SMG Industries Inc. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

OR

Commission File Number 000-54391

SMG INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period 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, 2019 was $5,550,957. 

The number of shares of the registrant’s common stock outstanding as of May 29, 2020 was 17,380,108.

Documents Incorporated by Reference

None

SMG Industries Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2019

TABLE OF CONTENTS

Cautionary Statement Regarding Forward-Looking Statements

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 company focused on logistics, midstream and oilfield services market segments in the Southwest United States.  Our primary business objective is to grow our operations and create value for our stockholder’s through organic growth and strategic acquisitions. We have implemented a ‘buy & build’ growth strategy of consolidating middle market companies and generating organic growth post-acquisition when possible by removing business constraints with strategic cross-selling of products and services across market segments benefiting us with higher utilization and customers with more efficient costs.

Our wholly-owned operating subsidiaries are:

Our operating subsidiaries provide a range of logistics, midstream and oilfield services such as:

We are headquartered in Houston, Texas with facilities in Odessa, Floresville, Alice, Palestine, Carthage, and Waskom, Texas. Our web sites are www.SMGIndustries.com, www.5Joilfield.net, www.5JTrucking.net, www.ts-oilfield.com, www.MGCleanersllc.com and www.MomentumWTS.com.

Our Corporate History and Background

We were incorporated under the laws of the State of Delaware on January 7, 2008. From inception through December 31, 2014, our primary business purpose was to stockpile indium, a specialty metal that is used as a raw material in a wide variety of consumer electronics manufacturing applications. As of December 31, 2014, we sold all of the indium from our stockpile. As a result, at such time we were no longer in the business of purchasing and selling indium. In 2015, our Board of Directors approved a cash distribution to our stockholders and a share repurchase program. After completion of the cash distribution and the share repurchase program the Company sought a new growth platform and focused on its current strategy of acquiring and growing operating businesses.

Acquire, grow, buy & build history and focus

On September 19, 2017, we completed our initial acquisition and acquired one hundred percent of the issued and outstanding membership interests (“MG Membership Interests”) of MG Cleaners LLC, a Texas limited liability company (“MG”) pursuant to which MG became our wholly-owned subsidiary (the “MG Acquisition”). In connection with the MG Acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash to the MG Members, payable with $250,000 at closing and the remaining $50,000 paid to the MG Members upon the completion of the Company’s sale of a minimum of $500,000 of its securities in a private offering to investors.

Effective April 2, 2018, we changed our corporate name to SMG Industries Inc. to reflect our new business focus.

On September 27, 2018, we acquired more than 800 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs, including both non-mag and steel units in exchange for the issuance of an aggregate of one million (1,000,000) shares of our common stock to the sellers.

On December 7, 2018, we acquired one hundred percent of the issued and outstanding membership interests (“MWTS Membership Interests”) of Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”) pursuant to which MWTS became our wholly-owned subsidiary (the “MWTS Acquisition”). In connection with the MWTS Acquisition, we issued 550,000 shares of our common stock, paid $361,710 in cash to the MWTS members and issued a note payable to the MWTS member in the aggregate amount of $800,000. Principal and interest on the note shall be repaid in sixty (60) equal monthly payments of $7,500 (“Installment Payments”) and a final balloon payment for the remaining principal and accrued interest due on the maturity date. The note bears interest at a rate of 6% per annum.

On June 27, 2019, we acquired one hundred percent of the issued and outstanding membership interests (“Trinity Membership Interests”) of Trinity Services LLC, a Louisiana limited liability company (“Trinity”) pursuant to which Trinity became our wholly-owned subsidiary (the “Trinity Acquisition”). In connection with the Trinity Acquisition, we issued 2,000 shares of our Series A Convertible Preferred Stock, with a stated value of $1,000 per share, to the sole member of Trinity. The Series A Convertible Preferred Stock is convertible at a fixed price of $0.50 per share and is convertible into an aggregate of 4,000,000 shares of the Company’s common stock.

On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), each a Texas limited liability company. The aggregate purchase price of 5J was $27.3 million, consisting of a combination of cash, notes, Series B Convertible Preferred Stock and the assumption and refinance of debt. In connection with the 5J Acquisition, we issued 6,000 shares of our Series B Convertible Preferred Stock, with a stated value of $1,000 per share, to the sole member of 5J. The Series B Convertible Preferred Stock is convertible at a fixed price of $1.25 per share and is convertible into an aggregate of 4,800,000 shares of the Company’s common stock.

Domestic United States Industry Overview by Segment

Heavy Haul and Over size loan Transportation Segment

A heavy haul or oversize load is a load that exceeds the standard or ordinary legal size and/or weight limits for a truck to convey on a specified portion of road, highway or other transport infrastructure. Also, a load that exceeds the per-axle limits, but not the overall weight limits, is considered overweight. Examples of oversize/overweight loads include construction machines (cranes, front loaders, backhoes, etc.), wind energy components, production equipment used in energy, midstream compressors, pre-built homes, power generation components, containers, and construction elements (bridge beams, industrial equipment).

The legal dimensions and weights vary between countries and regions. A vehicle which exceeds the legal dimensions usually requires a special permit which requires extra fees to be paid in order for the oversize/overweight vehicle to legally travel on the roadways. The permit usually specifies a route the load must follow as well as the dates and times during which the load may travel.

Midstream Services Segment

According to Mordor Intelligence Research report titled Pipeline Services Market - Growth, Trends, and Forecast (2020 - 2025) The market for pipeline services is expected to grow at a CAGR of more than 3.9% during the forecast period of 2020 – 2025. As of 2019, there were approximately 145,353 miles of pipelines planned and under-construction, of which 94,773 miles are in the engineering and design phase, while 50,580 are in various stages of construction. The natural gas pipeline network is expected to grow in parallel to the increase in natural gas demand, which in turn is expected to positively impact the global pipeline services market in the coming years. Therefore, increasing natural gas pipeline infrastructure is expected to drive the market over the forecast period.

As the demand for energy produced in North America continues to grow, the exploration and production would continue to move further towards harsh environments. In particular, the recent discovery of certain new extraction techniques has opened multiple oil & gas shale regions in extremely remote areas. In the United States, approximately 70% of crude oil and petroleum products are shipped through pipelines. In 2018, the United States crude oil production was 10.9 mb/d, an increase by 1.6 mb/d from 2017. Furthermore, it is expected to reach 12.1 mb/d in 2019 and 12.9 mb/d in 2020. Most of the increased production is expected to be generated from Texas and New Mexico.

Oilfield Services Segment

Rig Count 

In March 2020, the Domestic United States Rig Count, as measured by Baker Hughes, stood at 772 active rigs, down 24.5% from the highs of 1023 a year ago.  Rig Counts are a measurement of oilfield activity particularly relevant to the drilling market segment, as we provide services and sell products to drilling rig operator customers. As a result of relatively favorable operating economics for oil and gas companies, there is a high concentration of rigs and oilfield activity in Texas compared to other areas in the domestic United States. In March 2020 Texas and adjacent New Mexico (Permian and Delaware basins) had approximately 405 rigs operating, representing about 48% of the entire domestic United States rigs concentrated in these West Texas/New Mexico basins.

5J Trucking and 5J Oilfield Services business description

Our logistics and rig move company has been a leader in the field of logistics, production heavy haul and drilling rig mobilization for more than twenty years. 5J has over 100 trucks, 250 trailers, 18 cranes and 25 fork lifts. 5J generates roughly half of its revenues from logistics and heavy haul including transporting pipeline compressors, production equipment and industrial items such as bridge beam and cement loads. 5J’s remaining revenue is generated from moving oil and gas drilling rigs in the domestic United States.

Trinity Services business description 

Operating in East Texas and Northern Louisiana for more than ten years, Trinity builds drilling pad locations, reserve and water pits and lease roads for oil and gas operators. Trinity owns in excess of 25 motor graders, tractors, excavators, bulldozers and backhoes. Trinity’s well site services group operates a work-over rig that performs services and repairs to existing producing gas and oil wells in the same geographic area.

MG Cleaners Products and Services

Proprietary Products

Our branded products have proprietary formulations that perform in specific applications. These products include surfactants and degreasers which are environmentally friendly and sold primarily to drilling rig operators, exploration and production companies, and distribution and supply companies serving this market segment.

Our branded products have proprietary formulations that have been sold direct via our sales force and through distribution supply companies for over ten years. Miracle Blue®, a powerful degreaser, Luma Brite™, an aluminum brightener and descaler, and Wicked Green®, an enviro-friendly emulsifier used in oil remediation jobs that is bio-degradable, are some of the Company’s top selling products. In total, we currently offer 14 branded and proprietary products used by industry leading drilling contractors in the domestic United States including Nabors, Patterson-UTI, Helmrich & Payne and Cactus Drilling among others. MG’s products are sold throughout Texas using direct sales employees with distributors/suppliers handling other areas.

Service Crews

MG’s service crews consist of Company employees who perform drilling rig wash and mechanical repair services for drilling rig operator customers. MG’s rig wash crews typically consist of four employees using company equipment that clean a drilling rig prior to its transport to another location. Mechanic crews generate service revenues by performing onsite repairs of centrifugal pumps, mud agitators and related equipment. MG’s mechanic service crews also operate at MG’s East and West Texas facilities for non-time critical jobs.

In other examples, customers prefer to outsource cleaning and repair services where our service crews become strategic to MG’s business solving customer problems and using our products during service.

Equipment and Parts Sales

Other customers prefer to purchase equipment and perform their own maintenance on their equipment, using a variety of our cleaning products. Through long-standing relationships with manufacturers, we sell equipment and related parts to our customers which strategically promote our future product sales. We currently offer a full line of industrial and oilfield pressure washers along with compressors, heaters, water pumps and combination units. We also sell spare parts to customers who have purchased equipment, which include pressure washer water guns, hoses and fittings.

Rentals

Some drilling rig operators, oil company operators and other oilfield companies rent our rig wash equipment trailer units that are comprised of pressure washers, heating equipment, water containment units and related components. These rental revenues typically come in five to seven day rental cycles, and MG charges a day rate for this equipment.

SMG Oil Tools – Rentals

SMG Oil Tools has an inventory of more than 800 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs both non-mag and steel units. These tools are available, on a rental basis to drilling contractors and operators who do not own these tools but outsource to service companies. These tools can be rented on a day rate basis or per job basis.

Momentum Water Transfer Services – Frac Water Services

Momentum Water Transfer Services provides high volume water transfer services to frac sites, on behalf of oil and gas operators, utilizing its above ground temporary infrastructure including miles of lay flat no leak frac hose, high volume pumps and equipment. Oil and gas companies typically rent this equipment as a service to send water from a source such as a river, lake or frac pond to the well site for fracing. According to EIA, a typical frac in the areas we provide water transfer services to could require 4.4 million gallons of water during the drilling of the well. Separate pressure pumping service companies typically arrange for the sand and perform the frac, while water transfer companies such as ours, are typically hired by an oil and gas operator to send frac water to the pressure pumping service company performing the frac.

Our Strategies

Buy and Build. Our strategy involves growth resulting from making acquisitions of private owner/operated lower or middle-market size logistics, mid-stream and oilfield services companies operating in the Southwest United States with a plan to grow them post-acquisition. Our management team seeks to identify companies that have good reputations, customers and complementary service lines. We plan for additional growth post-acquisition of these targets by identifying business constraints which can be removed once acquired by us. These business constraints typically can be a lack of equipment, working capital, systems, sales force or MSAs and customer agreements. Our strategy is to seek target companies that, once acquired, can grow organically from removing those constraints, as well as leveraging the cross-selling opportunities between and among our operating subsidiaries. We believe growth can be obtained by both the acquisition of revenue generating companies and the subsequent growth post-acquisition. This strategy differs in management’s view from a “roll up” as we do not look to make acquisitions just for cost saving synergies from elimination of duplicate personnel etc., but rather by adding personnel, capital and customers for growth. Our first acquisition, MG Cleaners illustrates this strategy as its revenues approximately doubled for the year ended December 31, 2019 from its September 2017 acquisition date by cross-selling MG’s products and services to our other subsidiary company clients, adding equipment, systems, and working capital.

Cross-sell Customer Bases of Acquired Service Companies. We currently have over 200 customers, many of which are leading companies in their respective fields. Our strategy of cross-selling customer bases of acquired companies allows us to enhance our service offerings and our relationships with our customers by bringing other products and services to them that we develop or acquire when there is a demand. As an example, in June 2019, we acquired a construction and well site services business that brought customers that were active in the Cotton Valley play and Haynesville Shale area of East Texas allowing us to introduce other complementary products and services to those customers without the challenge of procuring new Master Service Agreements (MSAs), and without incurring undue sales and marketing expenses associated with soliciting and securing new customers.

Broaden Service Offerings to Diversify. We currently believe that our strategy of developing, adding or acquiring lines of service for other market segments such as heavy haul of infrastructure items, transportation of drilling rigs and crane services for midstream compressor infrastructure will assist us in diversifying our business and provide a more enhanced services offering for customers seeking to reduce vendor lists. Our June 2019 acquisition of Trinity Services, which is focused on East Texas gas customers with well pad construction and work over services, benefitted when we recently acquired a drilling rig mobilization company broadening the scope of services Trinity Services can provide to its customers. . Currently, our strategy is to further diversify in logistics and midstream to increase utilization of our assets.

Geographic Resource Focus. Currently, more than half of the rigs in the domestic United States are located in Texas and adjacent counties within New Mexico and Louisiana. Due to relatively favorable economics in these resource plays, our strategy of geographic focus allows us to address this significant portion of the domestic United States market with offices strategically located in Houston, Texas and facilities in Odessa, Floresville, Alice, Palestine, Carthage, and Waskom, Texas. This strategy permits us to avoid the additional expense of managing operations in other areas of the US such as North Dakota or New England. Our strategy of focusing on resource plays in this geographic area generates service activities such as the Haynesville shale, Eagle Ford shale, Permian and Delaware Basins.

Sales. The Company’s sales plan includes utilizing employed sales personnel based in our various locations that are engaged to generate new sales for the company’s operations. Our sales personnel are typically compensated on a fixed base salary plus performance incentives.

Manufacturing. We manufacturer our MG products in our facility in Carthage, Texas. Raw materials are procured by MG and the proprietary formulas for our brands are utilized throughout the process. Mixing tanks and other process equipment are used to make the products. The final product is then stored in large gravity-fed containers onsite or in transportation quantities such as totes or gallons. Third party shipping and distribution companies are currently utilized for certain shipments of product to West Texas.

Marketing Plan. The Company’s marketing plan focuses around cross-selling the respective customer bases at each operating subsidiary. As MSAs, or master service agreements, are typically difficult to obtain from customers, utilizing MSAs of our operating companies allows us to offer more services to our customers.

 Management. The Company’s Chief Executive Officer, Matthew Flemming, is located in Houston, Texas. Mr. Flemming has experience in acquisitions, management, capital raises and serving as an officer of public companies. He was previously the CEO of HII Technologies (“HII”), whose relative size and business plan started out similar to ours, as HII was a small public company with approximately $300,000 in cash, no debt and plans to enter the oilfield services business through an initial platform acquisition. HII had no revenues prior to its first acquisition in September 2012, when it acquired an owner operated frac water management company for approximately $2.3 million in cash, a seller note and stock. Following this initial acquisition, HII completed two more acquisitions as well as starting up two additional subsidiaries in the power and safety markets of the oilfield service business. By December 2014, HII’s consolidated revenues had grown to $4.2 million for that month (or an annual run rate of revenues of approximately $50 million). Falling rig counts, industry activity and oil & gas prices created an industry down-turn by 2015. In July 2015, HII’s senior lender declared HII in default of its senior credit facility, and as a result the lender did not continue to release funds to HII pursuant to the terms of the credit facility. As a result, HII was unable to continue to fund its operations or satisfy its reporting obligations with the SEC subsequent to its March 31, 2015 Form 10-Q filing. Led by a Chief Restructuring Officer, HII filed a voluntary Chapter 11 petition with the US Bankruptcy court in Houston, Texas in September 2015. On April 15, 2016, Mr. Flemming resigned as an officer and director of HII as it emerged from bankruptcy protection. On July 13, 2016, HII’s registration was revoked by the Securities and Exchange Commission (“SEC”) pursuant to Section 12(j) of the Securities Exchange Act of 1934. The revocation of HII’s registration was the result of proceedings instituted by the SEC, which HII accepted and consented to without admitting or denying the findings of the SEC. The SEC’s findings included that HII filed a Chapter 11 petition with the Bankruptcy court and that HII failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13.

Mr. Flemming has been a CEO and CFO for more than twenty years in high growth, capital intensive businesses, with more than twelve years’ experience as an officer in a public company environment. He has significant experience with our “Buy and Build” strategy, identifying target oilfield companies and relationships in the oilfield market place that help provide access to products and company acquisition targets.

Stephen Christian has been our EVP and head of operations since April 2018. Mr. Christian has served as President of MG Cleaners, LLC since October 2010, when he acquired MG Cleaners’ membership interests and continues to have operational responsibility for MG, our wholly-owned subsidiary. Prior to MG, Stephen was employed by one of the largest drilling rig operators in the United States, Nabors Drilling, a subsidiary of Nabors Industries (NYSE:NBR), as a Rig Manager from 2004 to 2010. Over the six years he was employed by Nabors, Mr. Christian developed a strong reputation with drilling contractor managers and industry partners. Mr. Christian has been the President of MG Cleaners since 2010. The Company believes Mr. Christian’s operations experience, industry relationships and reputation will continue to assist us in our growth.

Geographic Operations

Our headquarters are in Houston, Texas and our facilities are strategically located including Odessa, Texas for the Permian Basin (which includes the Midland and Delaware sub-Basins), Palestine, Carthage, and Waskom, Texas for the Haynesville shale and Cotton Valley plays, Floresville and Alice, Texas addressing the Eagle Ford Shale and Austin Chalk activity. All of our products are made in Texas. Any product sold outside of our current geographic focus are handled by distribution partners and currently represents an immaterial percentage of our sales.

Competition

The markets in which we operate are highly competitive. We provide services and sell our products primarily in the southwest United States. Our competitors include many large and small transportation, logistics, and midstream /oilfield service companies. In addition, the business segments in which we compete are highly fragmented. We believe that the principal competitive factors in the markets we serve are: reputation for service and technical expertise, equipment and personnel capacity, work force competency, efficiency, safety record and price. Our branded products compete against other cleaning products, surfactants and degreasers, some of which are branded retail and some industrial. Because of our dealer status with certain equipment, we do not frequently compete for equipment sales on selected items in our geographic areas. With our service crews, we compete with the human resources that drilling rig operators and oil companies employ. These firms may have their own service personnel, in which case we may not get awarded that service job. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on safety, performance and quality of our crews, equipment and services. We seek to differentiate ourselves from our competitors by delivering the highest quality service, experienced personnel and equipment possible, coupled with execution and operating efficiency in a safe working environment. Many of our competitors have greater financial and personnel resources than we do.

Cyclical Nature of Industry

We operate in a highly cyclical industry. The key factor driving demand for our services is the level of drilling activity by E&P companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Global supply and demand for oil and the domestic supply and demand for natural gas are critical in assessing industry outlook. Demand for oil and natural gas is cyclical and subject to large, rapid fluctuations. Producers tend to increase capital expenditures in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield service companies such as ours. Increased capital expenditures also ultimately lead to greater production, which historically has resulted in increased supplies and reduced prices, which in turn tend to reduce activity levels for oilfield services. Midstream or pipeline operating companies typically utilize service companies in their construction, build out or maintenance of their infrastructure they operate and manage. Midstream operators also have cyclical capital spending where area activity and hydrocarbon prices may have an effect on new project economics that may result in delays or elimination of project expenditures. Heavy haul logistics and transportation typically includes a material amount of oilfield production equipment as such is cyclical in nature.

For these reasons, the results of our operations may fluctuate from quarter to quarter and year to year. These fluctuations may distort comparisons of results across periods.

Dependence on One or a Few Major Customers

The Company serves several major drilling companies and independent oil & gas companies that are active in our core areas of operations.

As of December 31, 2019, three customers comprised more than 10% of our accounts receivable balance at approximately 25%, 12%, and 11%, respectively. During the twelve-month period ended December 31, 2019, 3 customers represented more than 10% of our revenues at 15%,13% and 12%, respectively, and no other customer represented more than 10% of our revenues during this period.

As of December 31, 2018, three customers comprised more than 10% of our accounts receivable balance at approximately 22%, 18% and 11%, respectively. During the twelve-month period ended December 31, 2018, two customers represented more than 10% of our revenues at 31% and 19%, respectively, and no other customer represented more than 10% of our revenues during this period.

Seasonality

Weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters resulting in higher prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results that may be realized on an annual basis.

Raw Materials

The Company purchases a wide variety of raw materials, parts and components that are made by other manufacturers and suppliers for our use. The Company is not dependent on any single source of supply for those parts, supplies or materials and we believe that such parts, supplies and materials are readily available from multiple sources. We do not foresee significant price fluctuations in our raw material costs.

Intellectual Property

We do not have any patents on our current products and do not intend to file any patents on such products. We protect our trademarks and may from time to time file for registration of those trademarks. We have four registered trademarks granted to date, and may file for additional marks in the future.

We currently protect our trade secrets and in-house intellectual property through contractual arrangements, including confidentiality, non-competition and non-disclosure agreements with employees and third parties and will continue to use such contractual arrangements in the future to help protect our proprietary intellectual property.

Government Regulation

We are not currently subject to any direct regulation by any government agency, other than regulations generally applicable to businesses.

General business regulations include the packaging, labeling, distribution, advertising and sale of our chemical products, such as those we sell, are subject to regulation by one or more federal agencies, principally the Federal Trade Commission, or FTC, and to a lesser extent the Consumer Product Safety Commission.

Federal agencies, primarily the FTC, have a variety of procedures and enforcement remedies available to them, including the following:

In addition, certain state agencies have similar authority. These federal and state agencies have in the past used these remedies in regulating participants in the industry, including the imposition by federal agencies of civil penalties. We cannot assure you that the regulatory environment in which we operate will not change or that such regulatory environment, or any specific action taken against us, will not result in a material adverse effect on our operations.

The Company’s operations are regulated and licensed by various federal, provincial, state, local and foreign government agencies in the United States and Canada. In the United States, the Company and its drivers must comply with the safety and fitness regulations of the DOT and the agencies within the states that regulate transportation, including those regulations relating to drug- and alcohol-testing and hours-of-service. Weight and equipment dimensions also are subject to government regulations. The Company also may become subject to new or more restrictive regulations relating to fuel emissions, environmental protection, drivers’ hours-of-service, driver eligibility requirements, on-board reporting of operations, collective bargaining, ergonomics and other matters affecting safety, insurance and operating methods. Other agencies, such as the U.S. Environmental Protection Agency (EPA), and the U.S. Department of Homeland Security (DHS), the U.S. Department of Defense (DOD) and the U.S. Department of Energy (DOE) also regulate the Company’s equipment, operations, drivers and the environment. The Company conducts operations outside of the United States, and is subject to analogous governmental safety, fitness, weight and equipment regulations and environmental protection and operating standards, as well as the Foreign Corrupt Practices Act (FCPA), which generally prohibits United States companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining favorable treatment. Any investigation of any actual or alleged violations of such laws could also harm the Company’s reputation or have a material adverse impact on its business, financial condition, results of operations, cash flows and prospects.

The DOT, through the Federal Motor Carrier Safety Administration (FMCSA), imposes safety and fitness regulations on the Company and its drivers, including rules that restrict driver hours-of-service. In December 2011, the FMCSA published its 2011 Hours-of-Service Final Rule (the 2011 Rule), requiring drivers to take 30-minute breaks after eight hours of consecutive driving and reducing the total number of hours a driver is permitted to work during each week from 82 to 70 hours. The 2011 Rule provided that a driver may restart calculation of the weekly time limits after taking 34 or more consecutive hours off duty, including two rest periods between 1:00 a.m. and 5:00 a.m.; these restrictions are referred to as the 2011 Restart Restrictions. These 2011 rule changes, including the 2011 Restart Restrictions, became effective on July 1, 2013. However, in December 2014, Congress passed the 2015 Omnibus Appropriations bill, which was signed into law on December 16, 2014. Among other things, the legislation provided relief from the 2011 Restart Restrictions, reverting requirements back to those in effect before the 2011 Rule became effective, including the more straight forward 34-hour restart period, without need for two rest periods between 1:00 a.m. and 5:00 a.m.. In December 2014, the FMCSA published a Notice of Suspension summarizing this suspension of enforcement of the 2011 Restart Restrictions.

The FMCSA has adopted a data-driven Compliance, Safety and Accountability (the CSA) program as its safety enforcement and compliance model. The CSA program holds motor carries and drivers accountable for their role in safety by evaluating and ranking fleets and individual drivers on certain safety-related standards. The CSA program affects drivers because their safety performance and compliance impact their safety records and, while working for a carrier, will impact their carrier’s safety record. The methodology for determining a carrier’s DOT safety rating relies upon implementation of Behavioral Analysis and Safety Improvement Categories (BASIC) applicable to the on-road safety performance of the carrier’s drivers and certain of those rating results are provided on the FMCSA’s Carrier Safety Measurement System website. As a result, certain current and potential drivers may no longer be eligible to drive for the Company, the Company’s fleet could be ranked poorly as compared to its peer firms, and the Company’s safety rating could be adversely impacted. The occurrence of future deficiencies could affect driver recruiting and retention by causing high-quality drivers to seek employment (in the case of company drivers) or contracts (in the case of owner-operator drivers) with other carriers, or could cause the Company’s customers to direct their business away from the Company and to carriers with better fleet safety rankings, either of which would adversely affect the Company’s results of operations and productivity. Additionally, the Company may incur greater than expected expenses in its attempts to improve its scores as a result of such poor rankings. Those carriers and drivers identified under the CSA program as exhibiting poor BASIC scores are prioritized for interventions, such as warning letters and roadside investigations, either of which may adversely affect the Company’s results of operations. To promote improvement in all CSA categories, including those both over and under the established scoring threshold, the Company has procedures in place to address areas where it has exceeded the thresholds and the Company continually reviews all safety-related policies, programs and procedures for their effectiveness and revises them, as necessary, to establish positive improvement. However, the Company cannot assure you these measures will be effective.

The methodology used to determine a carrier’s safety rating could be changed by the FMCSA and, as a result, the Company’s acceptable safety rating could be impaired. In particular, the FMCSA continues to utilize the three safety fitness rating scale—“satisfactory,” “conditional,” and “unsatisfactory”—to assess the safety fitness of motor carriers and the Company currently has a “satisfactory” FMCSA rating on 100% of its fleet. However, pursuant to a 2015 federal statutory mandate, the FMCSA commissioned the National Academy of Sciences (NAS) to conduct a study and report upon the CSA program and its underlying Safety Measurement System (SMS), which is the FMCSA’s process for identifying patterns of non-compliance and issuing safety-fitness determinations for motor carriers. In June 2017, the NAS published a report on the subject providing specific recommendations and concluding, among other things, that the FMCSA should explore a more formal statistical model to replace the current SMS process. In June 2018, the FMCSA posted its response to the NAS study in a report to Congress, concluding, among other things, that it would develop and test a new model, the Item Response Theory (IRT), which would replace the SMS process currently used. The FMCSA was expected to commence small scale testing of the IRT model as early as September 2018, with full scale testing expected to occur in April 2019 and possible program roll-out expected to occur in late 2019 but the testing schedule has been delayed. The FMCSA’s June 2018 response is under audit by the DOT Inspector General to assess consistency with the NAS recommendations, and the audit findings will guide the agency’s actions and timing with respect to testing of the IRT model as a potential replacement for the SMS, in the event and to the extent that the FMCSA adopts the IRT model in replacement of the SMS or otherwise pursues rulemakings in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more stringent standards, then it is possible that the Company and other motor carriers could be adversely affected, as compared to consideration of the current standards. If the Company were to receive an unsatisfactory CSA score, whether under the current SMS process, the IRT model, should it be finalized, and adopted, or as a result of some other safety-fitness determination, it could adversely affect the Company’s business as some of its existing customer contracts require a satisfactory DOT safety rating, and an unsatisfactory rating could negatively impact or restrict the Company’s operations.

In the aftermath of the September 11, 2001 terrorist attacks, federal, state and municipal authorities implemented and continue to implement various security measures, including checkpoints and travel restrictions on large trucks. This could reduce the pool of qualified drivers, which could require the Company to increase driver compensation or owner-operator contracted rates, limit fleet growth or allow trucks to be non-productive. Consequently, it is possible that the Company may fail to meet the needs of customers or may incur increased expenses.

The FMCSA published a final rule in December 2015 mandating the use of Electronic Logging Devices (ELDs) for commercial motor vehicle drivers to measure their compliance with hours-of-service requirements by December 18, 2017. The 2015 ELD final rule generally applies to most motor carriers and drivers who are required to keep records of duty status, unless they qualify for an exception to the rule, and the rule also applies to drivers domiciled in Canada and Mexico. Under the 2015 final rule, motor carriers and drivers subject to the rule were required to use either an ELD or an automatic onboard recording device (AOBRD) compliant with existing regulations by December 18, 2017. However, the AOBRDs may only be used until December 16, 2019, provided those devices were put into use before December 18, 2017. Starting December 16, 2019, all carriers and drivers subject to the 2015 final rule must use ELDs. Commencing with the December 18, 2017 effective date, the Company and other motor carriers subject to the 2015 rule are required to use ELDs or AOBRDs in their operations.

The Company is subject to various environmental laws and regulations governing, among other matters, the operation of fuel storage tanks, release of emissions from its vehicles (including engine idling) and facilities, and adverse impacts to the environment, including to the soil, groundwater and surface water. The Company has implemented programs designed to monitor and address identified environmental risks. Historically, the Company’s environmental compliance costs have not had a material adverse effect on its results of operations; however, there can be no assurance that such costs will not be material in the future or that such future compliance will not have a material adverse effect on the Company’s business and operating results. Additionally, certain of the Company’s operating companies are Charter Partners in the EPA’s SmartWay Transport Partnership, a voluntary program promoting energy efficiency and air quality. If the Company fails to comply with applicable environmental laws or regulations, the Company could be subject to costs and liabilities. Those costs and liabilities may include the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the occurrence of delays in permitting or performance of projects and the issuance of orders enjoining performance of some or all of its operations in a particular area. The occurrence of any one or more of such developments could have a material adverse effect on the Company’s business and operating results.

The Company also has vehicle maintenance operations at certain of its facilities. The Company’s operations involve the risks of fuel spillage or seepage into the environment, discharge of contaminants, environmental and natural resource damage, and unauthorized hazardous material spills, releases or disposal actions, among others. Some of the Company’s operations are at facilities where soil and groundwater contamination have occurred, and the Company or its predecessors have been responsible for remediating environmental contamination at some locations. In the past, the Company has also been responsible for the costs of cleanup of cargo and diesel fuel spills caused during its transportation operations, including as a result of traffic accidents or other events. If the Company is found to be responsible for such contamination or spills, the Company could be subject to costs and liabilities, including costs for remediation, environmental natural resource damages and penalties.

The EPA regulations limiting exhaust emissions became more restrictive in 2010. In 2010, a presidential executive memorandum was signed directing the National Highway Traffic Safety Administration (NHTSA) and the EPA to develop new, stricter fuel efficiency standards for, among other vehicles, heavy-duty trucks. In 2011, the NHTSA and the EPA adopted final Phase 1 rules that established the first-ever fuel economy and greenhouse gas standards for medium-and heavy-duty vehicles. These standards apply to certain combination tractors’ model years 2014 to 2018 and require them to achieve an approximate 20 percent reduction in fuel consumption by model year 2018, which equates to approximately four gallons of fuel for every 100 miles traveled. Additionally, in October 2016, the EPA and NHTSA jointly published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium- and heavy-duty vehicles beginning for model year 2019 and extending through model year 2027. The Phase 2 standards build upon the Phase 1 standards, encouraging wider application of currently available technologies and the development of new and advanced cost-effective technologies through model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards will be imposed on new trailers. The Company expects that these Phase 2 standards, if unchanged to make less stringent, will result in its incurrence of increased costs for acquiring new tractors and for additional parts and maintenance activities to retrofit its tractors with technology to achieve compliance with such standards. Such increased costs could adversely affect the Company’s operating results and profitability, particularly if such costs are not offset by potential fuel savings. Additionally, in November 2018, the EPA announced the Cleaner Trucks Initiative (CTI), pursuant to which it plans to issue a rule updating standards for nitrogen oxide emissions from highway heavy-duty trucks and engines. On January 6, 2020, the EPA issued an Advanced Notice of when the EPA may finalize the proposed rule and Proposed Rulemaking to implement the CTI program.  The Company cannot predict, however, when the EPA may finalize the proposed rule and the extent to which its operations and productivity will be adversely impacted, by these or any other new fuel or emission restrictions.

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect such additional regulation, when and if it occurs, would have on our business in the future. Such additional regulation could require, however, any or all of the actions listed below, which could have a material adverse effect on our operations:

Property

Our principal executive office is located at 710 N. Post Oak Road, Suite 315, Houston, Texas, where we lease approximately 1,429 square feet of office space on a three-year term starting August 1, 2018, at a rate of $2,620 per month. We also have operations facilities throughout Texas.

Our Carthage facility is comprised of approximately 2,500 square feet and one acre of property that is leased for $2,500 per month on a month-to-month basis.

Our Odessa facility is comprised of approximately 6,500 square feet and 1.5 acres of property that is leased for $8,500 per month and expires on Jan 22, 2022. We may cancel the lease with 30 days’ notice to our landlord.

Our Alice facility is comprised of includes an office and warehouse of approximately 1,200 square feet and a two acre yard which is leased at $2,000 per month. The lease commenced on June 1, 2018 and automatically renews for six month terms unless cancelled by written notice.

Our Palestine facility is leased by both 5J Oilfield Services and 5J Trucking subsidiaries have each entered into leases for our Palestine, Texas location which is comprised of a ten acre yard, 3,000 square feet of offices and shop facilities at a combined cost of $6,750 per month. The five-year term lease expires on February 1, 2025 and has an option to extend the lease for an additional five years.

Our Floresville facility is comprised of we lease a ten-acre yard with an office and shop facility located in Floresville, Texas. The Floresville lease is for a term of three-years expiring on April 30, 2023 at a cost of $3,500 per month with an option to renew for an additional five years.

Our West Odessa facility is comprised of a nineteen acre yard with office and shop facilities. The West Odessa lease is for a term of five years expiring on February 1, 2025, with a five year renewal option, at a cost of $4,000 per month.

The Palestine, Floresville and West Odessa Texas leases are all leased from 5J Properties LLC, controlled by Mr. Frye, the previous owner and current President of 5J, and an affiliate of our Company.

Our North Houston logistics terminal lease in Houston, Texas comprises 3.4 acres, which includes office space at a monthly rent of $6,000 and is a month to month lease.

We lease a 3,000 square foot residential house in Odessa, Texas for employees that work shifts transferring from other geographic areas at a monthly cost of $3,200. The lease expires in February of 2021.

Currently, we believe that our facilities are adequate for our present and future needs.

Legal Proceedings

In May 2018, MG Cleaners LLC, a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court for the Western District of Texas, Houston Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Six former employees of MG Cleaners, the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserting amongst other things unpaid overtime wages. The Company adamantly denies these claims.

SMG Industries has litigated this matter for several months and considered a range of outcomes for this matter and determined that the Company’s best interest was to settle the matter in full for $60,000, the amount reserved by the Company as its estimated liability. The matter was settled in full in January 2020 for this reserved amount. As of December 31, 2019, the Company accrued $60,000 related to this litigation.

From time to time, we may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the opinion of management; no other pending or known threatened claims, actions or proceedings against us, or its wholly-owned subsidiaries are expected to have a material adverse effect on our financial position, results of operations or cash flows. We cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any lawsuits or investigations.

Other than as disclosed above, there are no material legal proceedings currently pending or, to our knowledge, threatened against us.

Employees

As of December 31, 2019, we had 52 employees of whom 9 were administrative, 2 were in sales and marketing and 41 were in service or operations. In addition, we may employ independent contractors from time to time. Our employees are not represented by a labor union, and we believe our relations with our employees are satisfactory. Our independent contractors are either paid day rates or hourly commensurate with the job. Employees and independent contractors are required to execute agreements with us that set forth terms of engagement and contain customary confidentiality and non-competition provisions.

Corporate Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and beneficial ownership reports on Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act have been filed with the Securities and Exchange Commission (SEC). Such reports and other information that we file with the SEC are available on our website at http://www.SMGIndustries.com when such reports are filed with the SEC. Copies of this Annual Report on Form 10-K may also be obtained without charge electronically or by paper by contacting Matthew Flemming, SMG Industries Inc., by calling (713) 821-3153.

The public may also read and copy the materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. References to our website and the SEC’s website are intended to be inactive textual references and the contents of these websites are not incorporated into this filing.

Investing in our securities involves a high degree of risk. Before purchasing our common stock, you should carefully consider the following risk factors as well as other information contained in this Annual Report, including our financial statements and the related notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our securities could decline, and you may lose some or all of your investment.

Risks Related to Our Business

The COVID-19 pandemic has significantly reduced demand for our services, and has had, and may continue to have, a material adverse impact on our financial condition, results of operations and cash flows.

The effects of the COVID-19 (coronavirus) pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects have adversely affected the demand for oil and natural gas, as well as for our services and products. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, coupled with oil oversupply, has had, and is reasonably likely to continue to have, a material adverse impact on the demand for our services and products. The decline in our customers’ demand for our services and products has had, and is likely to continue to have, a material adverse impact on our financial condition, results of operations and cash flows.

While the full impact of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. These effects have included, and may continue to include, adverse revenue and cash flow effects; disruptions to our operations; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers.

The extent to which our operating and financial results are affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate the other risk factors set forth below. COVID-19 may also materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider to present significant risks to our operations.

Inadequate liquidity could materially and adversely affect our business operations.

We have significant outstanding indebtedness under our credit facilities. As of December 31, 2019, we had fully drawn the availability under our credit facility. In addition, we experienced declines in revenues in the fourth quarter of 2019 and the first quarter of 2020 compared to the prior year’s comparable quarters and have very limited cash flow. Due to this limited liquidity and decreased cash flow, we may not be able to provide our services, which could lead to continued deterioration in our financial condition. Our ability to pay interest and principal on our indebtedness and to satisfy our other obligations will depend upon our ability to achieve increased utilization of our equipment, which is highly influenced by customer's capital expenditure and activity.  We cannot assure that our business will generate sufficient cash flows from operations, or that future capital will be available to us in an amount sufficient to fund our liquidity needs. We cannot assure you that we will be able to raise capital through debt or equity financings on terms acceptable to us or at all, or that we could consummate dispositions of assets or operations for fair market value, in a timely manner or at all.  Furthermore, any proceeds that we could realize from any financings or dispositions may not be adequate to meet our debt service or other obligations then due.

The Master Lease Agreement between Utica Leaseco, 5J and SMG contains certain restrictive covenants which could limit management’s ability to operate the business of 5J and is secured by all of the equipment of 5J, and is guaranteed by SMG.

In connection with SMG’s acquisition of 5J, 5J entered into a master lease agreement with Utica Leaseco, which is guaranteed by SMG. The agreement places many restrictions on 5J, among other things, its ability to incur additional indebtedness, to create liens or other encumbrances and to sell or otherwise dispose of its equipment without their prior approval. Any failure to comply with the covenants in the Utica Leaseco master lease agreement could result in an event of default, which could trigger an acceleration of the related debt. If 5J were unable to repay the debt upon any such acceleration, Utica Leaseco could seek to foreclose on the 5J assets in an effort to seek repayment under the master lease agreement. If Utica Leaseco were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected. Additionally, we have guaranteed payments under the Utica Leaseco master lease agreement.  On May 18, 2020, being effective April 27, 2020, the Company entered into its first amendment with Utica Leaseco whereby Utica agreed to lower the monthly payment made by 5J from $331,000 to $150,000 for a six month period starting April 27, 2020.  If any such guaranteed payments are not made we will be in default of the master lease agreement which could cause Utica Leasco to foreclose on the 5J equipment, which could materially adversely affect our ability to operate our business.  

The line of credit facility for 5J Oilfield Services and 5J Trucking pledges all of the 5J Entities accounts receivable to Amerisource Funding Inc.

In connection with SMG’s acquisition of 5J, each of 5J Oilfield Services and 5J Trucking entered into a revolving accounts receivable assignment and term loan financing and security agreement with Amerisource Funding Inc. Pursuant to the terms of the agreement, Amerisource has been granted a first lien on all of the accounts receivable and other personal property of the 5J Entities, as well as a second lien on all other property of the 5J Entities. In the event that the 5J Entities were unable to comply with the payment terms of the Amerisource accounts receivable agreement, Amerisource could foreclose on the 5J Entities assets in an effort to seek repayment under the terms of the agreement. If Amerisource were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected. Additionally, we have guaranteed the Amerisource financing facility on behalf of our subsidiaries who are the borrowers.

The line of credit facility for MG Cleaners, Trinity and MWTS/Jake Oilfield contains restrictive covenants which limit management’s discretion to operate the businesses of certain of our wholly-owned subsidiaries and is secured by all of MG’s assets and substantially all of the assets of, Trinity, MWTS and Jake Oilfield Solutions, which is wholly-owned by MWTS.

In order to obtain the line of credit from Catalyst Financial for accounts receivable financing, certain of our wholly-owned subsidiaries agreed to certain covenants that place certain restrictions in the subsidiaries, among other things, their ability to incur additional indebtedness, to create liens or other encumbrances, and to sell or otherwise dispose of assets.  Any failure to comply with the covenants included in the Catalyst Financial loan agreements could result in an event of default, which could trigger an acceleration of the related debt.  If our subsidiaries were unable to repay the debt upon any such acceleration, Catalyst Financial could seek to foreclose on those assets in an effort to seek repayment under the loans.  If Catalyst Financial were successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected. Additionally, we have guaranteed the Catalyst Financial financing facility on behalf of our subsidiaries’ who are the borrowers.

The interest rate on a significant portion of our indebtedness varies with the market rate of interest.  An increase in the prime interest rate could have a material adverse effect on our interest expense and our results of operations.

The interest our lines of credit and term loans are payable monthly and are at rates per annum equal to the prime rate plus a range of 6% or more. The interest under our credit facilities will fluctuate over time, and if the prime rate significantly increases, our interest expense will increase.  This could have a material adverse effect on our results of operations.  

We may need additional financing to further our business plans.

We may require additional funds to finance our business development projects.  We may not be successful in raising additional financing as and when needed. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, our operating results and prospects could be adversely affected. Our ability to raise new debt or equity capital or to refinance or restructure our debt at any given time depends, among other things, on the condition of the capital markets and our financial condition at such time. Also, the terms of existing or future debt or equity instruments could further restrict our business operations. The inability to finance future growth could materially and adversely affect our business, financial condition and results of operations.

We are currently in a very difficult operating environment.

We face a very difficult operating environment in 2020 with logistics, midstream services and oilfield services as exploration and production companies significantly cutting back their drilling and completions plans and exerting significant pressure on us to reduce our prices for the services we provide. We cannot assure that we will raise any such capital on terms acceptable to us, if at all. Due to our lack of capital we may be forced to curtail operations in some or all of our locations which would materially and adversely affect our revenues and operations.  

Our business depends on domestic (United States) spending by the crude oil and natural gas industry which suffered significant price volatility in 2019 and 2020, and such volatility may continue; our business has been, and may in the future be, adversely affected by industry and financial market conditions that are beyond our control.

We depend on our customers’ ability and willingness to make operating and capital expenditures to explore, develop and produce crude oil and natural gas in the United States. Customers’ expectations for future crude oil and natural gas prices, as well as the availability of capital for operating and capital expenditures, may cause them to curtail spending, thereby reducing demand for our services and equipment. Major declines in oil and natural gas prices in 2019 and 2020 have resulted in substantial declines in capital spending and drilling programs across the industry. As a result of the declines in oil and natural gas prices, many exploration and production companies have and are expected to substantially reduce drilling and completions programs at times and have required service providers to make pricing concessions. 

Industry conditions and specifically the market price for crude oil and natural gas are influenced by numerous domestic and global factors over which the Company has no control, such as the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, weather conditions, political instability in oil and natural gas producing countries, and merger and divestiture activity among oil and natural gas producers. The volatility of the oil and natural gas industry and the consequent impact on commodity prices as well as exploration and production activity could adversely impact the level of drilling and activity by some of our customers. Where declining prices lead to reduced exploration and development activities in the Company’s market areas, the reduction in exploration and development activities also may have a negative long-term impact on the Company’s business. Continued decline in oil and natural gas prices may result in increased pressure from our customers to make pricing concessions in the future and may impact our borrowing arrangements with our principal bank. 

There has also been significant political pressures for the United States economy to reduce its dependence on crude oil and natural gas due to the perceived impacts on climate change. These activities may make oil and gas investment and production   less attractive.

Higher oil and gas prices do not necessarily result in increased drilling activity because our customers’ expectation of future prices also drives demand for drilling services. Oil and gas prices, as well as demand for the Company’s services, also depend upon other factors that are beyond the Company’s control, including the following:

Ongoing volatility and uncertainty in the domestic and global economic and political environments have caused the oilfield services industry to experience volatility in terms of demand. While our management is generally optimistic for the continuing development of the onshore North American oil and gas industry, there are a number of political and economic pressures negatively impacting the economics of continuing production from some existing wells, future drilling operations, and the willingness of banks and investors to provide capital to participants in the oil and gas industry. These cuts in spending will continue to curtail drilling programs as well as discretionary spending on well services, and will continue to result in a reduction in the demand for the Company’s services, the rates and equipment utilization can be charged. In addition, certain of the Company’s customers could become unable to pay their suppliers, including the Company. Any of these conditions or events could adversely affect our operating results.

We depend on several significant customers, and a loss of one or more significant customers could adversely affect our results of operations.

Our customers consist primarily of domestic United States oil and gas operators and drilling rig contractors. During fiscal year 2019, three of our customers accounted for approximately 40% of our total gross revenues, with one customer accounting for 15%, one for 13% and another accounting for 12%. No other customers exceeded 10% of revenues during 2019. During fiscal year 2018, two of our customers accounted for approximately 50% of our total gross revenues, with one customer accounting for 31% and another accounting for 19%. No other customers exceeded 10% of revenues during 2018. These customers do not have any ongoing commitment to purchase our services.  While additional customers have been sourced since December 31, 2019, significant customer concentration still exists.  The loss of or a sustained decrease in demand by these customers could result in a substantial loss of revenues and could have a material adverse effect on our results of operations.  In addition, should these large customers default in their obligations to pay, our results of operations and cash flows could be adversely affected. 

We are dependent on third-parties to supply the chemicals required to manufacture our products.

We do not manufacture the raw chemicals that are required to manufacture our products and we rely on third-parties to supply such chemical products to us. In the event that there is a shortage in the supply of raw chemicals that are required to manufacture our products and we are unable to acquire any such chemicals from another source, our sales and results of operations will be materially adversely affected.

The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.

Our success is largely dependent on the skills, experience and efforts of our people.  We currently depend on the continued services and performance of the key members of our management team, including Matthew Flemming, our Chief Executive Officer, and Stephen Christian, our EVP and President of MG Cleaners, Trinity Services and Momentum Water Transfer, our operating subsidiaries. In connection with our acquisition of 5J, 5J’s senior management entered into three year employment agreements with 5J, however, the loss of any such key personnel could result in a disruption to the operations of 5J. The loss of key personnel could disrupt our operations and have an adverse effect on our ability to grow our business if we are unable to replace them.

We operate in a highly competitive environment, which could adversely affect our sales and pricing.

We operate in a highly competitive environment. We expect competition to intensify in the future. We compete on the basis of our brands and branding, customer service, quality and price. There can be no assurance that we will be able to compete successfully with other companies. Thus, revenues could be reduced due to aggressive pricing pursued by competitors.  Many of our competitors are entities that are more established, larger and have greater financial and personnel resources than we do.  If we do not compete successfully, our business and results of operations will be materially adversely affected.

There may be restrictions on the availability to procure water or adjustments in water sourcing requirements could decrease the demand for services related to our water business.

Our business includes water transfer for use to our oil and gas customer activities. Our ability to obtain water we supply may be limited due to reasons such as extended drought or our inability to obtain or maintain water sourcing permits or other rights. Some state or local government authorities also may begin to monitor or restrict the use of water subject to their jurisdiction for hydraulic fracturing to ensure adequate local water supply and quality of water. Any such decrease in the availability of water or demand for water services could adversely affect our business and results of operations.

Anti-fracking possibilities could adversely impact our business.

Some states and certain municipalities have regulated or are considering regulating fracking which obtained, could impact certain of our operations. While we do not believe that these regulations and contemplated actions have limited or prohibited fracking, and have not impacted our activities to date, there can be no assurance that these actions, if taken on a wider scale, may not adversely impact our business operations and revenue.

While our growth strategy includes seeking acquisitions of other service and logistics companies, we may not be successful in identifying or making any acquisitions in the future. We may not realize all of the anticipated benefits of our acquisitions, joint ventures or divestitures, or these benefits may take longer to realize than expected.

Our business strategy includes growth through the acquisitions of other businesses in the areas of logistics and transportation, midstream and pipeline services, as well as oilfield drilling, completions or production business segments.  We may not be able to continue to identify attractive acquisition opportunities or successfully acquire those opportunities that are identified.  There is always the possibility that even if there is success in integrating our current or future acquisitions into the existing operations, we may not derive the benefits, such as administrative or operational synergy or earnings obtained, that were expected from such acquisitions, which may result in the commitment of capital resources without the expected returns on the capital.  The competition for acquisition opportunities may increase which in turn would increase our cost of making further acquisitions or causing us to curb our activities of making additional acquisitions.

In pursuing our business strategy, from time to time we evaluate targets and enter into agreements regarding possible acquisitions, divestitures and joint ventures. To be successful, we conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete transactions and manage post-closing matters such as the integration of acquired businesses. Our due diligence reviews are subject to the completeness and accuracy of disclosures made by third parties. We may incur unanticipated costs or expenses following a completed acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities.

The risks associated with our future acquisitions also include the following:

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:

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:

The Company maintains insurance coverage that we believe to be customary in the industry against these hazards. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. As such, not all of our property is insured. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at reasonable rates. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive. It is likely that, in our insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive than it has been in the recent past. In addition, our insurance is subject to coverage limits. The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our financial condition and results of operations.

Indemnification of officers and directors may result in unanticipated expenses.

The Delaware General Corporation Law, our Amended and Restated Certificate of Incorporation and bylaws, and indemnification agreements between the Company and certain individuals provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with us or activities on our behalf. We also will bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s promise to repay them if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us that we may be unable to recoup and could direct funds away from our business and products (if any).

Our operations are subject to cyber-attacks that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.

Our operations are increasingly dependent on digital technologies and services. We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks. If our systems for protecting against cybersecurity risks prove not to be sufficient, we could be adversely affected by, among other things: loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data; interruption of our business operations; and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.

Risks Related to Our Securities

There is a limited trading market for our shares.  You may not be able to sell your shares if you need money.

Our common stock is traded on the OTC QB Venture Market (herein “OTC Market”), an inter-dealer automated quotation system for equity securities.  During the thirty days preceding filing of this report, the average daily trading volume of our common stock was approximately 1,000 shares traded per day, on average, and currently is thinly traded.  As of May 29, 2020, we had 86 record holders of our common stock (not including an indeterminate number of stockholders whose shares are held by brokers in “street name”).  There has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely.  We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock.  Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock.

We are subject to the penny stock rules and these rules may adversely affect trading in our common stock.

Our common stock is a “low-priced” security under rules promulgated under the Securities Exchange Act of 1934.  In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s rights and remedies and certain market and other information.  Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives.  Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases transaction costs for sales and purchases of our common stock as compared to other securities.

Transfers of our securities may be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.

Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.

Our Officers, Directors and ten percent or greater shareholders collectively own a substantial portion of our outstanding common stock and preferred stock, and as long as they do, they may be able to control the outcome of stockholder voting.

Our Officers, Directors and ten percent or greater shareholders are collectively the beneficial owners of approximately 64.6% of the  outstanding shares of our common stock as of the date of this report.  As long as our Officers, Directors and ten percent or greater shareholders collectively own a significant percentage of our common stock, our other shareholders may generally be unable to affect or change the management or the direction of our company without the support of our Officers, Directors and ten percent or greater shareholders.  As a result, some investors may be unwilling to purchase our common stock.  If the demand for our common stock is reduced because our Officers, Directors and ten percent or greater shareholders have significant influence over our company, the price of our common stock could be materially depressed.  The Officers, Directors and ten percent or greater shareholders will be able to exert significant influence over the outcome of all corporate actions requiring stockholder approval, including the election of Directors, amendments to our certificate of incorporation and approval of significant corporate transactions.

We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted.

Our Certificate of Incorporation authorizes the Board of Directors to issue up to 25,000,000 shares of common stock and up to 1,000,000 shares of preferred stock.  The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval.  Currently, the Company has issued 2,000 shares of Series A convertible preferred stock in connection with the Trinity Services acquisition in June 2019 and 6,000 shares of Series B convertible preferred stock in connection the acquisition of 5J Trucking and 5J Oilfield Services. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment.

By issuing preferred stock, we may be able to delay, defer or prevent a change of control.

Our Certificate of Incorporation permits us to issue, without approval from our shareholders, a total of 1,000,000 shares of preferred stock, 8,000 of which have been issued to date as Series A and Series B Preferred Stock.  Our Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series.  It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.

Our stock price is volatile.

The trading price of our common stock has been and continues to be subject to fluctuations.  The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors.  Significant volatility in the market price of our common stock may arise due to factors such as:

As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock.

There are limitations in connection with the availability of quotes and order information on the OTC Markets.

Trades and quotations on the OTC Markets involve a manual process and the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available.  The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price.  Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly.  Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.

There are delays in order communication on the OTC Markets.

Electronic processing of orders is not available for securities traded on the OTC Marketplace and high order volume and communication risks may prevent or delay the execution of one's OTC Marketplace trading orders.  This lack of automated order processing may affect the timeliness of order execution reporting and the availability of firm quotes for shares of our common stock.  Heavy market volume may lead to a delay in the processing of OTC Marketplace security orders for shares of our common stock, due to the manual nature of the market.  Consequently, one may not able to sell shares of our common stock at the optimum trading prices.

There is a risk of market fraud on the OTC Marketplace.

OTC Marketplace securities are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTC Market reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no exchange requirements are imposed.  Dealers may dominate the market and set prices that are not based on competitive forces. Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the equally sudden collapse of the market price for shares of our common stock.

There is a limitation in connection with the editing and canceling of orders on the OTC Markets.

Orders for OTC Market securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received and processed by the OTC Markets.  Due to the manual order processing involved in handling OTC Markets trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one's order. Consequently, one may not be able to sell its shares of our common stock at the optimum trading prices.

Increased dealer compensation could adversely affect our stock price.

The dealer's spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our Common Stock on the OTC Markets if the stock must be sold immediately.  Further, purchasers of shares of our Common Stock may incur an immediate "paper" loss due to the price spread.  Moreover, dealers trading on the OTC Markets may not have a bid price for shares of our Common Stock on the OTC Markets.  Due to the foregoing, demand for shares of our Common Stock on the OTC Markets may be decreased or eliminated.

None.

Our principal executive office is located at 710 N. Post Oak Road, Suite 315, Houston, Texas, where we lease approximately 1,429 square feet of office space on a three year term starting August 1, 2018, at a rate of $2,620 per month. We also have facilities throughout Texas. Our Carthage facility is comprised of approximately 2,500 square feet and one acre of property that is leased for $2,500 per month. The Carthage facility is on a month to month basis and is used for our operations throughout East Texas. On January 22, 2018, we entered into a two year lease for a 6,500 square foot building on approximately 1.5 acres in Odessa, Texas providing for three lease term extensions totaling six additional years. The initial rent is $6,500 per month and increased to $8,500 per month at the seventh month of the lease. After the first year anniversary, we may cancel the lease with 30 days’ notice to our landlord. Lease extensions are at our discretion and require rent increases. Our Alice facility includes an office and warehouse of approximately 1,200 square feet and a one acre yard which is leased at $2,000 per month. The lease is for six months, commencing on June 1, 2018 and automatically renews for six month terms unless cancelled by written notice. Our 5J Oilfield Services and 5J Trucking subsidiaries both have each entered into leases for our Palestine, Texas location. The term of the lease is for five years, expiring on February 1, 2025. The aggregate lease amount is for $6,750 per month, with an option to extend the lease for an additional five years. We lease a ten-acre facility located in Floresville, Texas. The Floresville lease is for a term of three-years expiring on April 30, 2023 at a cost of $3,500 per month. We lease a nineteen acre facility in West Odessa, Texas. The West Odessa lease is for a term of five years expiring on February 1, 2025 at a cost of $4,000 per month. The Palestine, Floresville and West Odessa leases are all leased from 5J Properties LLC, controlled by Mr. Frye the previous owner of 5J and an affiliate of our company. Our logistics terminal lease in Houston, Texas comprises 3.4 acres at a monthly rent of $6,000 and is a month to month lease.

Currently, we believe that our facilities are adequate for our present and future needs.

In May 2018, MG Cleaners LLC, a wholly owned subsidiary of SMG Industries, Inc. was sued in the US District Court

for the Western District of Texas, Houston Division, Civil action no. 4:18-cv-00016; Christopher Hunsley et. al. vs MG Cleaners LLC. Six former employees of MG Cleaners, the Plaintiffs, filed claims under the Fair Labor Standards Act (FLSA) asserting amongst other things unpaid overtime wages. The Company adamantly denies these claims. We have litigated this matter for several months and considered a range of outcomes for this matter and determined that management’s best estimated amount to settle this matter is for the $60,000 accrued on our liabilities in the fiscal year 2019. On January 30, 2020, this matter was settled.

Litigation

From time to time, we may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the opinion of management; no other pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on SMG’s financial position, results of operations or cash flows. We cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any lawsuits or investigations.

Other than as disclosed above, there are no material legal proceedings currently pending or, to our knowledge, threatened against us.

Not applicable.

PART II

Market Price and Dividend Information

Our common stock is quoted on the OTCQB Marketplace operated by OTC Market Group, Inc. under the symbol “SMGI”. The following table sets forth the high and low closing prices for our common stock as reported.

Quarterly Price Ranges

As of May 28, 2020, the closing sales price of our common stock on the OTCQB was $0.11. As of May 28, 2020, there were approximately 86 stockholders of record of our common stock. 

Dividend Policy

Any determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, results of operations, capital requirements and other factors that our Board deems relevant. In addition, the terms of any future debt or credit facility may preclude us from paying dividends. At this time, we do not anticipate paying any future dividends.

Issuer Purchases of Equity Securities

None.

We are a smaller reporting company, and therefore, we are not required to provide information required by this item.

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forwarding looking statements as a result of certain factors, including but not limited to, those which are not within our control.

Overview

We are a growth-oriented company focused in logistics, midstream & oilfield services market segments in the Southwest United States.  Our primary business objective is to grow our operations and create value for our stockholder’s through organic growth and strategic acquisitions. We have a ‘buy & build’ growth strategy of consolidating middle market companies and generating organic growth post-acquisition when possible from removing business constraints with strategic cross-selling of products and services across market segments benefiting us with higher utilization and customers with more efficient costs.  

Our wholly-owned operating subsidiaries that offer this range of products and services are:

These operating subsidiaries provide a range of logistics, midstream and oilfield services such as:

We are headquartered in Houston, Texas with facilities in Odessa, Floresville, Alice, Palestine, Carthage, and Waskom, Texas. Our web sites are www.SMGIndustries.com,  www.5Joilfield.net, www.5JTrucking.net, www.ts-oilfield.com, www.MGCleanersllc.com and www.MomentumWTS.com.

On September 19, 2017, we entered into an exchange agreement with all of the members of MG Cleaners, LLC (“MG”) pursuant to which we acquired one hundred percent of the issued and outstanding membership interests of MG (“MG Membership Interests”) pursuant to which MG became our wholly-owned subsidiary. In connection with the acquisition, we issued 4,578,276 shares and agreed to pay $300,000 in cash ($250,000 in cash at closing) to the MG Members.

The acquisition of MG Cleaners LLC by SMG Industries Inc. (formerly SMG Indium Resources Ltd.) on September 19, 2017, was accounted for as a reverse acquisition with MG Cleaners as the acquirer of SMG Industries for accounting purposes. The financial statements presented in this Annual Report on Form 10-K are presented as a continuation of the operations of MG Cleaners LLC with one adjustment to retroactively adjust the membership interests of MG Cleaners LLC to reflect the legal capital of SMG Industries prior to the September 19, 2017 acquisition, and one adjustment to eliminate the accumulated deficit of SMGI in accordance with the recapitalization of MG.

On September 27, 2018, we acquired approximately 800 downhole oil tools which include stabilizers, crossovers, drilling jars, roller reamers and bit subs, including both non-mag and steel units in exchange for the issuance of an aggregate of one million (1,000,000) shares of our common stock to the sellers.

On December 7, 2018, we acquired one hundred percent of the issued and outstanding membership interests (“MWTS Membership Interests”) of Momentum Water Transfer Services LLC, a Texas limited liability company (“MWTS”) pursuant to which MWTS became our wholly-owned subsidiary (the “MWTS Acquisition”). In connection with the MWTS Acquisition, we issued 550,000 shares of our common stock, paid $361,710 in cash to the MWTS Members and issued a note payable to the MWTS Member in the aggregate amount of $800,000.

On June 27, 2019, we acquired one hundred percent of the issued and outstanding membership interests (“Trinity Membership Interests”) of Trinity Services LLC, a Louisiana limited liability company (“Trinity”) pursuant to which Trinity became our wholly-owned subsidiary (the “Trinity Acquisition”). In connection with the Trinity Acquisition, we issued 2,000 shares of our Series A Convertible Preferred Stock, with a stated value of $1,000 per share, to the sole member of Trinity. The Series A Convertible Preferred Stock is convertible at a price of $0.50 per share and is convertible into an aggregate of 4,000,000 shares of the Company’s common stock.

On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), each a Texas limited liability company. The aggregate purchase price of 5J was $27.3 million, consisting of a combination of cash, notes, Series B Convertible Preferred Stock and the assumption and refinance of debt.

Recent Accounting Pronouncements

The Financial Accounting Standards Board, or FASB, has issued Accounting Standards Update No. 2014-09, Revenue from contracts with Customers (Topic 606), or ASU 606. ASU 606 provides guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers in an amount that supersedes most current revenue recognition guidance. This guidance requires us to recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASU 606 at the beginning of our first quarter of fiscal 2018. The new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. We implemented the new standard using the modified retrospective approach effective January 1, 2018.  The adoption of this guidance did not have a material impact on our consolidated financial statements within any accounting period presented.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.

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.

Results of Operations

Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

Sales for the year ended December 31, 2019 increased to $6,474,268, or approximately 46.4%, from $4,422,346 for the year ended December 31, 2018. The increase in revenue during the year ended 2019 is primarily attributable to increased customer activity provided by increased capital budgets of our oil and gas customers as well as increasing domestic drilling rig count early in 2019 compared to 2018. Additionally, in June 2019, we acquired Trinity Services which is an operating company with ongoing revenues contributing to the second half of 2019 results not present in the 2018 period.

During the year ended December 31, 2019, cost of sales increased to $5,531,699, or approximately 85.4% of sales, an increase of $2,762,324, compared to $2,769,375, or 62.6% of sales, for the comparable 2018 period. The increase in cost of sales as a percentage of sales in 2019 was primarily attributable to increases in materials and supplies costs associated in part with Trinity Services’ well pad construction business acquired in June 2019, higher depreciation expense, increased equipment rental expense, higher direct labor costs from our Momentum frac water and Trinity operations , which were not present in the 2018 period. Repairs and maintenance costs also increased in 2019 compared to the 2018 period.

Selling, general and administrative expenses for the year ended December 31, 2019 increased to $3,210,475, or approximately 49.6% of revenues, an increase of $775,656 from $2,434,819 or 55% of revenues for the year ended December 31, 2018. This increase in selling, general and administrative expenses in 2019 over the prior year was due to increased lease operating expense, not present in the 2018 period, higher wages and $121,000 of bad debt expense. Several one-time expenses also occurred in 2019 in connection with the legal and professional fees associated with the Trinity Services acquisition in June 2019 and professional fees working on other potential acquisition targets, A reserve of $60,000 was accrued in 2019 in connection with a wage claim settlement not present in 2018 period that was settled in January 2020. Non cash stock option and stock award expense was $246,100.

Stock based compensation expense was $246,099 in 2019 compared to $81,657 for the same period in 2018. The increase was attributable to an increase in payment for services with our common stock.

The impairment expense in 2019 was $577,766 compared to $0 in 2018. The increase in 2019 was related to the impairment of goodwill to zero and partial impairment of Crown tools.

The bad debt expense in 2019 was $121,081, as compared to a bad debt expense of $22,907 in 2018 resulting from uncollectable accounts receivables from certain customers.

The acquisition costs in 2019 were $70,945 compared to $58,905 in 2018. The increase in 2019 resulted from the Company’s acquisition of Trinity Services in June 2019.

The loss on settlement of liabilities in 2019 of $82,843 resulted from the settlement of two notes payable during the year ended December 31, 2019, compared to a gain on settlement of accrued liability in 2018 of $9,151 resulted from the settlement of a liability from a vendor during the year ended December 31, 2018.

Interest expense, net, increased to $485,690 during the year ended December 31, 2019 from $310,030 during the year ended December 31, 2018.

The net loss for the year ended December 31, 2019 was $3,984,356 as compared to a net loss of $1,143,378 for the year ended December 31, 2018. Our increase in net loss in 2019 was primarily attributable to higher cost of sales and general and administrative expenses, transaction costs of the Trinity Services acquisition, increased public company expenses, higher professional fees, higher wages from an increase in employees, and higher interest expense. We plan to address our net loss and future operating results with a goal to achieve positive cash flow from operations by increasing sales organically or through acquisitions, covering more fixed costs within cost of sales, improving gross margins with better sales mix adding more higher margin service revenues, and reducing general and administrative costs including professional fees.

Liquidity and Capital Resources

As of December 31, 2019, our total assets were $6,431,384 comprised of $30,354 in cash, $1,172,697 in trade receivables, $71,185 in cost in excess of billings, $129,959 in inventory, $300,067 in prepaid expenses and $4,309,913 in net, property and equipment. This is an increase in total assets of $2,904,937 over December 31, 2018. Our working capital as of December 31, 2019 was a negative $4,062,760, compared to a negative working capital of $1,421,715 as of December 31, 2018.

During the year ended December 31, 2019, we had cash used in operating activities of $281,097 compared to $384,377 of cash used in operating activities for the year ended December 31, 2018. Our net cash used in operating activities for the year ended December 31, 2019 resulted primarily from our net loss, our reduction in accounts receivable of $565,833, impairment expense of $577,766, depreciation and amortization of $485,224, stock based compensation of $246,099 and $516,956 of amortization of deferred financing costs, which amounts were partially offset by changes in right of use operating lease liabilities of $162,527 and deferred revenue of $3,498.

During the year ended December 31, 2019, we used $548,399 of cash in investing activities of which $500,000 was used for the cash paid for the acquisition of Trinity Services and cash paid for the purchase of property and equipment of $48,399. By comparison, we used $402,564 of cash in investing activities of which $300,000 was used for the acquisition of Momentum Water Transfer and cash used for the purchase of property and equipment of $116,564, offset partially by cash received from the sale of assets of $14,000 in the year ended December 31, 2018.

We had net cash provided in financing activities of $858,242 in the year ended December 31, 2019 as compared to $702,979 of net cash provided by financing activities for year ended December 31, 2018. Our net cash provided by financing activities for the year ended December 31, 2019, resulted primarily from proceeds from notes payable of $1,180,000, proceeds from sale of common stock of $359,000, proceeds from a secured line of credit of $207,929 and proceeds from notes payable related party of $97,016. This net cash provided by financing activities was partially offset by payments on notes payable of $760,159, payments on notes payable related party of $188,036 and payments on MG Cleaners acquisition note related party of $21,000.

Our net cash and cash equivalents increased for the year ended December 31, 2019 by $28,746 as compared to a net decrease of $83,962 in the year ended December 31, 2018.

Our cash flows from operations are primarily funded through our accounts receivable line of credit facility, notes and loans, stock sales, issuing our stock for services and various leases. Currently, we believe we will need to continue to utilize lines of credit, borrowings and stock sales to sufficiently sustain our current level of operations for the next 12 months. At present, we believe the industry is or will enter a down-cycle given current commodity prices and the global COVID 19 pandemic that is prevalent in the markets we operate. We likely will require additional capital to maintain or expand operations. Additionally, we believe any material acquisition of another operating company would require additional outside capital consisting of debt or equity. Failure to secure additional funds could significantly hamper our ongoing operations particularly if a down cycle in our industry continues further. As the business cycle improves, and the pandemic dissipates in the markets we serve, we plan to improve our cash flows provided in operating activities by focusing on increasing sales by increasing utilization of the assets we have acquired and offering higher value services that receive higher gross margins. However, there can be no assurances given of industry improvement, pandemic relief or improved cash flows of our business.  

Historically, we have funded our capital expenditures internally through cash flow, leasing and financing arrangements. We intend to continue to fund future capital expenditures through cash flow, as well as through capital available to us pursuant to our line of credit, capital from the sale of our equity securities and through commercial leasing and financing programs.

On May 31, 2017, MG entered into a $1 million revolving accounts receivable financing facility with Crestmark Bank. The financing facility provides for MG to have access to the lesser of (i) $1 million or (ii) 85% of the net amount of eligible receivables (as defined in the financing agreement). The financing facility is paid for by the assignment of MG’s accounts receivable to Crestmark Bank and is secured by MG’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%.  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. Pursuant to the terms of the financing facility, Crestmark has been granted a security interest in all of our assets and the assets of MG and we have agreed to guaranty all amounts due under the facility upon an event of default, however, the guaranty does not restrict the Company’s ability to incur debt in connection with its operations. On August 13, 2018, MG entered into amendment #2 of the Crestmark Bank financing facility which increased the advance rate of which Crestmark would lend on Eligible accounts receivables to 90% from 85%. On January 9, 2019, we entered into amendment #3 of the Crestmark Bank financing facility whereby we increased the size of the line of credit to $1.5 million from $1 million and added our frac water subsidiary as an additional borrower with its accounts receivable. We are guarantors of the financing facility and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility.

Pursuant to the terms of the financing facility, MG is not allowed to incur additional indebtedness, to create liens or other encumbrances, or to sell or otherwise dispose of MG’s assets, without the prior written consent of Crestmark. The Crestmark facility does not restrict the Company’s ability to finance its operations through the sale of its equity securities. In June 2019, the Crestmark facility was replaced by a credit facility with a new lender.

On June 19, 2019, each of MG Cleaners LLC (“MG”), Trinity Services LLC (“Trinity”) and Jake Oilfield Solutions LLC (“Jake”), each of which is a wholly-owned subsidiary of the Company, entered into separate revolving accounts receivable financing facilities (collectively the “AR Facility”) with Catalyst Finance L.P. (“Catalyst”). The AR Facility was funded on June 27, 2019. The new AR Facility with Catalyst was used to pay off the Crestmark facility in full. The AR Facility provides for the Company, through MG, Trinity and Jake, to have access to up to 90% of the net amount of eligible receivables (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of MG, Trinity and Jake to Catalyst and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 2.25% in excess of the prime rate reported by the Wall Street Journal per annum, plus a financing fee equal to 0.20% of the receivable balance every 15 days, with a maximum cumulative rate of 1.6%.   There are no origination fees, monitoring or early termination fees. The AR Facility can be terminated by the Company with thirty days written notice. The Company is a guarantor of the financing facility and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility.

On June 27, 2019, an accounts receivable financing company funding a total of $1,317,304 pursuant to the AR facility. Of the amounts funded $500,000 was paid directly to the seller of Trinity, $43,219 was used to pay off notes payable of MG Cleaners, $714,239 was used to pay off the Crestmark liability and the remaining $59,846 was deposited to the Company’s bank account.

On October 15, 2010, the former managing member of MG Cleaners, Stephen Christian, purchased MG Cleaners from the previous membership interest owners (“Original MG Sellers”). In connection with that transaction, a $450,000 seller note was issued to the sellers. The note bears an interest rate of 8% and principal and interest payments are made monthly. The remaining principal balance of $307,391 was refinanced by the note holder in January 2015, bearing an interest rate of 6.00%, with principal and interest payments due monthly. The note is secured by the land and building originally occupied by MG, which property is no longer occupied. The balance of this note at December 31, 2018 was $180,552. On September 19, 2017, Stephen Christian and the Original MG Sellers amended the note, whereby the membership interests of MG Cleaners LLC were removed as security for the loan. Additionally, on September 19, 2017, the Company entered into a guaranty agreement with the Original MG Sellers with respect to the repayment of the note. This note does not restrict the Company’s ability to incur any additional indebtedness, or the sale of its equity securities, in connection with financing its operations. On October 11, 2019, the Original MG Sellers agreed to retire the note for a lump sum payment of $30,000 and the issuance of 400,000 shares of the Company’s restricted common stock.

On December 18, 2017 MG received $195,000 in return for an assignment and transfer to finance company of a specified percentage of the proceeds of each future sale made by MG, collectively “Future Receipts” until MG has received the purchased amount of $278,000. Pursuant to the terms of the finance agreement, MG cannot sell any portion of its future sales that have previously been sold to the finance company, however, it does not restrict the Company’s ability to incur any additional debt, or sell its equity securities, in connection with financing its operations. The final payment to the finance company was made in October 2018, at which point the finance agreement terminated by its terms.

On December 7, 2018, the Company issued three secured promissory notes each in the principal amount of $100,000, for aggregate proceeds of $300,000. The notes bear interest at a rate of 10% per annum and interest is paid on a monthly basis. The notes are due and payable on December 7, 2019.

From September 2018 through December 31, 2018, we sold an aggregate of 1,740,000 shares of restricted common stock to accredited investors in a private placement for aggregate cash proceeds of $348,000.

During the year ended December 31, 2019, we sold an aggregate of 1,436,000 shares of restricted common stock to accredited investors for aggregate cash proceeds of $359,000.

Critical Accounting Policies

The preparation for financial statements and related disclosures in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. For a description of our significant accounting policies, see Notes to Financial Statements – Note 2 Summary of Significant Accounting Policies. Of these policies, the following are considered critical to an understanding of the Company’s Financial Statements as they require the application of the most difficult, subjective and complex judgments: (1) Use of Estimates, (2) Share-Based Payment Arrangements and (3) Income Taxes. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers, which was adopted on January 1, 2018 using the modified retrospective method. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five step model:

-      Identification of the contract with a customer

-      Identification of the performance obligations in the contract

-      Determination of the transaction price

-      Allocation of the transaction price to the performance obligations in the contract

-      Recognition of revenue when, or as, the Company satisfies a performance obligation

Product sales are recognized all of the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. Net revenues comprise gross revenues less customer discounts and allowances, actual and expected returns. Shipping charges billed to customers are included in net sales. Various taxes on the sale of products and enrollment packages to customers are collected by the Company as an agent and remitted to the respective taxing authority. These taxes are presented on a net basis and recorded as a liability until remitted to the respective taxing authority.

Service revenues are recognized when (or as) the Company satisfies a performance obligation by transferring control of the performance obligation to a customer. Control of a performance obligation may transfer to the customer either over time or at a point in time depending on an evaluation of the specific facts and circumstances for each contract, including the terms and conditions of the contract as agreed with the customer, as well as the nature of the services to be provided. Control transfers over time when the customer is able to direct the use of and obtain substantially all of the benefits of our work as we perform. This typically occurs when services have no alternative use and the Company has a right to payment for performance completed to date, including a reasonable profit margin. The majority of our revenues are recognized at a point in time.

Contract Liabilities

The Company may at times receive payment at the time a customer places an order. Amounts received for undelivered product or services not yet provided are considered a contract liability and are recorded as deferred revenue. As of December 31, 2019 and 2018, the Company had deferred revenue of $36,379 and $39,877, respectively, related to unsatisfied performance obligations.

Disaggregation of revenue

The Company disaggregates revenue between services and products revenue. All revenues are currently in the southern region of the United States.

Concentrations

The Company sells direct to drilling rig operators, oilfield service companies, Oil and Gas operating companies, distributors and suppliers and performs ongoing credit evaluations of trade receivables due from customers. Generally, the Company does not require collateral for terms. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection using specific identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Generally, trade receivables are past due after 45-60 days after an invoice date, unless special payment terms are provided. Based on this analysis, the Company recorded an allowance for doubtful accounts of $254,483 and $25,000 at December 31, 2019 and 2018, respectively.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. During fiscal year 2019, three of our customers accounted for approximately 40% of our total gross revenues, with three customer accounting for 15%, another for 13% and another accounting for 12%. No other customers exceeded 10% of revenues during 2019. During fiscal year 2018, two of our customers accounted for approximately 50% of our total gross revenues, with one customer accounting for 31% and another accounting for 19%. No other customers exceeded 10% of revenues during 2018. Three customers accounted for approximately 48% of accounts receivable at December 31, 2019, and three customers accounted for 51% of accounts receivable at December 31, 2018. No other customers exceeded 10% of accounts receivable as of December 31, 2019 and 2018. The Company believes it will continue to reduce the customer concentration risks by engaging new customers and increasing activity of existing less active customers and smaller, newer customer relationships. While the Company continues to acquire new customers in an effort to grow and reduce its customer concentration risks, management believes these risks will continue for the foreseeable future.

No vendors accounted for more than 10% of accounts payable at December 31, 2019, and no vendors accounted for more than 10% of accounts payable at December 31, 2018. No other vendors exceeded 10% of accounts payable at December 31, 2019 and 2018.

The Company maintains demand deposits with commercial banks. At times, certain balances held within these accounts may not be fully guaranteed or insured by the U.S. federal government. The uninsured portion of cash are backed solely by the assets of the underlying institution. As such, the failure of an underlying institution could result in financial loss to the Company.

Inventories

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 market value, if lower, which resulted in no impairment recognized in 2019 and 2018.

Advertising

Advertising costs are expensed as incurred. Advertising expense was approximately $12,437 and $9,278 for the years ended December 31, 2019 and 2018, respectively, and is included in selling, general and administrative expenses in the accompanying statements of income. 

We are a smaller reporting company, and therefore, we are not required to provide information required by this item.

Our financial statements and notes thereto are set forth in this annual report on Form 10-K on pages F-1 through F-11.

None

Evaluation of Disclosure Controls and Procedures: Our management carried out an evaluation of the effectiveness and design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Chief Executive Officer and interim Chief Financial Officer has concluded that, at December 31, 2019, such disclosure controls and procedures were not effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management including our Chief Executive Officer and Interim Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls: Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Interim Chief Financial Officer has concluded, based on his evaluation as of the end of the period covered by this Report that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Control over Financial Reporting: There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and is a process designed by, or under the supervision of, our Chief Executive and Interim Chief Financial Officer and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - integrated Framework (2013).

Based on its evaluation, our management has concluded that, as of December 31, 2019, our internal control over financial reporting was not effective. The lack of separation of duties between the Chief Executive Officer and the Interim Chief Financial Officer, being the same person, along with the lack of personnel between processes provided two material weaknesses in the effectiveness of our controls.

We are a smaller reporting company and are exempt from the requirement for an attestation report on the Company’s internal controls over financial reporting by our registered public accounting firm.

None.

PART III

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.

Mr. Flemming has served as our Chief Executive Officer and Chairman of the Board of Directors since the completion of our acquisition of MG on September 19, 2017, and since March 19, 2018 has served as our interim Chief Financial Officer. Prior thereto, Mr. Flemming was the Chief Executive Officer of MG Cleaners since June 2017. Previous to that, Mr. Flemming was a consultant for a financial restructuring firm and a financial advisor to a private closely held oilfield services company during 2016 and early 2017. From June 2011 to March 2016, Mr. Flemming was the Chief Executive Officer, Treasurer, Secretary, and Chairman of the Board of HII Technologies Inc. HII Technologies was a Houston, Texas based oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia focused on commercializing technologies and providing services in frac water management, safety services and portable power used by exploration and production companies in the United States. During his tenure at HII, the Company acquired three frac water management companies and started up two other operating subsidiaries driving monthly revenues from nil in August 2012 building to $4.2 million per month by December 2014. In 2015, HII experienced significantly reduced customer activity and oil & gas pricing levels creating an industry down-turn pressuring its covenants with its debt with its senior lenders. In July 2015, HII’s senior lender declared HII in default of its senior credit facility and as a result the lender did not continue to release funds pursuant to the terms of the credit facility. As a result, HII was unable to continue to fund its operations or satisfy its reporting obligations with the SEC subsequent to its March 31, 2015 Form 10-Q filing. On September 18, 2015, HII Technologies filed voluntary petitions for reorganization under Chapter 11 of Title 111 of the U.S. Code in the United States Bankruptcy Court for the Southern District of Texas Victorian Division. On April 15, 2016, Mr. Flemming resigned as an officer and director of HII and the bankruptcy court entered an order confirming HII Technologies’ Plan of Reorganization. This plan became effective on May 20, 2016. On July 13, 2016, HII’s registration was revoked by the Securities and Exchange Commission (“SEC”) pursuant to Section 12(j) of the Securities Exchange Act of 1934. The revocation of HII’s registration was the result of proceedings instituted by the SEC, which HII accepted and consented to without admitting or denying the findings of the SEC. The SEC’s findings included that HII filed a Chapter 11 petition with the Bankruptcy court and that HII failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13.

Prior thereto, from 2009 to 2011, Mr. Flemming was Chief Financial Officer of Hemiwedge Industries Inc. a proprietary valve technology company with oilfield applications that was sold in 2011. From 2005 to 2009, Mr. Flemming was Chief Financial Officer of Shumate Industries, Inc., an oilfield manufacturing company and successor of Excalibur. Previous to that, from 2001 to 2005, Mr. Flemming was Chief Financial Officer of Excalibur Industries, Inc. an industrial and energy related manufacturer and fabrication company. From June 1999 to March 2001, he served as Chief Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held technology company. From January 1994 to May 1999, Mr. Flemming served as Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately held national specialty products company that he founded.  Mr. Flemming received a Bachelor of Arts in Finance from the University of Houston.  

Mr. Christian has served as Executive Vice President and Secretary of the Company since April 27, 2018. Mr. Christian has served as President of MG Cleaners, LLC, our wholly-owned subsidiary, since October 2010. Prior to MG, Mr. Christian was employed by the largest drilling rig operator in the United States, known as Nabors Drilling, a subsidiary of Nabors Industries (NYSE:NBR), from 2004 to 2010, in various positions rising to Rig Manager. Mr. Christian has significant operational experience and customer relationships in the drilling market segment and oilfield industry. Mr. Christian was educated at Oklahoma Christian University.

Mr. Paulson has served as a Director of the Company since the completion of our acquisition of MG. Mr. Paulson has been a director of TOR Minerals International Inc. (“TOR Minerals”) since 2008. TOR Minerals is a global producer of high performance, specialty mineral products focused on product innovation and technical support. Mr. Paulson has served as the President and Chief Executive Officer of Contech Control Services, an electrical and automation engineering/design services and construction firm since December 2014. Previously, Mr. Paulson served as President and Director of The Automation Group, or TAG, a national engineering firm focused in process automation, from 1996 until its sale to Emerson Electric in December 2007. Following the sale, he continued to serve as a consultant to Emerson and TAG until November 2012. Mr. Paulson received his Bachelors of Science in Electrical Engineering from Texas A&M University.    

Mr. Gilbert has served as a Director of the Company since the completion of our acquisition of MG. Mr. Gilbert is the co-founder and has been the Managing Partner of Sable Power and Gas LLC (“Sable”), an energy management services and advisory company since 2008. Prior to co-founding Sable, Mr. Gilbert was Senior Director of Gexa Energy, a retail electricity provider for residential and commercial customers from 2006 to 2008. From 2001 to 2006, Mr. Gilbert served several roles in energy trading and asset management at Citibank, Citigroup Energy and Reliant Energy. Mr. Gilbert’s experience includes energy management strategy, energy trading, risk management, data management, wholesale origination and structuring power and gas contracts for firm clients. Mr.Gilbert holds a Bachelor of Science degree from Texas A&M University.

Mr. Villarreal has served as a Director of the Company since July 2019. Mr. Villarreal is the Founder and President of Flite Banking Centers, LLC since its inception in 2009. Flite is a leading provider of specialty real estate for the deployment of off-premise ATMs for financial institutions. Flite is an authorized NCR Solutions provider for intelligent ATM equipment and software. Mr. Villarreal is responsible for the implementation and execution of Flite’s business strategies, strategic partnerships, capital fund raising and oversees Flite’s growth initiatives. Mr. Villarreal has negotiated long-term strategic real estate contracts with Walmart Inc, Albertsons Companies, Starbucks, Inc., Brixmor Properties Group, Weingarten Realty and many other commercial retail landowners. As president of Flite, Mr. Villarreal has established strategic relationships and long-term contracts with several U.S. and International Financial Institutions, including JPMorgan Chase, Wells Fargo, Bank of America, BBVA, M&T Bank, PNC Bank, Regions Bank, and USAA Federal Savings Bank. Prior to establishing Flite, from March 2008 to March 2009, Mr. Villarreal was the Co-founder and Managing Partner of V.V. Swartz and Co., where he was responsible for the origination and execution of strategic advisory services, including mergers and acquisitions and private capital placements for micro-cap and small-cap energy companies. From May 2006 to February 2008, Mr. Villarreal was a Senior Vice President with Morgan Keegan’s energy investment banking group, where his duties involved origination and execution of public market capital transactions, M&A advisory, private capital placements, and strategic advisory services. From June 2005 to June 2006, Mr. Villarreal was a Managing Director with DRG&L where he co-led the firm’s Energy Capital Markets Advisory practices. Mr. Villarreal has over 14 years’ experience as a senior equity research analyst covering oilfield service companies and independent producers. He has held senior level positions with Morgan Keegan, CIBC World Markets, Dillon Read & Company and Jefferies & Co. Mr. Villarreal received his B.B.A. in Finance from the University of Houston.

Director Independence and Qualifications

The Board of Directors has determined that each of Messrs. Paulson, Gilbert and Villarreal qualifies as an “independent director.” Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship with the Company that, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be independent if:

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:

On September 18, 2015, HII Technologies, Inc., and each of its wholly-owned subsidiaries, Apache Energy Services, LLC, Aqua Handling of Texas, LLC, Hamilton Investment Group, Inc. and Sage Power Solutions, Inc. (collectively, the “Debtors’) filed voluntary petitions for reorganization under Chapter 11 of Title 111 of the U.S. Code in the United States Bankruptcy Court for the Southern District of Texas Victoria Division. On April 15, 2016, the bankruptcy court entered an order confirming the Debtors’ Plan of Reorganization and the plan became effective on May 20, 2016. Mr. Flemming, who is currently an officer and member of our Board of Directors, was an officer and director of each of the Debtors during that period.

Family Relationships

There are no family relationships among the individuals comprising our Board of Directors, management and other key personnel.

Board Composition

Our certificate of incorporation, as amended, and bylaws provide that the authorized number of Directors may be changed only by resolution of the Board. We currently have four Directors with each Director serving a one-year term which will expire at our next annual meeting of stockholders. At each annual meeting of stockholders, the successors to the current Directors will be elected to serve until the next annual meeting following the election.

Director Independence

Our Board has reviewed the materiality of any relationship that each of our Directors has with us, either directly or indirectly. Based on this review, the Board has determined that Messrs. Gilbert, Paulson and Villarreal are “independent directors” under the NASDAQ independence standards.

Board Committees

Our Board currently has three standing committees: Audit Committee, Nominating and Governance Committee, and a Compensation Committee, each of which is described below. All standing committees operate under charters that have been approved by the Board. Copies of the charters of the Audit Committee, Compensation Committee and the Nominating and Governance Committee can be found on our Internet site www.SMGIndustries.com

Audit Committee.  Our Audit Committee is composed of Mr. Villarreal, Mr. Gilbert and Mr. Paulson. All members of our Audit Committee are independent as defined in the NASDAQ rules. In addition, the Board of Directors has determined that Mr. Villarreal satisfies the SEC’s criteria for an “audit committee financial expert. Our Audit Committee oversees our corporate accounting, financial reporting practices and the annual audit and quarterly reviews of the financial statements. For this purpose the Audit Committee has a charter (which is reviewed periodically) and performs several functions.

The Audit Committee’s primary functions are:

Compensation Committee.  Our Compensation Committee is composed of Mr. Gilbert, Mr. Villarreal and Mr. Paulson as Chairman of the committee. The Compensation Committee reviews its charter periodically. Our Compensation Committee’s primary functions are:

Decisions regarding executive compensation are ultimately determined by the Board upon recommendations of the Compensation Committee, which reviews a number of factors in its decisions, including market information about the compensation of executive officers at similar-sized companies within our industry and geographic region, and recommendations from our Chief Executive Officer. The Compensation Committee may consult external compensation consultants to assist with the recommendation of executive compensation. The Compensation Committee did not utilize the services of an external compensation consultant in 2019.

Non-executive director compensation is determined by the entire Board after review and approval by the Compensation Committee.

Nominating and Governance Committee.  Our Nominating and Governance Committee is composed of Mr. Villarreal, Mr. Paulson and Mr. Gilbert as Chairman of the committee. The Nominating and Governance Committee has a charter, which is reviewed periodically.

Our Nominating and Governance Committee’s primary functions are:

The Nominating and Governance Committee recommends to the Board candidates for nomination to the Board. When considering individuals to recommend for nomination as Directors, our Nominating and Governance Committee seeks persons who possess the following characteristics: integrity, education, commitment to the Board, business judgment, relevant business experience, diversity, reputation, and high-performance standards. While the Board values a diversity of viewpoints and backgrounds, it does not have a formal policy regarding the consideration of diversity in identifying director nominees. The Nominating and Governance Committee may engage the services of third-party search firms to assist in identifying and assessing the qualifications of Director candidates.

The Nominating and Governance Committee will consider recommendations for Director candidates from stockholders, provided that the stockholder submits the Director nominee and reasonable supporting material concerning the nominee by the due date for a stockholder proposal to be included in the Company’s Proxy Statement for the applicable annual meeting as set forth in Section 2.14 of the Company’s Bylaws and the rules of the SEC then in effect.

The Nominating and Governance Committee will consider properly and timely submitted Director candidates recommended by stockholders of the Company. Stockholders who wish to suggest qualified candidates for election to the Board should write to 710 N. Post Oak Road, Suite 315, Houston, Texas 77024 Attn: Matthew Flemming. These recommendations should include detailed biographical information concerning the nominee, his or her qualifications to be a member of the Board and a description of any relationship the nominee has to other stockholders of the Company. A written statement from the candidate consenting to be named as a candidate and, if nominated and elected, to serve as a Director should accompany any such recommendation.

Board Leadership Structure and Role in Risk Oversight

Our Board evaluates its leadership structure and role in risk oversight on an ongoing basis. Currently, Matthew Flemming serves as Chairman of the Board, President and Chief Executive Officer. Our Board determines what leadership structure it deems appropriate based on factors such as the experience of the applicable individuals, the current business environment of the Company and other relevant factors. After considering these factors, our Board has determined that the role of Chairman of the Board, Chief Executive Officer and President, is an appropriate Board leadership structure for our company at this time.

The Board is also responsible for oversight of our risk management practices, while management is responsible for the day-to-day risk management processes. This division of responsibilities is the most effective approach for addressing the risks facing the Company, and the Company’s Board leadership structure supports this approach. Through our President, and other members of management, the Board receives periodic reports regarding the risks facing the Company. In addition, the Audit Committee assists the Board in its oversight role by receiving periodic reports regarding our risk and control environment.

Corporate Code of Conduct and Ethics

We have adopted a corporate Code of Conduct and Ethics which is reviewed annually. The text of our Code of Conduct and Ethics, which applies to our officers and each member of our Board, is posted in the “Corporate Governance” section of our website, www.SMGIndustries.com. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendments to, or waiver from, a provision of our Code of Conduct and Ethics by posting such information on our website, www.SMGIndustries.com. A copy of our Code of Conduct and Ethics is also available in print; free of charge, upon written request to 710 N. Post Oak Road, Suite 315, Houston, Texas 77024, Attn: Matthew Flemming.

Executive Compensation

On October 1, 2017, we entered into an employment agreement with Mr. Flemming, our Chief Executive Officer and interim Chief Financial Officer. Pursuant to the terms of the agreement, Mr. Flemming is paid an annual salary of $180,000 and receives health care insurance and other customary benefits. The initial term of the agreement is for a period of three years. In addition to Mr. Flemming’s base salary, Mr. Flemming is entitled to bonuses at the discretion of the Compensation Committee of the Board of Directors.

On September 20, 2017, MG Cleaners, our wholly-owned subsidiary, entered into an employment agreement with Stephen Christian, our Executive Vice President and Secretary and the President of MG Cleaners. Pursuant to the terms of the agreement, Mr. Christian is currently paid an annual salary of $170,000 and receives health care insurance and other customary benefits. The initial term of the agreement is for a period of three years. In addition to Mr. Christian’s base salary, Mr. Christian is entitled to bonuses at the discretion of our Compensation Committee of the Board of Directors.

Certain Relationships and Related Transactions and Director Independence

The following is a description of the transactions we have engaged in since January 1, 2019, with our Directors and Officers and beneficial owners of more than five percent of our voting securities and their affiliates:

On January 11, 2019, the Company borrowed $100,000 from Aeneas, LC, of which Mr. George Gilman is the sole Trustee, pursuant to a 10% Secured Promissory Note.

On April 8, 2019, the $100,000 Secured Promissory Note from Aeneas, LC was converted into 511,370 shares of our common stock which included $2,274 of accrued interest in the conversion amount.

On May 1, 2019, the Company borrowed $100,000 from Mary Payne Family Trust, Mr. George Gilman Trustee, pursuant to a 12% interest rate Promissory Note that matured July 1, 2019. In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a $0.30 exercise price and a five year term.

On June 17, 2019, the Company entered into a First Amendment to Mary Payne Family Trust 12% Promissory Note extending the maturity to September 30, 2019 and issued a warrant for the purchase of up to 150,000 shares, having a ten year term and a $0.30 fixed exercise price.

On June 17, 2019 the Company borrowed $80,000 from George Gilman pursuant to a Promissory Note with a 12% interest rate that matures on September 30, 2019. In connection with this note, we issued a warrant for the purchase of up to 120,000 shares, having a ten year term and a fixed exercise price of $0.30 per share.

On October 1, 2019, the Company entered into a First Amendment for the George Gilman $80,000 Promissory Note extending the maturity to March 30, 2020. In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a ten year term and a fixed exercise price of $0.15 per share.

On October 1, 2019, the Company entered into a Second Amendment to the $100,000 Promissory Note for Mary Payne Family Trust, George Gilman, Trustee that extended the maturity to March 30, 2020. In connection with this note, we issued a warrant for the purchase of up to 120,000 shares, having a ten year term and a fixed exercise price of $0.15 per share.

On December 12, 2019, the Company borrowed $50,000 from Mary Payne Trust, George Gilman Trustee, pursuant to a 12% Promissory Note that has a term payment schedule. In connection with this note, the Company issued a warrant for the purchase of up to 75,000 shares, with a $0.15 fixed exercise price and a ten year term.

On October 1, 2019, the Company entered into a Second Amendment with the Leo B. Womack Family Trust, Leo Womack Trustee, pursuant to a 10% interest rate Promissory Note to capitalize all accrued interest of $5,590 to be included as a new principle balance of $45,590 with a new maturity date of June 30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 40,000 shares, having an exercise price of $0.15 and a 10 year term.

On March 6, 2020, the Company entered into a First Amendment with Leo Womack, pursuant to a 10% Promissory Note in the principal amount of $100,000 to extend the maturity date to June 30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 166,667 shares, having an exercise price of $0.20 and a 10 year term.

On February 27, 2020, Apex Steven. Madden invested $500,000 into the Company’s convertible note “Stretch Note” offering that closed in connection with the February 27, 2020 acquisition of 5J Trucking LLC and 5J Oilfield Services LLC (together “5J”). His investment was funded with $250,000 in cash and the conversion of a previous note held by Mr. Madden originally issued September 2018 of $250,000. The new convertible Stretch Note pays 10% interest quarterly and principal and any interest is due at maturity in February 2023. The Stretch Note is convertible into our common stock at a fixed exercise price of $0.25 per share anytime while the note is outstanding at the description of the note holder.

James Frye, who currently serves as President of our 5J subsidiary, and owns our $6 million Series B Convertible Preferred Stock, also owns or has control over 5J Properties LLC, an entity that is the lessor to three leases with the 5J Entities. These three leases located in Palestine, West Odessa and Floresville Texas all have similar five year terms with options for renewal. The current monthly rent for these leases totals approximately $14,250.

The Board of Directors has adopted a Related Party Transaction Policy for the review of related person transactions. Under these policies and procedures, the audit committee reviews related person transactions in which we are or will be a participant to determine if they are fair and beneficial to the Company. Financial transactions, arrangements, relationships or any series of similar transactions, arrangements or relationships in which a related person has or will have a material interest and that exceeds the lesser of: (i) $120,000, and (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, in the aggregate per year are subject to the audit committee’s review. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberation or vote requesting approval or ratification of the transaction. Transactions that are subject to the policy include any transaction, arrangement or relationship (including indebtedness or guarantees of indebtedness) in which the Company is a participant with a related person. The related person may have a direct or indirect material interest in the transaction. It is Company policy that the audit committee shall approve any related party transaction before the commencement of the transaction. However, if the transaction is not identified before commencement, it must still be presented to the audit committee for their review and ratification. For more information regarding related party transactions, see the section entitled “Certain Relationships and Related Transactions” below.

Director Independence

Our Board of Directors has determined that Messrs. Paulson, Gilbert and Villarreal are “independent” as defined under the standards set forth in Rule 5605 of the NASDAQ Stock Market Rules.  In making this determination, the Board of Directors considered all transactions set forth under “Certain Relationships and Related Transactions.” 

Legal Proceedings

To the best of our knowledge, none of our Directors or Executive Officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our Directors, Director nominees, or Executive Officers has been involved in any transactions with us or any of our Directors, Executive Officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.

Summary Compensation Table

The following table shows the total compensation earned during the fiscal years ended December 31, 2019 and 2018 to (1) our Chief Executive Officer, and (2) our other named executive officers during the fiscal years ended December 31, 2019 and 2018 (collectively, the “named executive officers”):

All compensation awarded to directors and executive officers are deliberated among, and approved by, the Compensation Committee and the Board.

Director Compensation

Director Compensation Table

During the year ended December 31, 2019, each of our non-executive independent directors received 100,000 options to purchase shares of our common stock for their Board service. 

Cash Compensation of Directors

Members of our Board of Directors do not currently receive cash compensation for their services, however, the Board may in the future determine to compensate it members through the payment of cash compensation. We reimburse our non-employee directors for out-of-pocket expenses for attending such meeting.

Equity Compensation of Directors

Our directors are eligible to participate in our 2018 Stock Option Plan.

Outstanding Equity Awards at 2019 Year End

There are no outstanding unexercised options, unvested stock and equity incentive plan awards held by any of our executive officers as of December 31, 2019.

The following table sets forth, as of May 20, 2020, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for: (i) each person known by us to own beneficially five percent (5%) or more of our outstanding common stock, (ii) each of our officers and directors, and (iii) all of our officers and directors as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares beneficially owned by them. As of May 29, 2020, there were 17,380,108 shares of our common stock issued and outstanding. Except as otherwise listed below, the address of each person is 710 N. Post Oak Road, Suite 315, Houston Texas 77024.

  *less than one percent

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our directors, executive officers and persons who beneficially own more than ten percent of our common stock file with the SEC initial reports of their ownership of our common stock and reports of changes in such ownership.

Based solely upon a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation of our own, in 2019, all of these filing requirements were satisfied.

Equity Compensation Plan Information

The following table provides information with respect to our compensation plans under which equity compensation is authorized as of December 31, 2019.

*In February 2020, the Company’s board of directors adopted a board resolution increasing the number of shares available for issuance under the 2018 Stock Option Plan from 2,000,000 to 4,000,000. 

2008 Long-Term Incentive Compensation Plan

In 2008, our Board adopted, and our stockholders approved the 2008 Long-Term Incentive Compensation Plan (“the Plan”). Under this plan, we may grant incentive stock options, non-qualified stock options restricted and unrestricted stock awards and other stock-based awards. The purpose of the Plan is to provide an incentive to attract directors, officers, consultants, advisors and employees whose services are considered valuable to encourage a sense of proprietorship and to stimulate an active interest of such person in our development and financial achievements. As amended in July 2010, a maximum of 1,000,000 shares of our common stock are authorized under the Plan. The Plan expired on January 31, 2018. Our Board has authorized our Compensation Committee to administer the Plan. In connection with the administration of the Plan, the Compensation Committee, with respect to awards to be made to any person who is not one of our directors, will:

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:

Any grant of awards to any directors under the Plan must be approved by our Board. In addition, the Compensation Committee will:

Our Board may amend the Plan at any time. However, without stockholder approval, the Plan may not be amended in a manner that would:

Awards previously granted under the Plan may not be impaired or affected by any amendment of the Plan, without the consent of the affected grantees.

Transferability

With the exception of Non-Qualified Stock Options, awards are not transferable other than by will or by the laws of descent and distribution. Non-Qualified Stock Options are transferable on a limited basis. Restricted stock awards are not transferable during the restriction period.

Change of Control Event

The Plan provides that in the event of a change of control the Board shall have the discretion to determine whether, and to what extent to, accelerate the vesting, exercise or payment of an Award.

Termination of Employment/Relationship

Awards granted under the Plan that have not vested will generally terminate immediately upon the grantee’s termination of employment or business relationship with us or any of our subsidiaries for any reason other than retirement with our consent, disability or death. The Board or a committee of the Board may determine at the time of the grant that an award agreement should contain provisions permitting the grantee to exercise the stock options for any stated period after such termination, or for any period the Board or a committee of the Board determines to be advisable after the grantee’s employment or business relationship with us terminates by reason of retirement, disability, death or termination without cause. Incentive Stock Options will, however, terminate no more than three months after termination of the optionee’s employment, twelve months after termination of the optionee’s employment due to disability and three years after termination of the optionee’s employment due to death. The Board or a committee of the Board may permit a deceased optionee’s stock options to be exercised by the optionee’s executor or heirs during a period acceptable to the Board or a committee of the Board following the date of the optionee’s death but such exercise must occur prior to the expiration date of the stock option.

Dilution; Substitution

As described above, the Plan will provide protection against substantial dilution or enlargement of the rights granted to holders of awards in the event of stock splits, recapitalizations, asset acquisitions, consolidations, reorganizations or similar transactions. New award rights may, but need not, be substituted for the awards granted under our the Plan, or our obligations with respect to awards outstanding under the Plan may, but need not, be assumed by another corporation in connection with any asset acquisition, consolidation, acquisition, separation, reorganization, sale or distribution of assets, liquidation or like occurrence in which we are involved. In the event that the Plan is assumed, the stock issuable with respect to awards previously granted under the Plan shall thereafter include the stock of the corporation granting such new option rights or assuming our obligations under the Plan.

2018 Stock Option Plan

In January 2018, our board of directors and a majority of our stockholders approved and adopted the 2018 Stock Option Plan (“2018 Plan”). Under this plan, we may grant incentive stock options and non-qualified stock options. In February 2020, our board of directors approved an amendment to the 2018 Plan to increase the number of shares of common stock that may be issued under the 2018 Plan from 2,000,000 shares to 4,000,000 shares.  

The Purpose of the Plan.  The purpose of the 2018 Plan is to provide additional incentive to the directors, officers, employees and consultants of the Company who are primarily responsible for the management and growth of the Company. Each option shall be designated at the time of grant as either an incentive stock option (an “ISO”) or as a non-qualified stock option (a “NQSO”).

The Board of Directors believes that the ability to grant stock options to employees which qualify for ISO treatment provides an additional material incentive to certain key employees. The Internal Revenue Code requires that ISOs be granted pursuant to an option plan that receives stockholder approval within one year of its adoption. The Company adopted the Plan in order to comply with this statutory requirement and preserve its ability to grant ISOs.

The benefits to be derived from the 2018 Plan, if any, are not quantifiable or determinable.

Administration of the Plan. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the “Administrator”).  The Board of Directors shall appoint and remove members of the Compensation Committee in its discretion in accordance with applicable laws.  In compliance with Rule 16b-3 under the Exchange Act and Section 162(m) of the Internal Revenue Code (the “Code”), the Compensation Committee shall, in the Board of Director's discretion, be comprised solely of “non-employee directors” within the meaning of said Rule 16b-3 and “outside directors” within the meaning of Section 162(m) of the Code.  Notwithstanding the foregoing, the Administrator may delegate non-discretionary administrative duties to such employees of the Company as it deems proper and the Board of Directors, in its absolute discretion, may at any time and from time to time exercise any and all rights and duties of the Administrator under the Plan.

Subject to the other provisions of the Plan, the Administrator shall have the authority, in its discretion: (i) to grant options; (ii) to determine the fair market value of the Common Stock subject to options; (iii) to determine the exercise price of options granted; (iv) to determine the persons to whom, and the time or times at which, options shall be granted, and the number of shares subject to each option; (v) to interpret the Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each option granted (which need not be identical), including but not limited to, the time or times at which options shall be exercisable; (viii) with the consent of the optionee, to modify or amend any option; (ix) to defer (with the consent of the optionee) the exercise date of any option; (x) to authorize any person to execute on behalf of the Company any instrument evidencing the grant of an option; and (xi) to make all other determinations deemed necessary or advisable for the administration of the Plan.  The Administrator may delegate non-discretionary administrative duties to such employees of the Company as it deems proper.

Shares of Stock Subject to the Plan. Subject to the conditions outlined below, the total number of shares of stock which may be issued under options granted pursuant to the Plan shall not exceed 4,000,000 shares of Common Stock, $.001 par value per share.

The number of shares of Common Stock subject to options granted pursuant to the Plan may be adjusted under certain conditions.  If the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification, appropriate adjustments shall be made by the Board of Directors in (i) the number and class of shares of stock subject to the Plan, and (ii) the exercise price of each outstanding option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustments.  Each such adjustment shall be subject to approval by the Board of Directors in its sole discretion.

In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each optionee at least thirty days prior to such proposed action.  To the extent not previously exercised, all options will terminate immediately prior to the consummation of such proposed action; provided, however, that the Administrator, in the exercise of its sole discretion, may permit exercise of any options prior to their termination, even if such options were not otherwise exercisable.  In the event of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive, or in the event of a sale of all or substantially all of the assets of the Company in which the Stockholders of the Company receive securities of the acquiring entity or an affiliate thereof, all options shall be assumed or equivalent options shall be substituted by the successor corporation (or other entity) or a parent or subsidiary of such successor corporation (or other entity); provided, however, that if such successor does not agree to assume the options or to substitute equivalent options therefor, the Administrator, in the exercise of its sole discretion, may permit the exercise of any of the options prior to consummation of such event, even if such options were not otherwise exercisable.

Participation. Every person who at the date of grant of an option is an employee of the Company or of any Affiliate (as defined below) of the Company is eligible to receive NQSOs or ISOs under the Plan.  Every person who at the date of grant is a consultant to, or non-employee director of, the Company or any Affiliate (as defined below) of the Company is eligible to receive NQSOs under the Plan.  The term “Affiliate” as used in the Plan means a parent or subsidiary corporation as defined in the applicable provisions (currently Sections 424(e) and (f), respectively) of the Code.  The term “employee” includes an officer or director who is an employee of the Company.  The term “consultant” includes persons employed by, or otherwise affiliated with, a consultant.

Option Price. The exercise price of a NQSO shall be not less than 85% of the fair market value of the stock subject to the option on the date of grant.  To the extent required by applicable laws, rules and regulations, the exercise price of a NQSO granted to any person who owns, directly or by attribution under the Code (currently Section 424(d)), stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Affiliate (a “10% Stockholder”) shall in no event be less than 110% of the fair market value of the stock covered by the option at the time the option is granted.  The exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the fair market value of the stock covered by the option at the time the option is granted.  The exercise price of an ISO granted to any 10% Stockholder shall in no event be less than 110% of the fair market value of the stock covered by the Option at the time the Option is granted.

Term of the Options.  The Administrator, in its sole discretion, shall fix the term of each option, provided that the maximum term of an option shall be ten years. ISOs granted to a 10% Stockholder shall expire not more than five years after the date of grant. The Plan provides for the earlier expiration of options in the event of certain terminations of employment of the holder.

 Restrictions on Grant and Exercise. Except with the express written approval of the Administrator, which approval the Administrator is authorized to give only with respect to NQSOs, no option granted under the Plan shall be assignable or otherwise transferable by the optionee except by will or by operation of law.  During the life of the optionee, an option shall be exercisable only by the optionee.

Termination of the Plan. The Plan shall become effective upon adoption by the Board of Directors; provided, however, that no option shall be exercisable unless and until written consent of the Stockholders of the Company, or approval of Stockholders of the Company voting at a validly called Stockholders’ meeting, is obtained within twelve months after adoption by the Board of Directors.  If such Stockholder approval is not obtained within such time, options granted pursuant to the Plan shall be of the same force and effect as if such approval was obtained except that all ISOs granted pursuant to the Plan shall be treated as NQSOs. Options may be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities laws.  The Plan shall terminate within ten years from the date of its adoption by the Board of Directors.

Termination of Employment.  If for any reason other than death or permanent and total disability, an optionee ceases to be employed by the Company or any of its Affiliates (such event being called a “Termination”), options held at the date of Termination (to the extent then exercisable) may be exercised in whole or in part at any time within three months of the date of such Termination, or such other period of not less than thirty days after the date of such Termination as is specified in the Option Agreement or by amendment thereof (but in no event after the expiration date of the option (the “Expiration Date”)); provided, however, that if such exercise of the option would result in liability for the optionee under Section 16(b) of the Exchange Act, then such three-month period automatically shall be extended until the tenth day following the last date upon which optionee has any liability under Section 16(b) (but in no event after the Expiration Date).  If an optionee dies or becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code) while employed by the Company or an Affiliate or within the period that the option remains exercisable after Termination, options then held (to the extent then exercisable) may be exercised, in whole or in part, by the optionee, by the optionee's personal representative or by the person to whom the option is transferred by devise or the laws of descent and distribution, at any time within twelve months after the death or twelve months after the permanent and total disability of the optionee or any longer period specified in the Option Agreement or by amendment thereof (but in no event after the Expiration Date). “Employment” includes service as a Director or as a Consultant.  For purposes of the Plan, an optionee's employment shall not be deemed to terminate by reason of sick leave, military leave or other leave of absence approved by the Administrator, if the period of any such leave does not exceed 90 days or, if longer, if the optionee's right to reemployment by the Company or any Affiliate is guaranteed either contractually or by statute.

Amendments to the Plan. The Board of Directors may at any time amend, alter, suspend or discontinue the Plan. Without the consent of an optionee, no amendment, alteration, suspension or discontinuance may adversely affect outstanding options except to conform the Plan and ISOs granted under the Plan to the requirements of federal or other tax laws relating to ISOs.  No amendment, alteration, suspension or discontinuance shall require stockholder approval unless (i) stockholder approval is required to preserve incentive stock option treatment for federal income tax purposes or (ii) the Board of Directors otherwise concludes that stockholder approval is advisable.

Tax Treatment of the Options.  Under the Code, neither the grant nor the exercise of an ISO is a taxable event to the optionee (except to the extent an optionee may be subject to alternative minimum tax); rather, the optionee is subject to tax only upon the sale of the Common Stock acquired upon exercise of the ISO.  Upon such a sale, the entire difference between the amount realized upon the sale and the exercise price of the option will be taxable to the optionee.  Subject to certain holding period requirements, such difference will be taxed as a capital gain rather than as ordinary income. Optionees who receive NQSOs will be subject to taxation upon exercise of such options on the spread between the fair market value of the Common Stock on the date of exercise and the exercise price of such options.  This spread is treated as ordinary income to the optionee, and the Company is permitted to deduct as an employee expense a corresponding amount.  NQSOs do not give rise to a tax preference item subject to the alternative minimum tax.

New Plan Benefits

Future grants and awards under the 2018 Plan, which may be made to Company executive officers, directors, consultants and other employees, are not presently determinable.

Information Regarding Options Granted

No grants and awards under the 2018 Plan have been made to Company executive officers, directors, consultants and other employees.  Such grants and awards will be made at the discretion of the Compensation Committee or the Board of Directors in accordance with the compensation policies of the Compensation Committee.

The following is a description of the transactions we have engaged in since January 1, 2019, with our directors and officers and beneficial owners of more than five percent of our voting securities and their affiliates:

On January 11, 2019, the Company borrowed $100,000 from Aeneas, LC, of which Mr. George Gilman is the Trustee, pursuant to a 10% Secured Promissory Note.

On April 8, 2019, the $100,000 Secured Promissory Note from Aeneas, LC was converted into 511,370 shares of our common stock which included $2,274 of accrued interest in the conversion amount.

On May 1, 2019, the Company borrowed $100,000 from Mary Payne Family Trust, Mr. George Gilman Trustee, pursuant to a 12% interest rate Promissory Note that matured July 1, 2019. In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a $0.30 exercise price and a five year term.

On June 17, 2019, the Company entered into a First Amendment to Mary Payne Family Trust 12% Promissory Note extending the maturity to September 30, 2019 and issued a warrant for the purchase of up to 150,000 shares, having a ten year term and a $0.30 fixed exercise price.

On June 17, 2019 the Company borrowed $80,000 from George Gilman pursuant to a Promissory Note with a 12% interest rate that matures on September 30, 2019. In connection with this note, we issued a warrant for the purchase of up to 120,000 shares, having a ten year term and a fixed exercise price of $0.30 per share.

On October 1, 2019, the Company entered into a First Amendment for the George Gilman $80,000 Promissory Note extending the maturity to March 30, 2020. In connection with this note, we issued a warrant for the purchase of up to 100,000 shares, having a ten year term and a fixed exercise price of $0.15 per share.

On October 1, 2019, the Company entered into a Second Amendment to the $100,000 Promissory Note for Mary Payne Family Trust, George Gilman Trustee that extended the maturity to March 30, 2020. In connection with this note, we issued a warrant for the purchase of up to 120,000 shares, having a ten year term and a fixed exercise price of $0.15 per share.

On December 12, 2019, the Company borrowed $50,000 from Mary Payne Trust, George Gilman Trustee, pursuant to a 12% Promissory Note that has a term payment schedule. In connection with this note, the Company issued a warrant for the purchase of up to 75,000 shares, with a $0.15 fixed exercise price and a ten year term.

On October 1, 2019, the Company entered into a Second Amendment with the Leo B. Womack Family Trust, Leo Womack Trustee, pursuant to a 10% interest rate Promissory Note to capitalize all accrued interest of $5,590 to be included as a new principle balance of $45,590 with a new maturity date of June 30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 40,000 shares, having an exercise price of $0.15 and a 10 year term.

On March 6, 2020, the Company entered into a First Amendment with Leo Womack, pursuant to a 10% Promissory Note in the principal amount of $100,000 to extend the maturity date to June 30, 2020. In connection with this amendment, we issued a warrant for the purchase of up to 166,667 shares, having an exercise price of $0.20 and a 10 year term.

Subsequent to our 2019 Annual Report on Form 10-K, Steven. Madden invested $500,000 into the Company’s convertible note “Stretch Note” offering that closed in connection with the February 27, 2020 acquisition of 5J Trucking LLC and 5J Oilfield Services LLC (together “5J”). His investment was funded with $250,000 in cash and the conversion of a previous note held by Mr. Madden originally issued September 2018 of $250,000. The new convertible Stretch Note pays 10% interest quarterly and principal and any interest is due at maturity in February 2023. The Stretch Note is convertible into our common stock at a fixed exercise price of $0.25 per share anytime while the note is outstanding at the description of the note holder.

James Frye, who currently serves as President of our 5J subsidiary, and owns our $6 million Series B Convertible Preferred Stock, also owns or has control over 5J Properties LLC, an entity that is the lessor to three leases used by the 5J Entities. These three leases located in Palestine, West Odessa and Floresville Texas all have similar five year terms with options for renewal. The current monthly rent for these leases totals approximately $14,250.   

In September 2017, the Audit Committee of the Board approved the appointment of the firm of MaloneBailey LLP (“Malone”) to serve as our independent registered public accountant. The Audit Committee may consider whether it is appropriate, either for this fiscal year or in the future, to consider the selection of other independent registered public accounting firms.

Audit Fees. The following table summarizes fees payable for services provided to us by our independent registered public accounting firm, which were pre-approved by the Audit Committee:

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.

PART IV

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Shareholders and Board of Directors of

SMG Industries, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of SMG Industries, Inc. as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Matter

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company's auditor since 2017.

Houston, Texas

May 29, 2020 

SMG INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2019 and 2018

The accompanying notes are an integral part of these consolidated financial statements

SMG INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

For the years ended December 31, 2019 and 2018

The accompanying notes are an integral part of these consolidated financial statements

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2019 and 2018