Company currently believe the most
significant effects relate to (1) the recognition of new ROU assets and lease liabilities on the balance sheet for operating leases,
and providing significant new disclosures about the Company’s leasing activities.
On adoption, the Company
currently expects to recognize additional operating liabilities of between approximately $260,000 and $310,000, with corresponding
ROU 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 expects to elect the short-term lease recognition
exemption for its leases. For those leases that qualify, the Company will not recognize ROU assets or lease liabilities. This includes
not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.
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.
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.
NOTE 3 – GOING CONCERN
The Company considered its going
concern disclosure requirements in accordance with ASC 240-40-50. The Company concluded that its negative working capital and
negative cash flows from operating are conditions that raised substantial doubt about the Company’s ability to continue
as a going concern. Without a successful plan in place from management these conditions could negatively impact the Company’s
ability to meets its financial obligations over the next year. In response, the Company has implemented a plan to alleviate such
substantial concern as follows. 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 2018
and partly related to the Company cross-selling additional sales initiatives already implemented with the acquisition’s
additional customer base. In addition, there were several one-time expenses in 2018 related to expansion to the new region
and related to the product line acquisition in September 2018 and the operating company acquisition in December 2018. As
a result, following this plan substantial doubt about the Company’s ability to continue as a going concern is
alleviated.
NOTE 4 - INVENTORY
Inventory consisted of the following
components as of December 31, 2018 and 2017:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
$
|
8,690
|
|
|
$
|
25,863
|
|
|
Finished and purchased products
|
|
|
131,972
|
|
|
|
116,190
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
140,662
|
|
|
$
|
142,053
|
|
NOTE 5 – LONG-LIVED
ASSETS
Property and equipment
Property and equipment at December
31, 2018 and 2017 consisted of the following:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,409,237
|
|
|
$
|
236,460
|
|
|
Downhole oil tools
|
|
|
700,000
|
|
|
|
-
|
|
|
Vehicles
|
|
|
151,497
|
|
|
|
165,867
|
|
|
Furniture, fixtures and other
|
|
|
43,430
|
|
|
|
16,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,304,164
|
|
|
|
418,934
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(306,155
|
)
|
|
|
(300,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,998,009
|
|
|
$
|
118,779
|
|
Depreciation expense for the
years ended December 31, 2018 and 2017 was $94,943 and $72,161, respectively.
During the year ended December
31, 2017, the Company decided to sell the land and building in Carthage, Texas and determined that this property met the criteria
for assets held for sale in September 2017. The market listing price for these assets was below the net book value at the time
of reclassification, resulting in the recognition of assets held for sale of $42,300 and impairment expense of $27,366. The Company
expects these assets to sell in 2019.
Intangible assets
Intangible assets as of December
31, 2018 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, 2018 and December 31, 2017 consisted of the following:
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
|
Life (yr)
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RigHands (Trademark and Formula)
|
|
|
15
|
|
|
$
|
150,000
|
|
|
$
|
-
|
|
|
MWST Tradename
|
|
|
10
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(10,344
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,656
|
|
|
$
|
-
|
|
Amortization expense for the
year ended December 31, 2018 and 2017 was $10,344 and $0, respectively. Future amortization of the intangible assets for the years
ended December 31, 2019, 2020, 2021, 2022, 2023 and beyond are $29,000, $29,000, $29,000, $29,000, $29,000 and $184,656, respectively.
NOTE 6 – ACCRUED
EXPENSES AND OTHER LIABILITIES
Accrued expenses as of December
31, 2018 and 2017 included the following:
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Payroll and payroll taxes payable
|
|
$
|
84,916
|
|
|
$
|
24,854
|
|
|
Sales tax payable
|
|
|
67,124
|
|
|
|
7,325
|
|
|
Interest payable
|
|
|
12,325
|
|
|
|
2,273
|
|
|
Inventory purchases payable
|
|
|
-
|
|
|
|
23,440
|
|
|
Other
|
|
|
43,546
|
|
|
|
11,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accrued Expenses
|
|
$
|
207,911
|
|
|
$
|
69,578
|
|
NOTE 7 – NOTES PAYABLE
Notes payable included the following as of December
31, 2018 and 2017:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
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
|
|
|
$
|
228,947
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued August 14, 2017, bearing interest of 7.25% per year, due in monthly installments ending August 1, 2021
|
|
|
49,885
|
|
|
|
63,752
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured finance facility issued February 2, 2017, bearing effective interest of 6%, due monthly installments ending August 20, 2020
|
|
|
25,960
|
|
|
|
41,777
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued December 18, 2017, bearing effective interest of 29.8%, due in daily installments ending October 2018, net of deferred financing costs of $0 and$55,729, respectively
|
|
|
-
|
|
|
|
188,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023
|
|
|
35,562
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured funding advance agreement issued June 27, 2018, bearing effective interest of 20%, due in daily installments ending April 2019, prinicipal balance $143,965, net of deferred financing costs of $43,412
|
|
|
143,965
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approxmately 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
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured note payable issued to a shareholder who controls approxmately 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
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
800,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,535,924
|
|
|
|
522,976
|
|
|
Less discounts
|
|
|
(239,750
|
)
|
|
|
-
|
|
|
Less current maturities
|
|
|
(328,328
|
)
|
|
|
(264,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
967,846
|
|
|
$
|
258,361
|
|
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, 2018 and 2017 was $180,552 and $228,947,
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 500,001 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 we 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.
Funding Advance Agreements
– included with secured notes
On April 7, 2017 SMG Indium
Resources Ltd. (the “Seller”) received $100,000 in return for an assignment and transfer to Capital Stack LLC of a
specified percentage of the proceeds of each collection of future receipts received by seller, collectively “Future Receipts”
until Seller has received the Purchased Amount of $143,000. This transaction is accounted for as a short term secured loan net
of deferred financing costs of $44,765 recognized on the date of incurrence. Deferred financing costs amortized and recognized
as interest expense during the year ended December 31, 2017 were $44,765. The loan was paid in full on November 8, 2017.
On August 10, 2017 SMG Indium
Resources Ltd. (the “Seller”) received $51,150 in return for an assignment and transfer to Libertas Funding LLC of
a specified percentage of the proceeds of each collection of future receipts received by seller, collectively “Future Receipts”
until Seller has received the Purchased Amount of $67,100. This transaction is accounted for as a short term secured loan, with
deferred financing costs of $15,950 recognized on the date of incurrence. Deferred financing costs amortized and recognized as
interest expense during the year ended December 31, 2017 were $15,950. The loan was paid in full on December 14, 2017.
On December 18, 2017, we received
$195,000 in return for an assignment and transfer to a specialty finance company of a specified percentage of the proceeds of
each collection of future receipts received by us, collectively “Future Receipts” until the finance company has received
the Purchased Amount of $278,000. This transaction is accounted for as a short term secured loan, with deferred financing costs
of $83,000 recognized on the date of incurrence.
On June 27, 2018, our company
re-financed and paid off the above December 18, 2017 note. This was accounted for as an extinguishment of the old note. During
the year ended December 31, 2018, $80,233 of debt discount was amortized to interest expense related to the old instrument. The
new facility had an original principal balance of $347,500. In conjunction with the new note we received $139,243 of proceeds,
applied $103,257 towards the payoff of the old instrument and recorded deferred financing cost of $105,000 as a debt discount.
Payments of principal and interest are paid daily. This note matures in April 2019. During the year ended December 31, 2018, $61,588
of debt discount was amortized to interest expense.
Future maturities of debt as of December 31, 2018
are as follows:
|
2019
|
|
$
|
568,078
|
|
|
2020
|
|
|
123,336
|
|
|
2021
|
|
|
128,713
|
|
|
2022
|
|
|
100,202
|
|
|
2023
|
|
|
615,595
|
|
|
Total
|
|
$
|
1,535,924
|
|
Notes Payable – Unsecured
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019) and 10% interest per year, balance of payable is due on demand. Additional $25,000 advanced and due on demand
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured advances from the sellers of Momentum Water Transfer Services LLC, non-interest bearing and due on demand
|
|
|
35,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,126
|
|
|
|
-
|
|
|
Less, discount
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
131,126
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(131,126
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current maturities
|
|
$
|
-
|
|
|
$
|
-
|
|
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, 2018, $101,220 remains outstanding with $54,307 included
as a current liability.
During the year ended December
31, 2018, Stephen Christian advanced $53,200 to the Company, was repaid $52,791 by the Company, and paid $8,034 of expense on
behalf of the Company. As of December 31, 2018, $8,443 remains outstanding 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 remains outstanding with $53,728 included as a current liability.
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 this line of credit was $593,888 and $353,975 as of December 31, 2018 and December 31, 2017, respectively.
Certain debts were paid in connection
with the closing of the Crestmark Bank Line of Credit, including a $50,000 reduction to the First State Bank note, pay off of
the accounts receivable purchase agreement for $46,512, pay off of past due IRS taxes totaling $70,898, and pay off of one other
accrued liability of $4,831. Total payments to debt and accrued liabilities at Crestmark closing were $172,241. During the year
ended December 31, 2017, the Company received total cash proceeds of $1,458,083 and repaid $1,314,935 of the Line of Credit via
Crestmark Bank withholding amount collected in our lock-box. In addition, Crestmark withheld $38,586 to pay for interest and fees.
Net proceeds received during the year ended December 31, 2017 on this facility were $181,734.
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, 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.
Convertible Notes Payable
On September 28, 2018, the Company
entered into a secured note purchase agreement with an individual accredited 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 year ended December 31, 2018, $11,970 of the discount was amortized.
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
Year ended December 31, 2017
As discussed in Note 1 –
Background and Basis of Presentation, effective September 19, 2017, SMG (formerly an inactive shell) entered into a reverse acquisition
transaction with MG Cleaners LLC. In conjunction with the transaction the Company was recapitalized, resulting in the capital
structure outlined below. The historical number of common shares presented in our financial statements were converted to post
merger shares on a 1 to 1 basis. As part of the recapitalization net assets of $21,474 were acquired including $21,164 of cash.
Prior to the reverse acquisition transaction, MG
Cleaners LLC sold 3,170,000 membership interest units for $3,170. At the conclusion of the merger the former owners of SMG held
2,094,569 of common stock while the former owners of MG Cleaners LLC owned 4,578,276 shares of common stock.
The following shares of common
stock were issued subsequent to the reverse acquisition during the year ended December 31, 2017:
-
432,345
shares of common stock for services valued at $211,320.
-
20,000
shares of common stock for assets valued at $5,000.
-
4,910,000
shares of common stock for cash proceeds of $351,170.
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.
NOTE 9 – STOCK OPTIONS AND WARRANTS
Summary of stock option information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
|
Outstanding, December 31, 2016
|
|
|
387,500
|
|
|
$
|
279,550
|
|
|
|
$0.24-3.40
|
|
|
$
|
0.73
|
|
|
Granted
|
|
|
150,000
|
|
|
|
64,500
|
|
|
$
|
0.37
|
|
|
$
|
0.37
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled, forfeited or expired
|
|
|
(27,500
|
)
|
|
|
(25,900
|
)
|
|
|
$2.52-3.48
|
|
|
$
|
2.55
|
|
|
Outstanding, December 31, 2017
|
|
|
510,000
|
|
|
$
|
318,150
|
|
|
|
$0.24-3.29
|
|
|
$
|
0.57
|
|
|
Granted
|
|
|
150,000
|
|
|
|
114,500
|
|
|
|
$.75-.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
|
|
|
Exercisable, December 31, 2018
|
|
|
448,335
|
|
|
$
|
212,601
|
|
|
|
$0.24-2.18
|
|
|
$
|
0.47
|
|
In November 2017 the Company issued 150,000 stock
options with an exercise price of $0.37 that vest in three equal tranches on in November 2018, 2019 & 2020. Option expense
of $41,840 will be recorded over the vesting term.
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 3.1 years for stock options outstanding on December 31, 2018. At December 31, 2018 and 2017
there was $84,000 and $232,500 in intrinsic value of outstanding stock options. During the years ended December 31, 2018 and 2017
share based compensation expense of $53,053 and $0 was recognized, respectively.
In connection with the acquisition
discussed in Note 1, MG Cleaners LLC assumed the 387,500 options that were previously issued by SMG as of December 31, 2016.
Summary Stock warrant information
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Exercise
|
|
|
Average
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Price Range
|
|
|
Exercise Price
|
|
|
Outstanding, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled, forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
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
|
|
|
Exercisable, December 31, 2018
|
|
|
525,001
|
|
|
$
|
218,750
|
|
|
|
$0.40-$0.75
|
|
|
$
|
0.42
|
|
In September 2018, the Company
granted 25,000 warrants to a debt holder with a five-year term and an exercise price of $0.75. 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, $0.74, Exercise price, $0.75, Term 5 years, Volatility 169%, Discount rate, 2.8%. During the year ended December
31, 2018, the fair value of $17,476 was recoded as a note payable discount and will be amortized over the life of the note payable.
In December 2018, the Company granted
500,001 stock warrants to three debt holders with five-year terms and an exercise price of $0.40. 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, $0.43, Exercise price, $0.40, Term 5 years, Volatility 177%, Discount rate, 2.7%. During the year ended December
31, 2018, the fair value of $203,338 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 4.9 years for stock warrants outstanding on December 31, 2018. At December 31, 2018 and December
31, 2017, there was $35,000 and $0, respectively, in intrinsic value of outstanding stock warrants.
NOTE 10 – ACQUISITION
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 (“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.
|
Preliminary Purchase Price:
|
|
|
|
|
Cash, net
|
|
$
|
300,000
|
|
|
Application of deposit
|
|
|
8,000
|
|
|
Short term payable
|
|
|
53,710
|
|
|
Notes payables
|
|
|
800,000
|
|
|
Common Stock issued
|
|
|
233,750
|
|
|
Total purchase price
|
|
$
|
1,395,460
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
|
|
|
Accounts receivable
|
|
$
|
44,685
|
|
|
Equipment
|
|
|
985,024
|
|
|
Tradenames
|
|
|
190,000
|
|
|
Goodwill
|
|
|
185,751
|
|
|
Accrued expenses
|
|
|
(10,000
|
)
|
|
|
|
$
|
1,395,460
|
|
The Company’s
consolidated revenue and net loss includes $48,577 and $67,132 related to the operations of MWTS since the acquisition date.
The
following schedule contains pro-forma consolidated results of operations for the years ended December 31, 2018 and 2017 as if
the acquisitions 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, 2017, or of results that may occur in the future.
|
(unaudited)
|
|
2018
|
|
|
2017
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Revenue
|
|
|
4,580,791
|
|
|
|
4,404,748
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,367,528
|
)
|
|
|
(50,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,668,407
|
)
|
|
|
(198,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic and diluted
|
|
|
(0.13
|
)
|
|
|
(0.05
|
)
|
NOTE 11 – COMMITMENTS AND CONTINGENCIES
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.
SMG Industries has 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 $40,000 probably during the fiscal year 2019. As such, management
believes it is appropriate to accrue for this on our year end 2018 financial statements.
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.
Leases
Effective July 15, 2017, we
leased a facility in Midland, Texas for $3,000 per month for approximately 2,400 square feet of space and a shared yard with several
acres of storage area. The Midland lease was for a period of 3 years and expired on July 15, 2020. This lease was cancelled with
mutual consent effective January 2018.
On January 22, 2018, MG Cleaners,
the Company’s subsidiary entered into a two-year lease for a 6,500 square foot building on approximately 1.5 acres in Odessa,
Texas providing for three lease extensions totaling six additional years. The initial rent is $6,500 per month and increases to
$8,500 per month at the seventh month of the lease. After the first-year anniversary, the Lessee may cancel the lease with 30
days’ notice to Lessor. Lease extensions are at the discretion of the Lessee and have increases.
On June 1, 2018, MG Cleaners,
the Company’s subsidiary, entered into a six month lease for a facility in Alice, Texas. The lease is an initial term of
six months commencing on June 1, 2018 with monthly payments due of $2,500 and automatically renews. The current expiration date
is May 31, 2019. The lease is cancellable upon written notice at the end of any term. A deposit of $1,250 was paid with the commencement
of the lease.
On June 18, 2018 the Company
entered into an operating lease for corporate office space in Houston, Texas. The lease is a term of three years commencing on
August 1, 2018 with monthly payments due of $2,620. A deposit was due in July 2018 for $5,240.
In July 2018, the Company entered
into an agreement to purchase a residential property in Odessa, Texas. The contract is subject to the Company securing financing
for the purchase. Related to this property the Company entered into a lease for a 90-day period with total lease payments of $9,000
and a $5,000 deposit both of which were paid at the commencement of this term. The Company is currently using the property on
a month to month basis with total cost of $3,000 per month.
Rent expense for the years ended
December 31, 2018 and 2017 for these leases amounted to $171,453 and $30,000, respectively.
Future minimum lease payments
in accordance with the above leases is $145,940, $39,940, $18,340, $0 and $0 for the fiscal years ending December 31, 2019, 2020,
2021, 2022 and 2023, respectively.
NOTE 12 – RELATED PARTY
TRANSACTIONS
During the year ended December
31, 2017 (prior to the acquisition) the former managing member of MG made contributions to the Company totaling $110,081.
During the year ended December
31, 2017 (prior to the acquisition) the Company made distributions to the former managing member of MG totaling $192,507.
On September 19, 2017, in connection
with the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the Managing MG Member, Stephen Christian,
payable with $250,000 at closing and the remaining $50,000 paid upon the completion of the Company’s sale of a minimum of
$500,000 of its securities in a private offering to investors. As of December 31, 2018 and 2017 amounts due under this arrangement
are $21,000 and $50,000, respectively.
On September 21, 2017, the company
issued 81,695 common shares to its former CFO for payment of services provided. The shares were valued at $28,593 and are included
in the total shares of common stock for services.
On October 31, 2017, and made
effective September 20, 2017, the Company entered into an employment agreement with Stephen Christian, the former Managing Member,
and current President, of our subsidiary MG Cleaners LLC. The term is for three years with a monthly salary of $8,333 for the
first six months of the effective date and $10,000 a month thereafter. Other terms include payment of Mr. Christian’s health
care insurance, use of a company truck and other customary benefits. Termination without cause, as defined in the agreement, grants
Mr. Christian six months’ severance pay.
On October 31, 2017, and made
effective October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief Executive Officer.
The term is for three years with a monthly salary of $15,000 for the period. The terms of the agreement also include providing
health care, auto allowance of $750 per month if a car is not provided by the Company, and other customary benefits. Termination
without cause, as defined in the agreement, grants Mr. Flemming six months’ severance pay. As of December 31, 2018 and 2017
Mr. Flemming was owed $0 and $45,585 related to prior expenses paid on behalf of the Company.
On February 12, 2018, the Company’s
wholly-owned subsidiary, MG Cleaners LLC (“
MG
”) entered into an Intellectual Property Sale Agreement (“
Agreement
”)
with Stephen Christian, MG’s President, for the purchase of RigHands™ an industrial strength hand cleaner product
line. RigHands™ is a trademarked branded product which is focused on the oilfield and industrial markets. MG issued a promissory
note to Mr. Christian for the purchase price in the amount of $150,000. In connection with the Agreement, Mr. Christian agreed
that he shall promptly, from time to time, fully inform and disclose to MG in writing all inventions, copyrightable material,
designs, improvements and discoveries of any kind which Mr. Christian now has made, conceived or developed (including prior to
the date of this Agreement), or which Mr. Christian may later make, conceive or develop, during the period of Mr. Christian’s
employment with MG, which pertain to or relate to MG’s business or any of the work or business carried on by MG. In addition
to the foregoing, the Agreement sets forth that all Inventions shall be the sole and exclusive property of MG, whether or not
fixed in a tangible medium of expression. Mr. Christian also assigned all rights in all Inventions and in all related patents,
copyrights and trademarks, trade secrets and other proprietary rights therein to MG. Mr. Christian further agreed that any copyrightable
material shall be deemed to be “works made for hire” and that MG shall be deemed the author of such works under the
United States Copyright Act, provided that in the event and to the extent such works are determined not to constitute “works
made for hire”, Mr. Christian has irrevocably assigned and transferred to MG all right, title and interest in such works.
NOTE 13 – INCOME TAXES
The components of income taxes
are as follows, in thousands:
|
|
|
For the Year Ended
|
|
|
|
|
December 31,
2018
|
|
|
December
31,
2017
|
|
|
Current income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred income tax expense (benefit)
|
|
|
(245,000
|
)
|
|
|
(40,000
|
)
|
|
Valuation Allowance
|
|
|
245,000
|
|
|
|
40,000
|
|
|
Income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation between the
provision for income taxes, computed by applying the statutory Federal income tax rate of 21% to net income before income taxes,
and the actual income tax expense follows
|
|
|
For
the Year Ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Federal
income tax provision at statutory rates
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
|
Reduction due to tax law change
|
|
|
|
|
|
|
-13.00
|
%
|
|
Valuation Allowance
|
|
|
-21.00
|
%
|
|
|
-21.00
|
%
|
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The components of deferred tax assets are as follows, in thousands:
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
414,000
|
|
|
$
|
170,000
|
|
|
Income not currently incurred
|
|
|
(13,000
|
)
|
|
|
9,000
|
|
|
Total
|
|
|
401,000
|
|
|
|
179,000
|
|
|
Valuation allowance
|
|
|
(401,000
|
)
|
|
|
(179,000
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
A valuation allowance is provided when it is more
likely than not that a portion or all of the deferred tax asset will not be realized. The differences between book income and
tax income relate principally to revenue recognition and to differences between accelerated methods of depreciation allowed on
income tax returns and straight-line methods of depreciation used for book purposes. The valuation allowance for 2018 was applied
to offset the deferred tax assets in recognition of the uncertainty that such benefits will be realized as a result of the change
in ownership of more than 50% through the reverse acquisition of the oilfield company in September 2017. Pursuant to Section 382
of the Internal Revenue Code of 1986, as amended, the annual utilization of a company’s net operating loss may be limited
(post-change) if the company experiences a change in ownership of more than fifty percent within a three-year period. Such change
occurred in September 2017. Net operating losses prior to the date of change, available to offset future taxable income, are limited
by IRC Section 382. At December 31, 2018, the company has net operating losses available for the 20-year carryforward of approximately
$805,000 ($2,805,000 of prior year losses being lost due to the Section 382 limitation) and $1,166,000 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 has been changed from 20 succeeding taxable years to an indefinite period. With the elimination of the alternative minimum
tax, NOLs for taxable years beginning after December 31, 2017, can offset 80% of Federal taxable income. Since the Company is using
the asset and liability method of accounting for income taxes and because deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income in the years in which temporary differences are expected to reverse, the Company is
valuing the net deferred assets, as being fully offset by a valuation allowance, to account for future changes in the tax law.
The Company’s Federal
and state income tax returns are subject to audit for all open years, starting with 2015 year.
NOTE 14 – SUBSEQUENT EVENTS
On January 4, 2019, the Company issued
13,830 shares of its restricted common stock to pay the quarterly interest payment of $5,532 due December 31, 2018 to a convertible
note holder.
On January 11, 2019, the Company
issued a promissory note to an accredited investor in return for $100,000. The note bears an interest rate of 10%, interest paid
monthly, and matures on January 13, 2020.
During the first quarter of
2019, the Company issued 936,000 shares of its restricted common stock for proceeds of $234,000 from accredited investors.