Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - SMG Industries Inc.tm211747d1_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - SMG Industries Inc.tm211747d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - SMG Industries Inc.tm211747d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SMG Industries Inc.tm211747d1_ex31-1.htm
EX-3.7 - EXHIBIT 3.7 - SMG Industries Inc.tm211747d1_ex3-7.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

(Mark one)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2020

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________

 

Commission File Number 000-54391

 

 

 

SMG INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

 

Delaware   51-0662991
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
710 N. Post Oak Road, Suite 315    
Houston, Texas 77024   (713) 821-3153
(Address of principal executive offices, including zip code)   (Registrant’s telephone number, including are code)

 

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

 

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

 

Common Stock, par value $.001 per share
(Title of Class)

 

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):

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x   Smaller reporting company x

 

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, 2020 was $839,761.

 

The number of shares of the registrant’s common stock outstanding as of April 19, 2021 was 19,671,258.

 

Documents Incorporated by Reference

 

None

 

 

 

 

 

SMG Industries Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2020

 

TABLE OF CONTENTS

 

  Page
Cautionary Note on Forward-Looking Statements  1
      
PART I     
      
ITEM 1. Business  2
ITEM 1A. Risk Factors  7
ITEM 1B. Unresolved Staff Comments  21
ITEM 2. Properties  21
ITEM 3. Legal Proceedings  21
ITEM 4. Mine Safety Disclosure  21
      
PART II     
      
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  22
ITEM 6. Selected Financial Data  22
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  23
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk  28
ITEM 8. Financial Statements  28
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure  28
ITEM 9A. Controls and Procedures  28
ITEM 9B. Other Information  29
      
PART III     
      
ITEM 10. Directors, Executive Officers and Corporate Governance  30
ITEM 11. Executive Compensation  36
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  38
ITEM 13. Certain Relationships and Related Transactions and Director Independence  43
ITEM 14. Principal Accounting Fees and Services  44
      
PART IV     
      
ITEM 15. Exhibits and Financial Statement Schedules  46

 

 

 

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.”

 

1

 

 

PART I

 

Item 1. Business

 

We are a growth-oriented Transportation Services company focused on the domestic logistics market.  Our primary business objective is to grow our operations and create value for our stockholders through organic growth and strategic acquisitions. We have implemented a Buy & Build growth strategy of acquiring middle market transportation companies and generating organic growth post-acquisition when possible by removing business constraints and strategic cross-selling of services benefiting us with higher equipment utilization and market share. We believe our business focus and equipment fleet position us to be significant participant in the domestic United States infrastructure market.

 

Our wholly-owned operating subsidiaries are:

 

  · 5J Trucking LLC
  · 5J Oilfield Services LLC
  · 5J Specialized LLC
  · 5J Transportation LLC
  · 5J Brokerage LLC

 

Our operating subsidiaries provide a range of Transportation Services such as:

 

·Transporting infrastructure components including bridge beams and power generation transformers
·Transporting wind energy components
·Heavy haul of production equipment, heat exchangers, coolers, construction equipment, refinery components
·Super heavy haul over-dimensional permit-required loads up to 500 thousand pounds for engineered projects
·Transportation of midstream compressors
·Flatbed freight
  · Crane services used to set equipment on compressor stations, pipeline infrastructure and load drilling rig components
  · Drilling rig relocation for drilling contractors and oil and gas operators
  · Freight brokerage

 

In connection with our focus to expand our Transportation Services business and exit certain up-stream oil and gas (O&G) industrial-related businesses, the financial results of the following business have been classified as as discontinued operations on our consolidated financial statements for the following businesses:

 

  · MG Cleaners LLC. The Company sold this business in December 2020
  · Trinity Services LLC

 

We are headquartered in Houston, Texas with facilities in Tomball, Odessa, Floresville, Henderson, Victoria and Palestine, Texas. Our web site is www.SMGIndustries.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 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.

 

Buy and build Approach

 

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.

 

2

 

 

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. In December 2020, management decided to cease the operations of this business, and began the process of auctioning the acquired fixed assets. The financial statement impact of the Trinity business is presented as discontinued operations in this Annual Report.

 

On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), combined referred to as “5J”. The aggregate purchase price of 5J was $12.7 million, consisting of a combination of cash, notes and Series B Convertible Preferred Stock. In 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. In December 2020, we agreed with the holder of the Series B Convertible Preferred Stock to the return and cancellation of all 6,000 shares of Series B Convertible Preferred Stock to the Company, as a result thereof, there are currently no shares of Series B Convertible Preferred Stock outstanding.

 

Domestic Industry Overview by Business

 

Transportation Services Business

 

Heavy Haul

 

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 infrastructure elements (such as bridge beams and industrial equipment).

 

Super Heavy Haul

 

A super heavy haul is a permit-required over-dimensional load that typically exceeds 254 thousand pounds gross vehicle weight and requires specialized equipment. Examples of this type of load include refinery components, boilers, slug catchers, vessels, large natural gas compressors, large wind components for renewable energy, and transformers for the power industry.

 

Drilling Rig Mobilization

 

Moving a drilling rig involves mobilization of the rig’s substructure, derrick, power generation and mud and pumping equipment, and drill pipe. Typically, jobs are quoted in ten-mile increments with most mobilizations within a hundred mile radius. These moves can include cold stack rigs coming out of storage into the field.

 

3

 

 

Commodity Freight

 

Legal loads not requiring permits that include mining and drilling equipment, lumber, pipe, heavy equipment, heavy machinery, coil tubing, steel, solar panels, and generators.

 

Freight Brokerage

 

Brokerage services are utilized when an existing, or new customer has logistics needs that exceed our current scope of services or equipment and we arrange for a carrier on their behalf. This service line was recently integrated in-house in lieu of outsourcing brokerage services to a third party to raise the value to our customers.

 

Sold and Discontinued Businesses

 

MG Cleaners LLC

 

Our former subsidiary, MG Cleaners, which we acquired in September 2017 preformed drilling rig cleaning products and services. MG sold a line of surfactants, decreases and soaps, provided cleaning equipment including industrial pressure washers as a dealer and offered mechanic repairs and rig wash services to customers

 

On December 22, 2020, the Company, as the sole member of MG Cleaners LLC (“MG”), entered into a share exchange agreement with S&A Christian Investments L.L.C. (“S&A”) pursuant to which the Company transferred all of the membership interests of MG (“MG Interests”) to S&A in exchange for Stephen Christian, the control person of S&A, returning 1,408,276 shares of the Company’s common stock, par value $.001 per share to the Company for cancellation, additional consideration received by the Company in connection with the transaction included the removal of the Company as a guarantor of certain MG debt. The financial results of MG Cleaners have been reclassified as discontinued operations in all periods presented within this filing.

 

Trinity Services LLC

 

Operating in East Texas and Northern Louisiana for more than ten years, Trinity built drilling pad locations, reserve and water pits and lease roads for O&G operators. Trinity owns in excess of 20 motor graders, tractors, excavators, bulldozers and backhoes. Trinity’s well site services group operated a work-over rig that performed services and repairs to existing producing gas and oil wells in the same geographic area. In December 2020, the Company decided to cease the operations of Trinity Services, LLC., The financial results of this businesses have been classified as discontinued operations on our consolidated financial statements in all periods presented within this filing.

 

4

 

 

Company Strategies

 

Buy and Build

 

Our strategy involves growth resulting from making acquisitions of private owner-operated lower or middle-market size transportation services and related businesses 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 and 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. This strategy differs, in management’s view, from a “roll-up” as we do not make acquisitions just for cost saving synergies from elimination of duplicate personnel, consolidation of facilities, etc., but rather by adding personnel, capital and customers for anticipated future growth.

 

The acquisition of 5J in February 2020 added heavy haul, super heavy haul, drilling rig mobilization and commodity freight to our lines of service.

 

Diversify Existing Service Offerings

 

Our strategy of developing or adding additional lines of service such as heavy haul of bridge beams and wind energy components will diversify our business and provide enhanced service offerings to our customers. In addition, we plan to further diversify into logistics with brokerage services.

 

Add owner operator trucking companies to balance transportation business

 

For independent trucking company fleets with less than 100 tractors it can be customary to ‘lease on’ with a larger transportation firm benefitting from their back-office infrastructure, insurance policies and ancillary equipment. 5J has historically sought a balance between company owned drivers and equipment as well as owner/operators leased on. 5J can average about 100 tractors through ten to fifteen owner operators that lease on. The revenue share lease allows our owner/operators to operate more efficiently, and we do not have to carry their assets and fixed overhead creating a balance for our transportation business.

 

Cross-sell Customer Bases of Acquired Transportation 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 services to them that we develop or acquire when there is a demand.

 

Reduce upstream Oil & Gas focus

 

We have seen a reduction in hydrocarbon prices and upstream oil and gas customer activity in the domestic US. 5J’s legacy business started with drilling rig mobilization almost twenty years ago and we have strategically pivoted over the last few year reducing concentration on oil and gas markets and instead focused on infrastructure business of hauling bridge beams, wind energy components and power transformers. We believe we will likely continue to have exposure in the upstream O&G market given the geography and customers we serve, as such, our strategy is to reduce the overall percentage to a minority share of our business.

 

Divest or wind-down non-strategic businesses

 

In December 2020 we sold MG Cleaners and decided to cease the operations of Trinity Services LLC. The financial results of these businesses have been classified as discontinued operations on our consolidated financial statements in all periods presented within this filing.

 

Geographic Focus

 

Currently, a large portion of our more than 200 customers have a geographic presence in Texas. Our facilities and locations are strategically located in Houston, Tomball, Odessa, Floresville, Alice, Palestine, Victoria 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 company headquarters are located in Houston, Texas.

 

Sales Channels

 

The Company’s sales plan includes utilizing employed sales personnel based in our various locations that are engaged to generate sales for the. Our sales personnel are typically compensated on a fixed base salary plus performance incentives. We also engage commission only salespersons from time to time to supplement the main employee-based sales force. We believe transportation services is a relationship-based business where sales relationships are important as well as safety record, equipment profile and quality of our employed and commission-based salespersons.

 

5

 

 

Employees

 

As of December 31, 2020, we had 199 employees of whom 29 were administrative, 8 were in sales and marketing and 162 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 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 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.

 

6

 

 

Item 1A. Risk Factors

 

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 and related variants, 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. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, has had, and should the pandemic continue, is reasonably likely to continue to have, a material adverse impact on the demand for our services. The decline in our customers’ demand for our services could 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 pandemic and related variants is not yet known, we are closely monitoring the effects of the pandemic on market demands, our customers, and 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 and related variants 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 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, 2020, we had fully drawn the availability under our credit facility. In addition, our 5J operating subsidiary experienced declines in revenues in 2020 and the first quarter of 2021, compared to the prior year’s comparable periods, and reduced 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. On August 31, 2020 the Company entered into its second amendment to Lease Documents with Utica, whereby for a two month period effective October 27, 2020 the Company's payments were amended to $150,000 per month. Starting December 27, 2020, at the end of the modification period, the Company's payment will resume at $379,400 through the maturity date of May 27, 2024. This amendment was accounted for as a modification of the debt. Effective March 9, 2021, the Company entered into a third amendment and surrender agreement with Utica requiring weekly payments of $23,750 until May 28, 2021. Upon the occurrence of an event of default under such amendment, and after the expiration of any cure period related to any such default, the surrender agreement entered into between the parties shall govern the surrender of the ownership and possession of the 5J equipment to Utica, or their designee, pursuant to the terms of the Lease agreement between the parties. The surrender agreement directs any third party in possession of any of such equipment to surrender the equipment in their possession to Utica and for Lessee to comply with any related paperwork requests to transfer ownership of the equipment to Utica. The surrender agreement shall terminate on the earlier to occur of: (i) June 25, 2021, or (ii) the occurrence of an event of default, that is not cured within any applicable cure period. From June 4, 2021 to June 25, 2021 the weekly payments shall increase to $112,000 per week, and thereafter commencing on July 27, 2021 the payments shall be $448,000 per month

 

7

 

 

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 Trinity Services contains restrictive covenants which limit management’s discretion to operate Trinity’s business and is secured by all of the assets of Trinity.

 

In order to obtain the line of credit from Catalyst Financial for accounts receivable financing, Trinity Services, our wholly owned subsidiary agreed to certain covenants that place certain restrictions on Trinity, including among other things, Trinity’s 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.   Additionally, we have guaranteed the Catalyst Financial financing facility on behalf of Trinity, which could result in a material liability that we could be responsible for.

 

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 faced a very difficult operating environment in 2020 and believe we will continue to in 2021, with logistics, midstream services and oilfield services as the global COVID pandemic affects economic activity and 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.

 

While our company is trying to reduce the percentage of revenues and activity received from oil and gas customers over time, 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.

 

8

 

 

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 have 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:

 

  · Supply and demand for crude oil and natural gas,
  · political pressures against crude oil and natural gas exploration and production, OPEC and Russia oil production decisions,
  · cost of exploring for, producing, and delivering oil and natural gas,
  · expectations regarding future energy prices,
  · advancements in exploration and development technology,
  · adoption or repeal of laws regulating oil and gas production in the U.S.,
  · imposition or lifting of economic sanctions against foreign companies,
  · weather conditions,
  · rate of discovery of new oil and natural gas reserves,
  · tax policy regarding the oil and gas industry,
  · development and use of alternative energy sources, and,
  · the ability of oil and gas companies to generate funds or otherwise obtain external capital for projects and production operations.

 

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

 

We operate in a highly cyclical industry which could adversely affect our results of operations.

 

We operate in a highly cyclical industry. The key factor driving demand for our services is the level of economic activity in basic industry as well as 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.

 

9

 

 

Additionally, 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 due to harsh northern climates, resulting in higher prices.

 

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.

 

We have intellectual property which the inability to defend could adversely affect our results of operations.

 

We currently protect our trade secrets, customer lists, MSAs 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.

 

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

 

The Company serves several major drilling companies and independent oil & gas companies that are active in our core areas of operations. Additionally, project-based engineering firms can provide large, concentrated revenue opportunities that can provide a large swing in revenues that are managed on intra-year basis.

 

As of December 31, 2020, one customer comprised of 10% of our accounts receivable balance. During the twelve-month period ended December 31, 2020, one customer represented 11% of our revenues.

 

As of December 31, 2019, no customers comprised more than 10% of our accounts receivable. During the twelve-month period ended December 31, 2019, one customer represented 71% of our revenues.

 

These customers do not have any ongoing commitment to purchase our services.  While additional customers have been sourced since December 31, 2020, significant customer concentration risk 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.

 

10

 

 

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 management team.  We currently depend on the continued services and performance of the key members of our management team, including Jeffrey Martini, our Chief Executive Officer and Chief Financial Officer, Matthew Flemming, our Chief Business Development Officer and James Frye, our President of 5J Transportation Group operating division. Mr. Frye, in connection with our acquisition of 5J, entered into a three-year employment agreement with 5J. However, the loss of any such key personnel could result in a disruption to the operations of the 5J Transportation Grpup. 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.

 

The markets in which we operate are highly competitive. We provide services primarily in the southwest United States. Our competitors include many large and small transportation, logistics, and other service companies. In addition, the transportation services business in which we compete is highly fragmented. We believe that the principal competitive factors in the markets we serve are reputation for high quality service and technical expertise, good equipment, trained personnel, work force competency, safety record and price. Competing firms may have their own service personnel, in which case we may not get awarded an available 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 and 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.

 

We expect competition to intensify in the future. 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.

 

While our growth strategy includes seeking acquisitions of other transportation services 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 services. 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.

 

11

 

 

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

 

  · the business culture of the acquired business may not match well with our culture,
  · we may fail to retain, motivate, and integrate key management and other employees of the acquired business,
  · we may experience problems in retaining customers and integrating customer bases, and
  · we may experience complexities associated with managing the combined businesses and consolidating multiple physical locations.

 

We believe that we have sufficient resources to integrate these acquisitions successfully, such integration involves a number of significant risks, including management’s diversion of attention and resources.  There can be no assurance as to the extent to which the anticipated benefits of these acquisitions will be realized, if at all, or that significant time and cost beyond that anticipated will not be required with the integration of new acquisitions to the existing business.  If we are unable to accomplish the integration and management successfully or achieve a substantial portion of the anticipated benefits of these acquisitions within the time frames anticipated by management and within budget, it could have a material adverse effect on our business.

 

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and attention. They may also delay the realization of the benefits we anticipate when we enter into a transaction.  Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our business, financial condition and results of operations.

 

We are vulnerable to the potential difficulties associated with rapid growth

 

We believe that our future success depends on our ability to manage the rapid growth that we expect to experience organically and through acquisitions.  Our anticipated growth will place additional demands and responsibilities on our management to maintain existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems.  The following could present difficulties:

 

  · Lack of sufficient executive level personnel
  · Increased administrative burden
  · Availability of suitable acquisitions
  · Additional equipment to satisfy customer requirements
  · The ability to provide focused service attention to our customers

 

If we are unable to manage our expected future growth, our business could be materially adversely affected.

 

We are subject to a wide range of government regulations that could adversely affect our business

 

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, and cash flows.

 

12

 

 

 

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. While the Company believes the FMCA will update its records and grant a “satisfactory” rating, there can be no guarantee that this rating will occur. Accordingly, the Company’s market opportunities could remain constrained, as many customers require a rating of “satisfactory”. 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 many of its existing customer contracts have a prohibition against doing business with carriers that have an “unsatisfactory” DOT safety rating, and an unsatisfactory rating could negatively impact or restrict the Company’s operations.

 

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 were only permitted to 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.

 

13

 

 

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. 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.

 

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:

 

  · the reformulation of certain products to meet new standards
     
  · the recall or discontinuance of certain products and/or services
     
  · additional record keeping
     
  · expanded documentation of the properties of certain products
     
  · revised, expanded or different labeling
     
  · additional scientific substantiation

 

14

 

 

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.

 

15

 

 

Changes in accounting guidance could have an adverse effect on our results of operations, as reported in our financial statements.

 

Our consolidated financial statements are prepared in accordance with GAAP, which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board and the SEC. Market conditions have prompted these organizations to issue new guidance that further interprets or seeks to revise accounting pronouncements related to various transactions as well as to issue new guidance expanding disclosures. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting guidance we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported in our consolidated financial statements.

 

Unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.

 

The occurrence of one or more unexpected events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods and other forms of severe weather in the United States or in other countries in which our suppliers may be located could adversely affect our operations and financial performance. Natural disasters, pandemic illness, equipment failures, power outages or other unexpected events could result in physical damage to and complete or partial closure of one or more of our offices and disrupt our ability to deliver our products and services. Existing insurance arrangements may not provide protection for all of the costs that may arise from such events.

 

Failure to obtain and retain skilled technical personnel could impede our operations.

 

We require skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our businesses intensifies as activity increases. In periods of high utilization, it may become more difficult to find and retain qualified individuals. This could increase our costs or have other adverse effects on our operations.

 

Our operations are subject to inherent risks, some of which are beyond our control. These risks may not be fully covered under our insurance policies.

 

Our operations are subject to hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, fires, and oil spills. These conditions can cause:

 

  · Personal injury or loss of life,

 

  · Damage to or destruction of property, equipment, and the environment

 

  · Suspension of operations by our customers

 

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

 

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).

 

16

 

 

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.

 

17

 

 

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 OTCQB Venture Market (herein “OTC Market”), an inter-dealer automated quotation system for equity securities.  According to OTC Markets, during the thirty days preceding filing of this report, the average daily trading volume of our common stock was approximately 54,789 shares traded per day, on average, and currently is thinly traded.  As of April 16, 2021, 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.

 

18

 

 

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 54.5% of the  outstanding shares of our common stock as of the date of this report. Additionally, the holder of our Series A Preferred Stock controls approximately 22% of our common stock, which preferred stock votes with the common stockholders on as converted basis.  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 250,000,000 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. 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.

 

19

 

 

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, 2,000 of which have been issued to date as Series A Preferred Stock.  Our Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series.  It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.

 

Our stock price is volatile.

 

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

 

  · our developing business
     
  · relatively low price per share
     
  · relatively low public float
     
  ·

variations in quarterly operating results

     
  ·

changes in our cash flow from operations or earnings estimates

     
  · general market trends and economic conditions in the industries in which we do business
     
  ·

Domestic and international economic, legal and regulatory factors unrelated to our performance

     
  ·

the number of holders of our common stock

     
  · the interest of securities dealers in maintaining a market for our common stock

 

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

 

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

 

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

 

There are delays in order communication on the OTC Markets.

 

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

 

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

 

OTC Marketplace securities are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTC 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.

 

20

 

 

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.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

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 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, a Director on the Board, and an affiliate of our company. Our Tomball Texas facility and terminal lease is comprised of 14 acres at a monthly rent of $9,000 and is a twelve-month term lease ending August 2021. Our Waskom Texas facility lease is comprised of 12 acres at a monthly rent of $2,000 and whose lessor is Dorsett Properties, LLC; Newton Dorsett is the owner of our Series A convertible preferred stock.

 

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

 

Item 3. Legal Proceedings

 

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.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

21

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

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

 

    Common Stock 
Quarter Ended   High    Low 
March 31, 2020  $0.31   $0.07 
June 30, 2020  $0.15   $0.08 
September 30, 2020  $0.20   $0.09 
December 31, 2020  $0.16   $0.08 
           
March 31, 2019  $0.64   $0.30 
June 30, 2019  $0.45   $0.30 
September 30, 2019  $0.45   $0.13 
December 31, 2019  $0.25   $0.12 

 

As of April 16 2021, the closing sales price of our common stock on the OTCQB was $0.1950. As of April 16, 2021, 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.

 

Item 6. Selected Financial Data

 

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

 

22

 

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

 

Overview

 

We are a growth-oriented Transportation Services company focused on the domestic logistics market.  Our primary business objective is to grow our operations and create value for our stockholders through organic growth and strategic acquisitions. We have implemented a Buy & Build growth strategy of acquiring middle market transportation companies and generating organic growth post-acquisition when possible by removing business constraints and strategic cross-selling of services benefiting us with higher equipment utilization and market share. We believe our business focus and equipment fleet position us to be significant participant in the domestic United States infrastructure market. Our wholly owned operating subsidiaries are:

 

Our wholly-owned operating subsidiaries are:

 

  · 5J Trucking LLC
     
  · 5J Oilfield Services LLC
     
  · 5J Specialized LLC
     
  · 5J Transportation LLC
     
  ·

5J Brokerage LLC

 

   

Together these business units are referred to as the “5J Transportation Group”.

 

Our operating subsidiaries provide a range of Transportation Services such as:

 

 

·

Transporting infrastructure components including bridge beams and power generation transformers

     
 

·

Transporting wind energy components 

     
 

·

Heavy haul of production equipment, heat exchangers, coolers, construction equipment, refinery components

     
 

·

Super heavy haul over-dimensional permit-required loads up to 500 thousand pounds for engineered projects

     
 

·

Transportation of midstream compressors

     
 

·

Flatbed freight

     
  · Crane services used to set equipment on compressor stations, pipeline infrastructure and load drilling rig components
     
  · Drilling rig relocation for drilling contractors and oil and gas operators

 

  · Freight brokerage

 

In connection with our focus to expand our Transportation Services business and exit certain up-stream oil and gas (O&G) industrial-related businesses, the financial results of the following business have been classified as as discontinued operations on our consolidated financial statements for the following businesses:

 

  · MG Cleaners LLC. The Company sold this business in December 2020
     
  · Trinity Services LLC

 

We are headquartered in Houston, Texas with facilities in Tomball, Odessa, Floresville, Henderson, Victoria and Palestine, Texas. Our web site is www.SMGIndustries.com.

 

23

 

 

Acquisition, divestiture and wind-down of businesses

 

On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), combined referred to as “5J”. The aggregate purchase price of 5J was $12.7 million, consisting of a combination of cash, notes and Series B Convertible Preferred Stock.

 

In December 2020 we sold MG Cleaners LLC (“MG”), an O&G drilling rig cleaning company. The assets of MG are reflected on the December 31, 2019 Consolidated Balance Sheet as “assets of discontinued operations” and the results of operations are reflected in the Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 as “net loss from discontinued operations”.

 

In December 2020, the Company decided to sell Trinity Services LLC (“Trinity”), an O&G drilling pad dirt construction company, and is currently in the disposition process. The assets and operations of Trinity are reflected on the December 31, 2020 and 2019 Consolidated Balance Sheets as “assets of discontinued operations” and the results of operations are reflected in the Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 as “net loss from discontinued operations”.

 

Management believes certain comparisons of 2020 to 2019 are not meaningful as the variances are due almost entirely to the 5J acquisition. Where applicable, this analysis provides explanation of any meaningful causes of variances that are in addition to variances resulting from the 5J acquisition.

 

24

 

 

Results of Operations

 

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

 

The Consolidated Balance Sheets as of December 31, 2020 present the assets and liabilities of MG and Trinity as discontinued operations. The Consolidated Statements of Operations for the years end December 31, 2020 and 2019 present the results of MG and Trinity as Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the years end December 31, 2020 and 2019 present operating, investing and financing activities of MG and Trinity as cash flows from or used in discontinued operations.

 

Sales for the year ended December 31, 2020 increased to $26,665,719 from $508,659 for the year ended December 31, 2019, driven primarily by from the acquisition of 5J in February 2020. The lower than expected revenues are the result of reduced customer activity from the global COVID pandemic and related variants and its economic affects in the markets we serve.

 

During the year ended December 31, 2020, cost of sales increased to $29,477,208, or 110.5% of sales, compared to $967,305, or 190.2% of sales for the 2019 period. The increase in cost of sales is due primarily to the 5J acquisition. The cost of sales exceeding revenues during 2020 and 2019 was the result of lower than expected revenues available to cover fixed costs within cost of sales. Cost of sales includes non-cash depreciation expense of $4,901,689 for the year ended a December 31, 2020, and $221,305 for the comparable period in 2019.

 

Selling, general and administrative expenses for the year ended December 31, 2020 increased to $5,267,186, or approximately 19.8% of revenues, compared to $1,707,982 for the year ended December 31, 2019. The increase was due primarily to the 5J acquisition. Share based compensation expense included in SG&A expenses was $66,566 for the year ended December 31, 2020 compared to $246,099 for the same period in 2019. Bad debt expense included in SG&A expenses for the year ended December 31, 2020 was $474,708, as compared to bad debt expense of $52,737 in 2019 resulting from uncollectable accounts receivables from certain customers.

 

Impairment expenses for the year ended December 31, 2020 was $1,084,671 and $565,466 in the prior year. The expenses in 2020 related primarily to the full impairment of goodwill for the oil tools and the frac water equipment at Momentum. In 2019, the impairment expense of goodwill was associated with the oil tools.

 

Acquisition costs for the year ended December 31, 2020 was $1,485,829 and were related to the acquisition of 5J in February 2020. For the year ended December 31, 2019, acquisition costs were $70,945 and related to the acquisition of Trinity.

 

Interest expense, net, increased to $3,801,020 during the year ended December 31, 2020 from $573,028 during the year ended December 31, 2019, resulting from increased borrowings to fund the 5J acquisition. Gain on extinguishment of debt for the year ended December 31, 2020 was $94,339 related to forgiveness on PPP loans.

 

Loss on settlement of notes payable in the year end December 31, 2020 was $14,204, compared to a loss on settlement of liabilities in 2019 of $101,251 which resulted from the settlement of two notes payable during 2019.

 

Gain on sale of assets for the year ended December 31, 2020 of $220,315 was primarily related to the disposal of 5J assets.

 

The net loss from continuing operations for the year ended December 31, 2020 was $14,105,158 as compared to a net loss of $3,459,490 for the year ended December 31, 2019. Our increase in net loss in 2020 was primarily attributable to lower than expected revenues to cover fixed costs due primarily to the COVID-19 pandemic, $1,084,671 of impairment expense, $1,485,829 of transaction costs of the 5J acquisition and $3,801,020 of net 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 such as super heavy haul, and reducing general and administrative costs including professional fees.

 

25

 

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating activities

 

Net cash used in operating activities was $3,972,667 for the year ended December 31, 2020, compared to $314,303 for the year ended December 31, 2019, including $242,162 of cash used by discontinued operations during the year ended December 31, 2020, and $340,317 of cash provided by discontinued operations during the year ended December 31, 2019.

 

For the year ended December 31, 2020, net cash used in continuing operating activities of $3,730,505 consisted of net loss from continuing operations of $14,105,158, plus $7,130,573 of non-cash items, consisting primarily of depreciation and amortization of $4,901,689, impairments of $1,084,671, amortization of deferred financing costs of $609,396 and bad debt expense of $474,708, less $3,244,080 used in changes in operating assets and other operating activities, consisting primarily of cash used in accounts receivable of $2,782,038.

 

For the year ended December 31, 2019, net cash used in continuing operating activities of $654,620 consisted of net loss from continuing operations of $3,459,490, plus $1,993,322 of non-cash items, consisting primarily of depreciation and amortization of $240,318, impairments of $565,466, amortization of deferred financing costs of $516,956 and bad debt expense of $52,737, less $811,548 used in changes in operating assets and other operating activities, consisting primarily of cash used in accounts payable of $936,797.

 

Investing activities

 

Net cash used in investing activities was $6,837,536 for the year ended December 31, 2020, compared to $543,432 for the year ended December 31, 2019, with $42,368 and $15,325, respectively, related to discontinued operations.

 

For the year ended December 31, 2020, net cash used in investing activities consisted of $6,320,168 cash paid for the acquisition of 5J, $75,000 paid to the buyer of MG Cleaners, and $400,000 of net capital expenditures. For the year ended December 31, 2019, net cash used in investing activities consisted of $500,000 cash paid for the acquisition of Trinity and $28,107 of net capital expenditures.

 

Financing activities

 

Net cash provided by financing activities was $11,759,723 for the year ended December 31, 2020, compared to $886,010 for the year ended December 31, 2019, including $484,235 and $170,130, respectively, related to discontinued operations.

 

For the year ended December 31, 2020, net cash provided by financing activities consisted of net proceeds from secured line of credit of $4,156,238, net proceeds from notes payable of $5,584,048 and proceeds from convertible notes payable of $3,144,295, partially offset by payments on notes payable of $1,385,535 and payment of deferred finance costs of $223,558.

 

For the year ended December 31, 2019, net cash provided by financing activities consisted of proceeds from convertible notes payable and other notes payable of $1,230,000 and proceeds from sale of common stock of $359,000, partially offset by payments on notes payable of $819,105 and other payments of $54,015.

 

Our cash flows from operations are primarily funded through our financing activities, including our accounts receivable line of credit facility, notes and loans, stock sales, issuing our stock for services and various leases. Currently, we believe we will need to continue to utilize lines of credit, borrowings and stock sales to sufficiently sustain our current level of operations for the next 12 months. At present, we believe the industry and general domestic economic activity is still depressed 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 June 19, 2019, each of MG Cleaners LLC (“MG”), Trinity Services LLC (“Trinity”) and Jake Oilfield Solutions LLC (“Jake”), each of which were wholly owned subsidiary of the Company, entered into separate revolving accounts receivable financing facilities (collectively the “Catalyst AR Facility”) with Catalyst Finance L.P. (“Catalyst”). The Catalyst AR Facility was funded on June 27, 2019. The new Catalyst AR Facility with Catalyst was used to pay off the Crestmark facility in full. The Catalyst 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 Catalyst 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 Catalyst 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 Catalyst 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.

 

26

 

 

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.

 

In connection with the acquisition of 5J Oilfield Services LLC and 5J Trucking LLC (collectively “5J Entities”), on February 27, 2020, the 5J Entities entered into a Master Lease Agreement with Utica Leaseco LLC (“Utica”) pursuant to which Utica refinanced substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 (“Utica Financing”) which amount was financed based on 75% of the net forced liquidation value of the equipment. The Company used a portion of the proceeds from the Utica Financing to pay the cash portion of the Purchase Price of the 5J Entities.

 

Pursuant to the terms of the Utica Financing, the 5J Entities will pay a monthly fee of $331,065 to Utica for a period of 51 months, with a cash payment due at the end of the lease term in the amount of $831,880. The 5J Entities own all of the assets financed pursuant to the Utica Financing, subject to Utica’s security interest in all of the equipment of the 5J Entities. The Company has entered into a guaranty agreement with Utica, whereby it has guaranteed all of the obligations of the 5J Entities under the Utica 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 $331,065 to $150,000 for a six month period starting April 27, 2020. On August 31, 2020 the Company entered into its second amendment to Lease Documents with Utica, whereby for a two month period effective October 27, 2020 the Company’s payments were amended to $150,000 per month. Starting December 27, 2020, at the end of the modification period, the Company’s payment will resume at $379,400 through the maturity date of May 27, 2024. This amendment was accounted for as a modification of the debt. Effective March 5, 2021, the Company entered into a third amendment requiring weekly payments of $23,750 until June 4, 2021. From June 4, 2021 to June 25, 2021 the weekly payments shall increase to $112,000 per week, and thereafter commencing on July 27, 2021 the payments shall be $448,000 per month for the remaining term.

 

On February 27, 2020, the 5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”). The Company used a portion of the proceeds from the Amerisource Financing to pay the cash portion of the purchase price of the 5J Entities.

 

The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”).

 

The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 85% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0%) of the then maximum account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0%) of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing.

 

The Amerisource Equipment Loan in the amount of $1,401,559 is secured by certain equipment pledged as collateral, has a term of thirty-six (36) months during which the 5J Entities shall make equal monthly payments of principal and interest, bears an interest rate of prime rate plus five and one-quarter percent (5.25%) and an origination fee equal to one and one-half percent (1.5%) of the loan amount, a copy of the Amerisource Loan agreement is attached as Exhibit 10.15.

 

The Bridge Facility has a term of six (6) months during which the 5J Entities shall make equal monthly payments of principal and interest. In connection with the Bridge Facility, the 5J Entities paid an upfront facility fee of five percent (5%) of the total Bridge Facility amount at closing. The Bridge Facility was paid off during 2020 by the company.

 

On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Note”) to Amerisource (“Amerisource Loan Agreement”). The Amerisource Note matures on February 27, 2023 and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s common stock were issued to the noteholder in connection with the sale of the Amerisource Note. The Amerisource Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty.

 

27

 

 

During the year ended December 31, 2020, we sold an aggregate of $2,019,000 principal amount of convertible promissory notes and issued 3,028,500 shares of restricted common stock in connection therewith. During the year ended December 31, 2019, we sold an aggregate of 1,436,000 shares of restricted common stock to investors for aggregate cash proceeds of $359,000.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 8. Financial Statements and Supplementary Data

 

Our financial statements and notes thereto are set forth in this Annual Report on Form 10-K on pages F-1 through F-35.

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures

 

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 Chief Financial Officer has concluded that, at December 31, 2020, 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 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 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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

28

 

 

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 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:

 

  · Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

  · Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors; and

 

  · Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. 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, 2020, our internal control over financial reporting was not effective. The lack of separation of duties between the Chief Executive Officer and the Chief Financial Officer, being the same person and the lack of a formal review process including multiple levels of review 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.

 

Item 9B. Other Information

 

None.

 

29

 

 

PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance

 

The following table sets forth the names of our Executive Officers and Directors as of the date of this Annual Report. Directors hold office for a period of one year from their election at the annual meeting of stockholders or until their successors are duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors.

 

Name   Age   Position
Jeffrey Martini   49   Chief Executive Officer and Chief Financial Officer
Matthew C. Flemming   52   Chief Business Development Officer and Chairman
Steven E. Paulson   56   Director
Michael A. Gilbert II   46   Director
Joseph Page    54   Director
Brady Crosswell   52   Director
Todd Riedel   55   Director
James E. Frye   63   Director

 

Mr Martini. In December 2020, Mr. Jeffrey Martini was appointed Chief Executive Officer of the Company. Our previous CEO. Mr. Martini’s professional management experience includes executive positions with publicly traded companies, as well as private equity backed private companies.

 

Jeff Martini is an accomplished executive, having served as a senior financial leader in several different businesses over the last 20 years. He began his career outside oil and gas, in the pulp and paper industry in a series of cost accounting and financial reporting roles. It was here that he first developed his passion for understanding and enhancing business value through detailed analysis.

 

Once he made his way to Houston in 2000, Jeff joined Stewart & Stevenson, then a billion-dollar publicly held distributor, manufacturer, and servicer of large, engine-driven equipment.  He held a variety of corporate accounting, financial reporting, and operational finance roles and was a member of the team responsible for a going-private transaction in 2007.  During his tenure, Jeff came to appreciate the value and importance of trusted business relationships, being in a position to help implement a broad culture change at the company. Having completed assignments at these larger organizations, Jeff took on a series of opportunities at smaller, private equity backed companies, especially within oilfield service.  His first standalone CFO role was with a technology startup in the artificial lift space but has also served as the lead finance executive in businesses associated with directional drilling, energy delivery, field service, and gas compression equipment manufacturing. All told, Jeff has worked alongside nearly 20 different chief executive officers and numerous private equity backers and lenders and has raised over $100 million in debt and equity in dozens of transactions.

 

Jeff is a Magna Cum Laude graduate of Gettysburg College, is a member of the Phi Beta Kappa Society, and has received his Certified Public Accountancy license.

 

Mr. Flemming has served as our Chief Business Development Officer since December 2020, prior thereto Mr. Flemming served as our Chief Executive Officer since September 2017 and continues to serve as the Chairman of the Board of Directors. Prior thereto, Mr. Flemming was the Chief Executive Officer of MG Cleaners from June 2017 until September 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 experience and industry down-turn and ultimately entered into a plan of reorganization under Chapter 11 subsequent to Mr. Flemming’s employment.

 

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. Paulson has served as a Director of the Company since the completion of our acquisition of MG Cleaners in September 2017. 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.

 

30

 

 

Mr. Gilbert has served as a Director of the Company since the completion of our acquisition of MG Cleaners in September 2017. 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. Page was appointed to serve as a member of our board of directors on August 13, 2020.  Since 2016, Mr. Page has been the Chief Administrative Officer, EVP & General Counsel of Amerisource Capital, a US-based financial lending and equity capital company.  Since 2014, Mr. Page has been Of Counsel to the law firm of Selman, Munson & Lerner.  Mr. Page previously served as CEO and serves as a Director of Venntis Technologies, a technology company focused on lighting and touch integration solutions for the horticultural, appliance and auto industries, since 2014.  Mr. Page also served as CAO, interim CEO and a Director of Synagro Technologies, a private equity backed waste-to-energy company from 2009-2014. Mr. Page also sits on the non-profit boards of HiSPrint Ministries, Tres Dias and Ft. Bend Texans Sports associations.  Mr. Page graduated from The University of Texas with a Bachelor’s of Science in Molecular Biology. Mr. Page received his Doctorate of Jurisprudence in 1994 from South Texas College of Law.

 

Mr. Crosswell was appointed to serve as a member of the Company’s board of directors on October 20, 2020. Mr. Crosswell currently serves as the General Partner of Grey Fox Investments, LP, which has investments in privately held companies in which he is active. He was Founder and Manager of Grey Rock Resources LLC and Grey Rock Gathering and Marketing LLC, which owned and managed rail, truck and marine terminal facilities in Lake Charles, LA. The companies internally processed and marketed crude oil and related products through these facilities. Both companies were sold in January 2020. Prior thereto, Mr. Crosswell was Founder and General Partner of Cierra Marine, LP and Crescent Terminals LLC, which owned inland marine tug and barges and a terminal located in the gulf coast. These companies were sold to a public MLP in July 2013.

 

Mr. Riedel was appointed to serve as a member of the Company’s board of directors on October 20, 2020. Mr. Riedel serves as the President of Apex Capital Investments for the Apex Heritage Group. He is responsible for The Apex Heritage Group's Business Investments, Mergers & Acquisitions, Real Estate Investments & Activities, Deal Sourcing, Debt/Equity Financing, Capital Fundraising, Apex Strategic Planning, and various Philanthropic and Community Projects. Apex Heritage Group is a private firm that invests and manages small-to-mid-sized companies and real estate ventures located in the Southern US region and abroad. Apex focuses on identifying and growing entrepreneurial industrial manufacturing and services companies and diversifying overall investment holdings. Mr. Riedel has been with the Apex Heritage Group since 2012 and prior to his position with Apex Heritage Group, he was involved in several investment and leadership roles related to commercial development, family office, and the healthcare industry. Additionally, Mr. Riedel has been involved and served on numerous non-profit and for-profit boards for more than 25 years.

 

Mr. Frye was appointed to serve as a member of the Company’s board of directors on October 20, 2020.  Mr. Frye founded each of 5J Oilfield Services LLC in November 2009 and 5J Trucking LLC in January 2004.     He has been involved in the oilfield trucking industry for more than thirty-five years.   Mr. Frye served as President and as the direct or indirect owner of one hundred percent of both 5J entities until he sold both entities to the Company in February 2020.

 

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 Director is, or at any time during the past three years was, an employee of the Company,
     
  · the Director or a family member of the Director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service),

 

  · a family member of the Director is, or at any time during the past three years was, an Executive Officer of the Company,
     
  · the director or a family member of the Director is a partner in, controlling stockholder of, or an Executive Officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions),
     
  · the Director or a family member of the Director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity, or,
     
  · the Director or a family member of the Director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit.

 

31

 

 

The Board believes that the qualifications of the Directors, as set forth in their biographies which are listed above and briefly summarized in this section, gives them the qualifications and skills to serve as a Director of our Company. All of our directors have strong business backgrounds. The Board also believes that each of the Directors has other key attributes that are important to an effective Board: integrity and demonstrated high ethical standards; sound judgment; analytical skills; the ability to engage management and each other in a constructive and collaborative fashion and the commitment to devote significant time and energy to service on the Board and its Committees.

 

Involvement in Certain Legal Proceedings

 

Except as set forth below, none of our Directors or executive officers has, during the past ten years:

 

  · been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences),
     
  · been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities, or,
     
  · been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated, or,
     
  ·

has had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time.

 

In 2020, serving in the capacity of chief restructuring officer, Mr. Martini assisted a manufacturer of vessels and separation equipment with a Chapter 11 filing process.

 

Mr. Flemming was an executive officer of HII Technologies, Inc. (“HII”) in 2016. Subsequent to his employment with HII, that company entered into a plan of reorganization under Chapter 11.

 

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.

 

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 currently composed of Mr. Gilbert and Mr. Paulson. The current members of our Audit Committee are independent as defined in the NASDAQ rules. In addition, the Board of Directors has determined that Mr. Paulson 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.

 

32

 

 

The Audit Committee’s primary functions are:

 

  · assist the monitoring the integrity of our financial statements,
  · appoint and retain the independent registered public accounting firm to conduct the annual audit and quarterly reviews of our financial statements and review the firm’s independence,
  · review the proposed scope and results of the audit and discuss required communications in connection with the audit,
  · review and pre-approve the independent registered public accounting firm’s audit and non-audit services rendered,
  · review accounting and financial controls with the independent registered public accounting firm and our financial and accounting staff,
  · meet regularly with the independent registered public accounting firm without management present,
  · recognize and prevent prohibited non-audit services,
  · establish procedures for complaints received by us regarding accounting matters,
  · review, pass on the fairness of, and approve “related-party transactions” as required by and in conformance with the rules and regulations of the SEC,
  · establish procedures for the identification of management of potential conflicts of interest, and review and approve any transactions where such potential conflicts have been identified, and,
  · prepare the report of the audit committee that SEC rules require to be included in our annual meeting proxy statement.

 

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

 

  · review and recommend the compensation arrangements for management, including the compensation for our Chief Executive Officer,
  · establish and review general compensation policies with the objective to attract and retain superior talent, to reward individual performance and to achieve our financial goals,
  · approve and oversee reimbursement policies for Directors, Executive Officers and key employees,
  · administer our stock incentive plan,
  · review and discuss the compensation discussion and analysis prepared by management to be included in our Annual Report, proxy statement or any other applicable filings as required by the SEC, and,
  · prepare the report of the compensation committee that SEC rules require to be included in our annual meeting proxy statement.

 

Decisions regarding executive compensation are ultimately determined by the Board upon recommendations of the Compensation Committee, which reviews a number of factors in its decisions, including market information about the compensation of executive officers at similar-sized companies within our industry and geographic region, and recommendations from our Chief Executive Officer. The Compensation Committee may consult external compensation consultants to assist with the recommendation of executive compensation. The Compensation Committee did not utilize the services of an external compensation consultant in 2020.

 

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. 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:

 

  · identify the appropriate size, functioning and needs of and nominate members of the Board,
  · develop and recommend to the Board of Directors a set of corporate governance principles applicable to our company and review at least annually our code of conduct and ethics,

  · review and maintain oversight of matters relating to the independence of our board and committee member, in light of the independence standards of the Sarbanes-Oxley Act of 2002 and the rules of the NASDAQ Stock Market, and,
  · Oversee the evaluation of the Board and management.

 

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

 

33

 

 

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: President. 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 and Chief Business Development 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 Chief Business Development Officer and Chairman of the Board, 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 Chief Executive Officer 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: President.

 

Executive Compensation

 

Mr. Martini serves as our Chief Executive Officer, however, we are not party to an employment agreement with Mr. Martini. Instead, APEX Heritage Group, Inc. (“Apex”) has contracted directly with Mr. Martini for such management services, and is routinely compensated in turn via the provision of debt and/or equity instruments under the terms of an interim management services agreement, among other arrangements. During 2020, Apex was reimbursed via convertible debt valued at $225,000, which was in part compensation for such employment. The Company expects to continue such arrangement in 2021.

 

On October 1, 2017, we entered into an employment agreement with Mr. Flemming, formerly our Chief Executive 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, with automatic three month extensions after the first term. 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. February 27, 2020, the Board agreed to pay Mr. Flemming $5,000 per month in exchange for providing a personal guarantee in connection with the $11.8 million Utica master lease and the $10 million Amerisource accounts receivable revolving line of credit financing transactions, payments shall be made until the termination of Mr. Flemming’s personal guarantees. Mr. Flemming waived this guarantee fee through December 31, 2020. In December 2020, Mr. Flemming agreed to a voluntary temporary salary reduction to an annual rate of $144,000 still his present rate as of the date of this report.

 

34

 

 

Certain Relationships and Related Transactions and Director Independence

 

The following is a description of the transactions we have engaged in since January 1, 2020, with our Directors and Officers and beneficial owners of more than five percent of our voting securities and their affiliates:

 

On February 28, 2020, Amerisource Leasing Corporation purchased $1,600,000 principal amount of our convertible promissory notes (the “Stretch Note”), with a fixed conversion price of $0.25 per share and was issued an aggregate of 2,498,736 shares of our common stock in connection therewith.

 

On February 27, 2020, the 5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”).The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”).

 

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.

 

James Frye, who currently serves as President of our 5J subsidiary, 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.

 

APEX Heritage Investments, which is owned and controlled by Mr. Steven Madden, invested through Amerisource Leasing Co. $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”). The Apex 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. Amerisource Leasing Co. has control over the shares of common stock issued in connection with the Stretch Note and the shares underlying the convertible note. As a result, until such time as Amerisource distributes the shares of common stock and convertible note, neither Mr. Madden, nor Apex Heritage Investments, will have voting or investment control over the shares of common stock underlying the Stretch Note.

 

On September 17, 2020, Mr. George Gilman purchased $14,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 21,000 shares of our common stock in connection therewith.

 

On September 17, 2020, Mr. Leo Womack purchased $14,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 21,000 shares of our common stock in connection therewith.

 

On December 18, 2020, December 22, 2020 and January 14, 2021, Mr. Steven Madden purchased $225,000, $500,000 and $150,000, respectively, principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 1,312,500 shares of our common stock in connection therewith.

 

On August 20, 2020, Apex Heritage Investments, of which Mr. Steven Madden is the controlling shareholder, purchased $366,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 549,000 shares of our common stock in connection therewith.

 

On August 21, 2020, Mr. Brady Crosswell purchased $300,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 450,000 shares of our common stock in connection therewith.

 

On September 3, 2020, Mr. James Frye purchased $250,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 375,000 shares of our common stock in connection therewith.

 

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.

 

35

 

 

Director Independence

 

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

 

Legal Proceedings

 

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

 

 

Item 11. Executive Compensation

 

Summary Compensation Table

 

The following table shows the total compensation earned during the fiscal years ended December 31, 2020 and 2019 to (1) our Chief Executive Officer, and (2) our other named executive officers during the fiscal years ended December 31, 2020 and 2019 (collectively, the “named executive officers”):

 

Name and principal
position
  Year     Salary
($)
    Bonus
($)
    Stock
awards
($)
    Option
awards
($)
    Non-equity
incentive
plan
compensation
($)
   

Non-qualified
deferred
compensation
earnings

($)

    All other
compensation
($)
   

Total

($)

 
Jeffrey Martini                                                                        
Chief Executive Officer and Chief Financial Officer     2020       118,760       -       -       -         -       -     -       118,760  
                                                                         
Matthew Flemming(1)(2)     2020       180,000               -       -       -       -       1,685       181,685  
Chief Business Development Officer and Former Chief Executive Officer     2019       180,000       12,500       -       -       -       -       -       192,500  
                                                                         
Stephen Christian     2020       195,113       -       -       -       -       -       -       195,113  

Former Executive Vice President and Secretary

and President of MG Cleaners

    2019       155,000       12,500       -       -       -       -       -       167,500  
                                                                         
Vanessa Pittman   
Former Controller
    2020       86,503                                           86,503  
      2019       80,000                                                       80,000  

 

(1) Share awards are valued at the fair value at the grant date. Stock options are valued at a fair value in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718. All options vest at the date of grant and are exercisable at the market value at the date of grant. For information regarding assumptions underlying the determination of grant date fair value of share and option awards in accordance with FASB ASC Topic 718, see note 2 of notes to financial statements included herein.
(2) In March 2020, the Company paid the annual personal life insurance premium for Mr. Flemming.

 

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, 2020, none of our non-executive independent directors received compensation for their Board service.

 

36

 

 

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 independent directors are eligible to participate in our 2018 Stock Option Plan. During 2020, no members of our Board of Directors received any cash or equity consideration for their services.

 

Outstanding Equity Awards at 2020 Year End

 

Other than 1,000,000 options to purchase shares of our common stock held by Mr. Flemming, there are no outstanding unexercised options, unvested stock and equity incentive plan awards held by any of our executive officers as of December 31, 2020.

 

37

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth, as of March 31, 2021, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for: (i) each person known by us to own beneficially five percent (5%) or more of our outstanding common stock, (ii) each of our officers and directors, and (iii) all of our officers and directors as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares beneficially owned by them. As of March 31, 2021, there were 19,671,258 shares of our common stock issued and outstanding. Except as otherwise listed below, the address of each person is 710 N. Post Oak Road, Suite 315, Houston Texas 77024.

 

Name  Amount of Beneficial
Ownership of Common
Stock (1)
   Percent of Common
Stock
 
Leo Womack (6)   1,719,560    8.7%
George Gilman (7)   3,037,630    14.6%
Newton Dorsett (8)   4,333,200    18.1%
Amerisource Leasing Corporation (9)   8,800,000    33.8%
Steven Madden (10)   15,259,066    47.6%
Dane Stewart (11)   4,025,000    17.4%
           
Directors and Executive Officers:          
Jeffrey Martini   -0-    -0- 
Matthew Flemming (2)   1,600,000    7.7%
Steven Paulson (3)   200,000    1.0%
Michael A. Gilbert II (3)   200,000    1.0%
Joseph Page   -0-    -0- 
Brady Crosswell (4)   3,450,000    15.2%
Todd Riedel   -0-    -0- 
James E. Frye (5)   2,875,000    13.0%
All Directors and Executive Officers as a group (8 persons) (1)-(5)   8,325,000    31.3%

  *less than one percent

(1)

Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of common stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table.

(2) Flemming Family Trust, an irrevocable trust, is the owner of the shares. Rolf O. Flemming, Father to Matthew Flemming, is the Grantor of the trust and Matthew Flemming is the Trustee. His immediate relatives are the beneficiaries.  Includes 1,000,000 shares of common stock issuable upon the exercise of options held by Mr. Flemming.
(3) Includes 100,000 shares of common stock issuable upon the exercise of options.
(4) Includes 3,000,000 shares of common stock issuable upon the conversion of convertible promissory notes held by Grey Fox Investments LLC, of which Mr. Crosswell is the sole member and manager and which he has sole voting and investment control over the shares.  The business address of Grey Fox Investments LLC is 902 Wild Valley Road, Houston, Texas 77057.
(5) Includes 2,500,000 issuable upon the conversion of a convertible promissory note held by Mr. Frye.
(6) Includes: (i) 760,000 shares of common stock held by Ramsey Financial Fund One, LLC, of which Leo Womack is the managing member; (ii) 154,000 shares of common stock and 140,000 shares of common stock issuable upon the conversion of a convertible promissory note, held by the Leo B. Womack Family Trust, of which Mr. Womack is the Trustee and has sole voting and investment control over the shares, and (iii) 398,334 shares of common stock issuable upon the exercise of warrants held by Mr. Womack.
(7) Includes: (i) 650,015 shares of common stock held by Aeneas, LC, of which Mr. Gilman is the manager and has sole voting and investment control over the shares, (ii) 662,164 shares of common stock held by The Mary Payne Family Trust, of which Mr. Gilman is the Trustee and has sole voting and investment control over the shares, (iii) 140,000 shares of common stock issuable upon the conversion of a convertible note held by the Mary Payne Trust, (iv) 195,000 shares of common stock issuable upon the exercise of warrants held by The Mary Payne Trust, and (iv) 803,334 shares of common stock issuable upon the exercise of warrants held by Mr. Gilman.
(8) Includes 4,333,200 shares of common stock issuable upon the conversion of 2,000 shares of Series A Convertible Preferred Stock held by Mr. Dorsett.  The address for Mr. Dorsett is 220 Travis Street, 5th Floor, Shreveport, LA 71101.

 

38

 

 

(9) Includes 7,400,000 shares of common stock issuable upon the conversion of a convertible promissory note held by Amerisource Leasing Corporation, of which Mr. D. Michael Monk has sole or shared voting and investment control over the shares.  The business address of Amerisource Leasing Corporation is 7225 Langtry Street, Houston, Texas 77040.
(10) Includes: (i) 8,750,000 shares of common stock issuable upon the conversion of convertible promissory notes held by Mr. Madden, (ii) 549,000 shares of common stock and 3,660,000 shares of common stock issuable upon the conversion of a convertible promissory note held by Apex Heritage Investments, LLC, of which Mr. Madden has sole voting and investment control over the shares, and (iii) 375,000 shares held by Madden Heritage Foundation, of which Mr. Madden has sole voting and investment control over the shares.  The business address of Steven H. Madden is 9821 Katy Freeway #880, Houston, Texas 77024.
(11) Includes: (i) 300,000 shares of common stock and 2,000,000 shares of common stock issuable upon the conversion of a convertible promissory note held by Stewart Investment Partners Ltd. of which Mr. Stewart is the managing partner and has sole voting and investment control over the shares, and (ii) 225,000 shares of common stock and 1,500,000 shares of common stock issuable upon the conversion of a convertible promissory note held by Whitewing Investment Partners I, Ltd., of which Mr. Stewart is the managing partner and has sole voting and investment control over the shares. The business address for Mr. Stewart is 7500 San Felipe, Suite 1060, Houston, Texas 77063

 

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 2020, we believe all of these filing requirements may not have been 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, 2020.

 

Plan Category  Number of
securities to
be issued
upon
exercise of
outstanding
options
and
rights
   Weighted-average exercise
price of outstanding options
   Number of
securities
remaining
available
for
future issuance
under equity
compensation
plans
 
Equity compensation plans approved by security holders               
2008 Long-Term Incentive Compensation Plan   590,000   $0.47    -0- 
2018 Stock Option Plan*   50,000    0.79      
Total   640,000   $0.50      

 

*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.

 

39

 

 

2008 Long-Term Incentive Compensation Plan

 

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

 

  determine which employees and other persons will be granted awards under the Plan;
  grant the awards to those selected to participate;
  determine the exercise price for options; and
  prescribe any limitations, restrictions and conditions upon any awards, including the vesting conditions of awards.

 

With respect to stock options or restricted stock awards to be made to any of our directors, the Compensation Committee will make recommendations to our Board as to:

 

  which of such persons should be granted stock options, restricted stock awards, performance units or stock appreciation rights;
  the terms of proposed grants of awards to those selected by our Board to participate;
  the exercise price for options; and
  any limitations, restrictions and conditions upon any awards.

 

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

 

  interpret the Plan; and
  make all other determinations and take all other action that may be necessary or advisable to implement and administer the Plan.

 

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

 

  increase the number of shares that may be issued under the Plan;
  materially modify the requirements for eligibility for participation in the Plan;
  materially increase the benefits to participants provided by the Plan; or
  otherwise disqualify the Plan for coverage under Rule 16b-3 promulgated under the Exchange Act.

 

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

 

Transferability

 

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

 

Change of Control Event

 

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

 

Termination of Employment/Relationship

 

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

 

40

 

 

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.

 

41

 

 

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.

 

42

 

 

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

 

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

 

New Plan Benefits

 

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

 

Information Regarding Options Granted

 

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

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

The following is a description of the transactions we have engaged in since January 1, 2020, with our directors and officers and beneficial owners of more than five percent of our voting securities and their affiliates:

 

43

 

 

 

 

On February 28, 2020, Amerisource Leasing Corporation purchased $1,600,000 principal amount of our convertible promissory notes (the “Stretch Note”), with a fixed conversion price of $0.25 per share and was issued an aggregate of 2,498,736 shares of our common stock in connection therewith.

 

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.

 

James Frye, who currently serves as President of our 5J subsidiary, 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.

 

On September 17, 2020, Mr. George Gilman purchased $14,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 21,000 shares of our common stock in connection therewith.

 

On September 17, 2020, Mr. Leo Womack purchased $14,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 21,000 shares of our common stock in connection therewith.

 

On December 18, 2020, December 22, 2020 and January 14, 2021, Mr. Steven Madden purchased $225,000, $500,000 and $150,000, respectively, principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 1,312,500 shares of our common stock in connection therewith.

 

On August 20, 2020, Apex Heritage Investments, of which Mr. Steven Madden is the controlling shareholder, purchased $366,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 549,000 shares of our common stock in connection therewith.

 

On August 21, 2020, Mr. Brady Crosswell purchased $300,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 450,000 shares of our common stock in connection therewith.

 

On September 3, 2020, Mr. James Frye purchased $250,000 principal amount of our convertible promissory notes, with a conversion price of $0.10 per share and was issued an aggregate of 375,000 shares of our common stock in connection therewith.

 

Item 14. Principal Accounting Fees and Services

 

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

 

44

 

 

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:

 

    2020     2019  
Audit Fees (1):   $ 105,650     $ 81,750  
Tax Fees (2):     -          
All Other Fees:     -       -  
                 
Total   $ 105,650     $ 81,750  

 

(1) Audit fees include fees for professional services by Malone in 2020 and 2019 rendered for the audits of the financial statements of the Company, quarterly reviews, consents and assistance with the review of documents filed with the SEC.

 

(2) Tax fees include fees for tax services, including tax compliance.

 

The Audit Committee of the Board has established its preapproval policies and procedures, pursuant to which the Audit Committee approves audit and tax services provided by our independent auditors. Consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed fee estimates for these services. Pursuant to these procedures, the Audit Committee approved the foregoing audit and tax services provided by Malone.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

45

 

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules
   

(a)Documents filed as part of this Report

 

(1) Financial Statements:

 

Report of Independent Registered Public Accounting Firm F-1
   
Consolidated Balance Sheets as of December 31, 2020 and 2019 F-2
   
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 F-3
   
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2020 and 2019 F-4
   
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-5
   
Notes to Consolidated Financial Statements F-6

 

(2) Financial Statement Schedules. All schedules are omitted because they are inapplicable, or not required, or the information is shown in the financial statements or notes thereto.

 

(3) Exhibits:

 

Exhibit   Description
     
3.1   Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.5 to Amendment No. 4 to the Company’s Form S-1 filed on December 15, 2010).
     
3.2   Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed on March 28, 2014).
     
3.3   Amended and Restated Bylaws (incorporated by reference to Exhibit 3.6 to Amendment No. 5 to the Company’s Form S-1 filed on March 10, 2011).
     
3.4   Amendment to Certificate of Incorporation dated January 30, 2018 (incorporated by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
3.5   Certificate of Designation of Preferences, Rights and Limitations of 3% Series A Secured Convertible Preferred Stock dated June 4, 2019 (incorporated by reference to Exhibit 3.5 to the Company’s 8-K filed on June 7, 2019).
     
3.6   Certificate of Designation of Preferences, Rights and Limitations of 5% Series B Convertible Preferred Stock dated February 18, 2020 (incorporated by reference to Exhibit 3.6 to the Company’s 8-K filed on March 3, 2020).
     
3.7**   Certificate of Amendment of the Certificate of Incorporation of SMG Industries Inc. dated October 20, 2020.
     
4.1   Specimen Unit Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Company’s Form S-1 filed on June 4, 2010).
     
4.2   Specimen Common Stock Certificate Incorporation (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Company’s Form S-1 filed on June 4, 2010).
     
4.3   Specimen Warrant Certificate (incorporated by reference to Exhibit 4.4 to Amendment No. 1 to the Company’s Form S-1 filed on June 4, 2010).
     
10.1   Form of Unit Option Purchase Agreement (incorporated by reference to Exhibit 4.5 to Amendment No. 5 to the Company’s Form S-1 filed on March 10, 2011).
     
10.2   2008 Long-Term Incentive Compensation Plan (incorporated by reference to Exhibit 4.6 to the Company’s Form S-1 filed on April 7, 2010).

 

46

 

 

10.3***   Consulting Services Agreement between the Company and Nano-Cap Advisor, LLC as amended on March 28, 2017.
     
10.4***   Consulting Services Agreement between the Company and Brack Advisors LLC as amended on March 28, 2017.
     
10.5   2018 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K filed on April 2, 2018).
     
10.6   Loan and Security Agreement entered into by and between Trinity Services LLC and Newton Dorsett dated June 3, 2019 (incorporated by reference to Exhibit 10.6 to the Company’s 8-K filed on June 7, 2019).
     
10.7   Line of Credit – Promissory Note in the amount of up to $1,000,000 issued by Trinity Services to Newton Dorsett dated June 3, 2019 (incorporated by reference to Exhibit 10.7 to the Company’s 8-K filed on June 7, 2019).
     
10.8   Purchase and Sale Agreement entered into by and between Catalyst Finance LP and MG Cleaners LLC dated June 27, 2019 (incorporated by reference to Exhibit 10.8 to the Company’s 8-K filed on July 10, 2019).
     
10.9   Purchase and Sale Agreement entered into by and between Catalyst Finance LP and Trinity Services LLC dated June 27, 2019 (incorporated by reference to Exhibit 10.9 to the Company’s 8-K filed on July 10, 2019).
     
10.10   Purchase and Sale Agreement entered into by and between Catalyst Finance LP and Jake Oilfield Solutions LLC dated June 27, 2019 (incorporated by reference to Exhibit 10.10 to the Company’s 8-K filed on July 10, 2019).
     
10.11   Membership Interest Purchase Agreement dated February 27, 2020 by and between SMG Industries Inc. and James E. Frye Jr. for the purchase of 100% of the membership interests of 5J Oilfield Services LLC (incorporated by reference to Exhibit 10.11 to the Company’s 8-K filed on March 3, 2020).
     
10.12   Membership Interest Purchase Agreement dated February 27, 2020 by and between SMG Industries Inc. and each of THE JUDY FRYE TRUST and THE JAMES FRYE, JR. TRUST for the purchase of 100% of the membership interests of 5J Trucking LLC (incorporated by reference to Exhibit 10.12 to the Company’s 8-K filed on March 3, 2020).
     
10.13   Master Lease Agreement entered into by and between Utica Leaseco LLC and 5J Oilfield Services LLC, 5J Trucking LLC and SMG Industries Inc. dated February 27, 2020 (incorporated by reference to Exhibit 10.13 to the Company’s 8-K filed on March 3, 2020).
     
10.14   Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement entered into by and between Amerisource Funding Inc. and 5J Oilfield Services LLC, 5J Trucking LLC and SMG Industries Inc. dated February 27, 2020 (incorporated by reference to Exhibit 10.14 to the Company’s 8-K filed on March 3, 2020).
     
10.15   Commercial Promissory Note entered into by and between Amerisource Funding, 5J Oilfield Services, 5J Trucking LLC and SMG Industries Inc. dated February 27, 2020 (incorporated by reference to Exhibit 10.15 to the Company’s 8-K filed on March 3, 2020).
     
10.16   Loan Agreement entered into by and between Amerisource Leasing Corporation and SMG Industries, Inc. dated February 27, 2020 (incorporated by reference to Exhibit 10.16 to the Company’s 8-K filed on March 3, 2020).
     
10.17   Promissory note entered into by and between 5J Oilfield Services LLC and James E. Frye, Jr. dated February 27, 2020 (incorporated by reference to Exhibit 10.17 to the Company’s 8-K filed on March 3, 2020).
     
10.18***   First Amendment to Lease Documents entered into by and between 5J Oilfield Services LLC, 5J Trucking LLC and UticaLeaseco, LLC dated May 19, 2020.
     
10.19   Agreement and Plan of Share Exchange by and among MG Cleaners LLC and SMG Industries on the one hand and S&A Christian Investments LLC dated December 22, 2020 (incorporated by reference to Exhibit 10.19 to the Company’s Form 8-K filed on December 29, 2020).
     
10.20   Amendment and Partial Recission of Membership Interest Purchase Agreement by and among 5J Oilfield Services LLC, and James E. Frye, on the one hand, and the Company effective February 27, 2020 (incorporated by reference to Exhibit 10.20 to the Company’s Form 8-K filed on January 15, 2021).

 

47

 

 

31.1**   Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
     
31.2**   Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
     
32.1x*   Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2x*   Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
99.1   Amended and Restated Audit Committee Charter (incorporated by reference to Exhibit 99.1 to the Company’s Annual Report on Form 10-K filed on March 23, 2012).
     
99.2   Amended and Restated Corporate Governance and Nominating Committee Charter (incorporated by reference to Exhibit 99.1 to the Company’s Annual Report on Form 10-K filed on March 23, 2012).
     
99.3   Amended and Restated Compensation Committee Charter (incorporated by reference to Exhibit 99.1 to the Company’s Annual Report on Form 10-K filed on March 23, 2012).

 

48

 

 

101.ins**   XBRL Instance Document
     
101.sch**   XBRL Taxonomy Extension Schema Document
     
101.cal**   XBRL Taxonomy Calculation Linkbase Document
     
101.def**   XBRL Taxonomy Definition Linkbase Document
     
101.lab**   XBRL Taxonomy Label Linkbase Document
     
101.pre**   XBRL Taxonomy Presentation Linkbase Document

 

x*   Filed herewith. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
     
**   Filed herewith.
     
***   Previously filed. 
     
  Portions of this exhibit were omitted and filed separately with the Securities and Exchange Commission pursuant to an application for confidential treatment filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. 
     
 +    Management contract or compensatory plan or arrangement of the Company required to be filed as an exhibit.

 

49

 

 

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.

 

  SMG INDUSTRIES INC.
   

Date: April 19, 2021

By: /s/
    Jeffrey Martini
    Chief Executive Officer and Chief Financial Officer

 

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.

 

Name   Position   Date
         
/s/ Jeffrey Martini   Chief Executive Officer   April 19, 2021
Jeffrey Martini   (Principal Executive Officer and Principal Financial Officer)    
         
/s/  Matthew C. Flemming   Chairman of the Board and Chief Business Development Officer   April 19, 2021
Matthew C. Flemming        
         
/s/ Steven E. Paulson   Director   April 19, 2021
 Steven E. Paulson        
         
/s/ Michael A. Gilbert III   Director   April 19, 2021
Michael A. Gilbert III        
         
/s/ Joseph Page   Director   April 19, 2021
Joseph Page        
         
/s/ Brady Crosswell   Director   April 19, 2021
Brady Crosswell        
         
/s/ Todd Riedel   Director   April 19, 2021
Todd Riedel        
         
/s/ James E. Frye   Director   April 19, 2021
James E. Frye        
         

 

50

 

 

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. and its subsidiaries (collectively, the “Company”) as of December 31, 2020 and 2019, 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, 2020 and 2019, 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.

 

Critical Audit Matters

 

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

 

/s/ MaloneBailey, LLP

www.malonebailey.com

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

Houston, Texas

April 19, 2021

 

F-1

 

 

SMG INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
 
    December 31,     December 31,  
    2020     2019  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 263,814     $ 29,568  
Restricted cash     715,274       -  
Accounts receivable, net of allowance for doubtful accounts of $691,098 and $42,182 as of December 31, 2020 and 2019, respectively     4,920,967       -  
Prepaid expenses and other current assets     1,409,996       102,567  
Current assets of discontinued operations     437,787       1,572,127  
                 
Total current assets     7,747,838       1,704,262  
                 
Property and equipment, net of accumulated depreciation of $5,991,572 and $451,195 as of December 31, 2020 and 2019, respectively     16,337,914       1,311,991  
Right of use assets - operating lease     1,270,989       46,882  
Other assets     499,707       2,620  
Other assets of discontinued operations, net     1,568,700       3,365,629  
                 
Total assets   $ 27,425,148     $ 6,431,384  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
Current liabilities:                
Accounts payable   $ 3,171,086     $ 603,129  
Accounts payable – related party     205,444       -  
Accrued expenses and other liabilities     2,373,057       258,543  
Right of use liabilities - operating leases short term     575,517       29,313  
Deferred revenue     30,000       30,000  
Secured line of credit     4,046,256       10,204  
Current portion of unsecured notes payable     2,187,436       76,374  
Current portion of secured notes payable, net     4,010,627       717,504  
Current portion of convertible notes, net     50,000       -  
Current liabilities of discontinued operations     2,243,037       4,042,055  
                 
Total current liabilities     18,892,460       5,767,122  
                 
Long term liabilities:                
Convertible notes payable, net     2,417,335       260,926  
Notes payable - unsecured, net of current portion     1,040,223       -  
Notes payable - secured, net of current portion     14,038,409       727,701  
Right of use liabilities - operating leases, net of current portion     846,212       17,569  
Long term liabilities of discontinued operations     1,008,362       579,514  
                 
Total liabilities     38,243,001       7,352,832  
                 
Commitments and contingencies                
                 
Stockholders' deficit                
Preferred stock 1,000,000 shares authorized:                
Series A preferred stock - $0.001 par value; 2,000 shares authorized; 2,000 shares issued and outstanding  at December 31, 2020 and 2019     2       2  
Series B convertible preferred stock - $0.001 par value; 6,000 shares authorized;  no shares issued and outstanding at December 31, 2020 and  2019, respectively     -       -  
Common stock - $0.001 par value; 250,000,000 shares authorized; 19,446,258 and 14,881,372  shares issued and outstanding at December 31, 2020 and 2019, respectively     19,447       14,881  
Additional paid in capital     10,978,254       4,756,194  
Accumulated deficit     (21,815,556 )     (5,692,525 )
                 
Total stockholders' deficit     (10,817,853 )     (921,448 )
                 
Total liabilities and stockholders' deficit   $ 27,425,148     $ 6,431,384  

 

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

 

F-2

 

 

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2020 and 2019
             
    December 31, 2020     December 31, 2019  
REVENUES   $ 26,665,719     $ 508,659  
                 
COST OF REVENUES     29,477,208       967,305  
                 

GROSS LOSS

    (2,811,489 )     (458,646 )
                 
OPERATING EXPENSES:                
Selling, general and administrative     5,267,186       1,707,982  
Impairment expense     1,084,671       565,466  
Acquisition costs     1,485,829       70,945  
                 
Total operating expenses     7,837,686       2,344,393  
                 
LOSS FROM OPERATIONS     (10,649,175 )     (2,803,039 )
                 
OTHER INCOME (EXPENSE)                
Interest expense, net     (3,801,020 )     (573,028 )
Other income     74,587       14,159  
Other expense     (30,000 )     -  

Loss on settlement of notes payable

    (14,204 )     (101,251 )
Gain on sale of assets     220,315       3,669  
Gain on extinguishment of debt     94,339       -  

Total other expense

    (3,455,983 )     (656,451 )
                 
NET LOSS FROM CONTINUING OPERATIONS     (14,105,158 )     (3,459,490 )
                 
Gain on disposal of discontinued operations     572,741       -  
Loss from discontinued operations     (2,336,573 )     (524,868 )
NET LOSS     (15,868,990 )     (3,984,358 )
                 
Preferred stock dividends     (254,041 )     (30,740 )
                 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS   $ (16,123,031 )   $ (4,015,098 )
                 
Net loss per common share                
Continuing operations   $ (0.80 )   $ (0.25 )
Discontinued operations   $ (0.10 )   $ (0.04 )
Net loss attributable to common shareholders   $ (0.90 )   $ (0.29 )
                 
Weighted average common shares outstanding                
Basic     17,860,452       13,824,474  
Diluted     17,860,452       13,824,474  

 

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

 

F-3

 

 

SMG INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the years ended December 31, 2020 and 2019
 
                                     
   Series A    Series B            Additional         
   Preferred Stock   Preferred Stock   Common Stock   Paid In   Accumulated     
   Shares   Value   Shares   Value   Shares   Value   Capital   Deficit   Total 
Balances at December 31, 2018   -   $-    -   $-    11,910,690   $11,911   $1,567,567   $(1,677,427)  $(97,949)
                                              
Shares issued for cash   -    -    -    -    1,436,000    1,436    357,564    -    359,000 
Shares issued to settle accounts liabilities   -    -    -    -    1,334,682    1,334    432,076    -    433,410 
Share based compensation   -    -    -    -    200,000    200    245,899    -    246,099 
Series A preferred shares issued for acquisition of Trinity Services LLC   2,000    2    -    -    -    -    1,938,998    -    1,939,000 
Warrant issued for notes payable - debt discount   -    -    -    -    -    -    214,090    -    214,090 
Series A preferred stock   -    -    -    -    -    -    -    (30,740)   (30,740)
Net loss   -    -    -    -    -    -    -    (3,984,358)   (3,984,358)
Balances at December 31, 2019   2,000    2    -    -    14,881,372    14,881    4,756,194    (5,692,525)   (921,448)
                                              
Shares issued for acquisition of 5J Entities   -    -    6,000    6    -    -    4,379,994    -    4,380,000 
Shares issued for deferred financing cost   -    -    -    -    2,498,736    2,499    417,289    -    419,788 
Share based compensation   -    -    -    -    -    -    66,566    -    66,566 
Warrant issued for notes payable - debt discount   -    -    -    -    -    -    59,439    -    59,439 
Shares issued to settle liabilities   -    -    -    -    445,926    446    65,554    -    66,000 

Shares issued with debt and beneficial conversion feature on convertible notes payable

   -    -    -    -    3,028,500    3,029    1,054,681    -    1,057,710 
Preferred stock dividends   -    -    -    -    -    -    -    (254,041)   (254,041)
Returned shares of MG Cleaners LLC   -    -    -    -    (1,408,276)   (1,408)   1,408    -    - 
Cancellation of Series B preferred stock and accrued dividends   -    -    (6,000)   (6)   -    -    177,129    -    177,123 
Net loss   -    -    -    -    -    -    -    (15,868,990)   (15,868,990)
                                              
Balances at December 31, 2020   2,000   $2    -   $-    19,446,258   $19,447   $10,978,254   $(21,815,556)  $(10,817,853)

 

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

 

F-4

 

 

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2020 and 2019

 

    December 31, 2020     December 31, 2019  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss from continuing operations   $ (14,105,158 )   $ (3,459,490 )
Adjustments to reconcile net loss to net                
cash used in operating activities:                
Share based compensation     66,566       246,099  
Depreciation and amortization     4,901,689       240,318  
Amortization of deferred financing costs     609,396       516,956  
Amortization of right of use assets - operating leases     286,790       305,903  
Impairment expense     1,084,671       565,466  
Bad debt expense     474,708       52,737  
Loss on settlement of liabilities     21,407       69,512  
Gain on disposal of assets     (220,315 )     (3,669 )
Gain extinguishment of debt     (94,339 )     -  
Changes in:                
Accounts receivable     2,782,038       29,716  
Prepaid expenses and other current assets     558,182       (77,568 )
Accounts payable     (2,158,362 )     936,797  
Accounts payable – related party     130,444       -  
Accrued expenses and other liabilities     2,067,828       198,506  
Right of use operating lease liabilities     (136,050 )     (305,903 )
Deferred revenue     -       30,000  
Net cash used in operating activities from continuing operations     (3,730,505 )     (654,620 )
Net cash used in operating activities from discontinued operations     (242,162 )     340,317  
Net cash used in operating activities     (3,972,667 )     (314,303 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Cash paid for acquisition of 5J Entities, net     (6,320,168 )     -  
Cash paid for acquisition of Trinity Services, LLC     -       (500,000 )
Cash paid for disposition of MG Cleaners, LLC     (75,000 )     -  
Cash received from sale of property and equipment     4,200       -  
Cash paid for purchase of property and equipment     (404,200 )     (28,107 )
Net cash used in investing activities from continuing operations     (6,795,168 )     (528,107 )
Net cash used in investing activities from discontinued operations     (42,368 )     (15,325 )
Net cash used in investing activities     (6,837,536 )     (543,432 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Payment of deferred financing costs     (223,558 )     -  
Proceeds from secured line of credit, net     4,156,238       -  
Payments on secured line of credit, net     -       (33,015 )
Proceeds from notes payable     5,584,048       1,180,000  
Payments on notes payable     (1,385,535 )     (819,105 )
Proceeds from sales of common stock     -       359,000  
Proceeds from convertible notes payable     3,144,295       50,000  
Payments in MG Cleaners acquisition - related party     -       (21,000 )
Net cash provided by financing activities from continuing operations     11,275,488       715,880  
Net cash provided by financing activities from discontinued operations     484,235       170,130  
Net cash provided by financing activities     11,759,723       886,010  
                 
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH     949,520       28,275  
                 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period     29,568       1,293  
                 
CASH,CASH EQUIVALENTS AND RESTRICTED CASH, end of period   $ 979,088     $ 29,568  
                 
Supplemental disclosures:                
Cash paid for income taxes   $ -     $ -  
Cash paid for interest   $ 1,979,483     $ 221,140  
                 
Noncash investing and financing activities                
Capitalization of ROU assets and liabilities - operating   $ -     $ 352,785  
Non-cash consideration paid for business acquisitions   $ 4,380,000     $ 1,939,000  
Cancellation of Series B Convertible Preferred stock and accrued dividends   $ 177,123     $ -  
Non-cash consideration paid for increase in secured notes payable   $ 5,840,622     $ -  
Non-cash consideration paid for prepaids from debt financing   $ 331,065     $ -  
Non-cash consideration increase in convertible notes payable   $ 225,000     $ -  
Debt discount from issuance of common stock warrants   $ 59,439     $ 214,090  
Preferred stock dividend   $ 254,041     $ 30,740  
Settlement of accounts payable and accrued interest with common stock issuance   $ 66,000     $ 144,016  
Settlement of notes payable with common stock issuance   $ -     $ 219,882  
Settlement of accounts payable with note payable   $ -     $ 123,818  
Expenses paid by related party   $ 69,516     $ -  
Shares issued for deferred financing costs   $ 419,788     $ -  
Prepaid expenses financed with note payable   $ 100,997     $ 234,914  
Equipment received in exchange for settlement of notes receivable   $ 223,200     $ -  
Note payable for property and equipment   $ 1,353,500     $ -  
Beneficial conversion feature on convertible notes payable   $ 1,057,710     $ -  
Capitalized accrued interest   $ -     $ 4,559  

 

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

 

F-5

 

 

SMG INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — ORGANIZATION AND NATURE OF BUSINESS

 

Organization and Nature of Business

 

SMG Industries Inc. (“we”, “our”, the “Company” or “SMG”) is a corporation established pursuant to the laws of the State of Delaware on January 7, 2008. The Company’s original business was the acquisition and stockpile of a rare metal known as Indium used in cell phones and other industrial applications. The Company eventually sold its stockpile and distributed most of the proceeds to its stockholders via special dividends and share repurchases.

 

The Company today is a growth-oriented midstream, logistics and oilfield services company that operates throughout the domestic Southwest United States. Through its wholly-owned operating subsidiaries, the Company offers an expanding suite of products and services across the oilfield market segments of drilling, completions and production.

 

SMG is headquartered in Houston, Texas with facilities in Tomball, Odessa, Floresville, Henderson, Victoria and Palestine, Texas.

 

In March 2020 the World Health Organization declared COVID-19 a pandemic. Throughout 2020 and into 2021, many variants of the virus arose. We are still assessing the impact COVID-19 and related variants (together, “COVID-19”) may have on our business, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.  The extent to which the COVID-19 pandemic and global efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic.

 

F-6

 

 

 

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The Company prepares its consolidated financial statements on the accrual basis of accounting. The accompanying consolidated financial statements include the accounts of the Company and its wholly subsidiaries, 5J Trucking LLC, 5J Oilfield Services LLC, 5J Specialized LLC, 5J Transportation LLC and 5J Brokerage LLC (together referred to as “5J”), Momentum Water Transfer Services, LLC Jake Oilfield Solutions LLC and Trinity Services LLC, all of which have a fiscal year end of December 31. All intercompany accounts, balances and transactions have been eliminated in the consolidation.

 

Use of Estimates in Financial Statement Preparation

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Acquisition Accounting

 

The Company’s acquisitions are accounted for using the purchase acquisition method of accounting whereby purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on fair value. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired is recorded as goodwill. The consolidated statements of operations for the fiscal years presented include the results of operations for each of the acquisitions from the date of acquisition.

 

Customer Concentration and Credit Risk

 

During the year ended December 31, 2020,  one customer accounted for 11% of our total gross revenues. During fiscal year 2019, one customer accounted for approximately 71% of our total gross revenues. One customer accounted for 10% of accounts receivable at December 31, 2020 and no customer accounted for more than 10% of accounts receivable as of December 31, 2019.

 

No vendors exceeded 10% of accounts payable at December 31, 2020 and 2019.

 

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

 

Cash and Cash Equivalents

 

Cash equivalents include all highly liquid investments with original maturities of three months or less.

 

Accounts Receivable

 

Accounts receivable are comprised of unsecured amounts due from customers. The Company carries its accounts receivable at their face amounts less an allowance for bad debts. The allowance for bad debts is recognized based on management’s estimate of likely losses per year, based on past experience and review of customer profiles and the aging of receivable balances. As of December 31, 2020 and 2019, the allowance for bad debts was $691,098 and $42,182, respectively.

 

F-7

 

 

Inventory

 

Inventory, consisting of raw materials, work in progress and finished goods, is valued at the lower of the inventory’s costs or net realizable value, using the first in, first out method to determine the cost. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to net realized value, if lower. All inventory of the Company is held by MG and Trinity and is classified in the December 31, 2020 and 2019 consolidated balances sheets as Current Assets of Discontinued Operations.

 

Property and Equipment

 

Property and equipment are valued at cost. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows:

 

Category   Estimated
Useful
Lives
Building and improvements   20 years
Vehicles and trailers   5 years
Equipment   5 -7 years
Furniture, Fixtures and Other   3 - 7 years

 

Goodwill, Intangible Assets, and Long-Lived Assets

 

Goodwill is carried at cost and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 350. The Company completed an evaluation of goodwill at December 31, 2019 and determined that the goodwill should be fully impaired.

 

The fair value of the Company’s reporting unit is dependent upon the Company’s estimate of future cash flows and other factors. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from the Company’s market capitalization plus a suitable control premium at date of the evaluation.

 

The financial and credit market volatility directly impacts the Company’s fair value measurement through the Company’s weighted average cost of capital that the Company uses to determine its discount rate and through the Company’s stock price that the Company uses to determine its market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded.

 

The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.

 

The Company’s long-lived assets, including intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset. During the years ended December 31, 2020 and 2019, the Company evaluated long lived assets for impairment and recorded impairment losses of $1,084,671 and $565,466, respectively.

 

F-8

 

 

Revenue Recognition

 

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

 

-          Identification of the contract with a customer

 

-          Identification of the performance obligations in the contract

 

-          Determination of the transaction price

 

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

 

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

 

Disaggregation of revenue

 

All of the Company’s revenue from continuing operations is currently generated from services. As such no further disaggregation of revenue information is provided. All revenues are currently in the southern region of the United States.

 

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.

 

Cost of Revenues

 

Cost of revenues includes all direct expenses incurred to produce the revenue for the period. This includes, but is not limited to, direct employee cost, direct contract labor, transportation costs, equipment rental, equipment maintenance, fuel and non-cash depreciation of equipment. Cost of revenues are recorded in the same period as the corresponding revenue.

 

Discontinued Operations

 

A component of an entity that is disposed of by sale or abandonment is reported as discontinued operations if the transaction represents a strategic shift that will have a major effect on an entity's operations and financial results. The results of discontinued operations are aggregated and presented separately in the Consolidated Statements of Operations. Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities of discontinued operations in the Consolidated Balance Sheets as of December 31, 2020 and 2019. The cash flows of Trinity and MG Cleaners are reflected as cash flows from discontinued operations within the Company’s Consolidated Statements of Cash Flows for each period presented.

 

Amounts presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical basis of assets, liabilities, and historical results of Trinity and MG Cleaners. The discontinued operations exclude general corporate allocations.

 

Employee Benefits

 

Wages, salaries, bonuses and social security contributions are recognized as an expense in the year in which the associated services are rendered by employees. Any unused portion of accrued sick or vacation leave expires on December 31 of each year and is not eligible to be carried over to the following year.

 

F-9

 

 

Fair Value of Financial Instruments

 

The carrying value of short-term instruments, including cash, accounts payable and accrued expenses, and short-term notes approximate fair value due to the relatively short period to maturity for these instruments. The long-term debt approximate fair value since the related rates of interest approximate current market rates.

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a three-level valuation hierarchy for disclosures of fair value measurements, defined as follows:

 

Level 1: inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets

 

Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3: inputs to the valuation methodology are unobservable and significant to the fair value

 

The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.

 

During the years ended December 31, 2020 and 2019, the Company recorded non-recurring fair value measurements related to the 5J, Trinity Services LLC and Momentum Water Transfer Services LLC acquisitions. These fair value measurements were classified as Level 3 within the fair value hierarchy. See Note 9.

 

Basic and Diluted Net Loss per Share

 

The Company presents both basic and diluted net loss per share on the face of the statements of operations. Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted per share calculations give effect to all potentially dilutive shares of common stock outstanding during the period, including stock options and warrants, and using the treasury-stock method. If anti-dilutive, the effect of potentially dilutive shares of common stock is ignored. For the year ended December 31, 2020, 2,060,000 of stock options, 1,763,335 of warrants, 4,000,000 shares issuable from Series A Preferred Stock and 26,792,950 shares issuable from convertible notes were considered for their dilutive effects. For the year ended December 31, 2019, 845,000 of stock options, 1,430,001 of warrants, 4,000,000 shares issuable from Series A Preferred Stock and 600,000 shares issuable from convertible notes were considered for their dilutive effects. As a result of the Company’s net losses for the years ended December 31, 2020 and 2019, all potentially dilutive instruments were excluded as their effective would have been anti-dilutive.

 

Basic and Diluted Loss   December 31, 2020     December 31, 2019  
Net loss from continuing operations   $ (14,105,158 )   $ (3,459,490 )

Net loss from discontinued operations

    (1,763,832 )     (524,868 )
Net loss     (15,868,990 )     (3,984,358 )
Preferred stock dividends     (254,041 )     (30,740 )
Net loss attributable to common shareholders     (16,123,031 )     (4,015,098 )
                 
Basic and Dilutive Shares:                
  Weighted average basic shares outstanding     17,860,452       13,824,474  
  Net dilutive stock options     -       -  
  Dilutive shares     17,860,452       13,824,474  

 

F-10

 

 

Assets Held for Sale

 

Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. See Note 9 for discussion of impairments of our assets held for sale that are included within assets and liabilities of discontinued operations on the consolidated balance sheet

 

Income Taxes

 

Income taxes are accounted under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized must then be offset by recording a valuation allowance. A valuation allowance has been established against all of the deferred tax assets, as it is more likely than not that these assets will not be realized given the Company’s expected operating losses. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgement occurs. The Company recognizes potential interest and penalties, if any, related to income tax positions as a component of the provision for income taxes on the statements of operations.

 

Share-Based Payment Arrangements

 

The Company measures the cost of services received in exchange for an award of equity instruments (share-based payments, or SBP) based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the SBP award—the requisite service period (vesting period). For SBP awards subject to conditions, compensation is not recognized until the performance condition is probable of occurrence. The grant-date fair value of share options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense for SBP awards granted to nonemployees is remeasured each period as the underlying options vest.

 

The fair value of each option granted during the years ended December 31, 2020 and 2019 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table:

 

   2020   2019 
Expected dividend yield   0%   0%
Expected option term (years)   5    5 
Expected volatility   223% - 244%    175% - 215% 
Risk-free interest rate   0.33% - 0.89%    1.6% - 2.3% 

 

The expected term of options granted represents the period of time that options granted are expected to be outstanding. The expected volatility was based on the volatility in the trading of the Company’s common stock. The assumed discount rate was the default risk-free five-year interest rate provided by Bloomberg L.P.

 

Reclassification

 

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)," which requires an entity to recognize credit losses as an allowance rather than as a write-down. For smaller reporting entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is planning to adopt ASU 2016-03 for its year ending December 31, 2022 and is currently evaluating to what extent ASU 2016-13 will affect the Company's consolidated financial position, results of operations, cash flows and related disclosures.

 

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

 

F-11

 

 

NOTE 3 – GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, no adjustments to the financial statements have been made to account for this uncertainty. The Company concluded that the uncertainty surrounding the COVID-19 global pandemic, its negative working capital and negative cash flows from operations are conditions that raised substantial doubt about the Company’s ability to continue as a going concern. The Company plans to continue to generate additional revenue (and improve cash flows from operations) in connection with its anticipated growth related to the Company’s February 2020 acquisition of 5J and its expanded revenue lines in heavy haul, super heavy haul, drilling rig mobilization, commodity freight, and brokerage services. The Company believes that loans obtained under the Paycheck Protection Program in 2020 and 2021 will be forgiven in accordance with the terms of the program.

 

F-12

 

 

NOTE 4 – LONG-LIVED ASSETS

 

Property and equipment

 

Property and equipment at December 31, 2020 and 2019 consisted of the following:

 

   December 31, 2020   December 31, 2019 
Equipment  $8,549,824   $1,030,296 
Trucks and Trailers   11,062,588    - 
Downhole oil tools   659,873    671,888 
Vehicles   1,550,335    56,859 
Buildings   493,626    - 
Furniture, fixtures and other   13,240    4,143 
           
Property and equipment, gross   22,329,486    1,763,186 
           
Less: accumulated depreciation   (5,991,572)   (451,195)
           
Property and equipment, net  $16,337,914   $1,311,991 

 

Depreciation expense for the years ended December 31, 2020 and 2019 was $4,901,689 and $221,305, respectively.

  

During the years ended December 31, 2020 and 2019, the Company evaluated long lived assets for impairment and recorded impairment losses for continuing operations of $1,084,671 and $565,466, respectively, and $983,660 and $12,300 for discontinued operations, respectively.

 

Goodwill

 

During the year ended December 31, 2019, the Company fully impaired its goodwill of $185,751 related to the acquisition of Momentum Water Transfer Services LLC on December 7, 2018. At December 31, 2020 and 2019, the Company had no recorded goodwill.

 

F-13

 

 

NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses as of December 31, 2020 and 2019 included the following:

 

   December 31, 2020   December 31, 2019 
Payroll and payroll taxes payable  $490,033   $118,653 
Sales tax payable   1,627    1,680 
State income tax payable   144,800    - 
Interest payable   839,240    97,292 
Credit cards payable   31,422    - 
Accrued operational expenses   664,710    - 
Accrued general and administrative expenses   79,067    - 
Accrued dividend   107,658    30,740 
Other   14,500    10,178 
           
Total Accrued Expenses  $2,373,057   $258,543 

 

F-14

 

 

 

NOTE 6 – NOTES PAYABLE

 

Notes payable included the following as of December 31, 2020 and 2019:

 

    December     December  
    31, 2020     31, 2019  
Secured notes payable:                
                 
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year, due in monthly installments ending January 2023.     22,293       28,000  
                 
Secured note payable issued to a shareholder who controls approximately 9.7% of votes issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%. Principal balance $100,000, net of deferred financing costs of $0.     100,000       100,000  
                 
Secured note payable issued to a shareholder who controls approximately 6.0% of votes issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. On March 6, 2020, the note was extended to June 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%. Principal balance $100,000, net of deferred financing costs of $0.     100,000       100,000  
                 
Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance, principal balance $100,000. Note is currently past due. If a default notice is received, the interest rate will be 14%.     100,000       100,000  
                 
Secured note payable issued on December 7, 2018 related to the acquisition of Momentum Water Transfer Services LLC, bearing interest of 6% per year and due in monthly installments of $7,500, with a maturity date of December 8, 2023.     792,470       792,470  
                 
Secured note payable issued to a shareholder who controls approximately 9.7% of votes issued May 1, 2019, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000, net of deferred financing costs of $7,125. Note was extended to March 30, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.     100,000       100,000  
                 
Secured note payable issued to a shareholder who controls approximately 9.7% of votes May 1, 2019, bearing interest of 10% per year, due June 30, 2020. Note is currently past due. If a default notice is received, the interest rate will be 14%.     80,000       80,000  
                 
Secured note payable issued to a shareholder who controls approximately 9.7% of votes December 12, 2019, bearing interest of 12% per year, due June 3, 2020. Note is currently past due. If a default notice is received the interest rate will be 14%.     25,000       50,000  
                 
Secured note payable issued July 26, 2019, bearing interest of 7% per year, due in monthly installments ending July 2020. Note is currently past due. If a default notice is received the interest rate will be 10%.     123,818       123,818  
                 
Secured note payable issued on February 27, 2020 in connection with the 5J acquisition to a shareholder who owns 100% of Series B convertible preferred stock, bearing interest of 10% per year, due February 1, 2023.  In October 2020, note holder was named as a board member     2,000,000       -  
                 
Various notes payable secured by equipment of 5J Trucking, LLC, bearing interest ranging from 5.32% to 5.5% maturing from January 2023 through March 2023.     568,589       -  
                 
Secured note payable issued on February 27, 2020 , bearing interest of 10.0% per year, due March 1, 2023. The note holder, owns approximately 12.2% of common shares and has an officer on the Board of Directors of the Company. Deferred financing costs associated with this agreement were $3,504 as of December 31, 2020     1,012,237       -  
                 
Secured Master Lease Agreement refinanced substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 which amount was financed based on 75% of the net forced liquidation value of the equipment. Deferred financing costs associated with this agreement were $361,831 as of December 31, 2020.     11,708,919       -  
                 
Secured promissory notes with Small Business Administration Economic Injury Disaster Loans, bearing interest 3.75% annually and matures in June, August and September 2050.     390,000       -  
                 
Secured promissory note issued on June 20, 2020. The note is due and payable in thirty-six monthly installments of $45,585 commencing on July 20, 2020 and the final installment is due on July 1, 2023. Deferred financing costs associated with this agreement were $279,572 as of December 31, 2020     1,570,617       -  
      18,693,943       1,474,288  
Less discounts and deferred finance costs     (644,907 )     (29,083 )
Less current maturities     (4,010,627 )     (717,504 )
                 
Long term secured notes payable, net of current maturities and discounts   $ 14,038,409     $ 727,701  

 

F-15

 

 

On January 2, 2018, we financed a truck with a note to a bank. The $41,481 note has an interest rate of 6.29% and payments of principal and interest are paid monthly. The note is secured by the truck purchased. This note matures in January 2023.

 

On December 7, 2018, the Company issued and sold secured promissory notes in the aggregate principal amount of $300,000 to three separate purchasers. In addition to the issuance of the Notes an aggregate of 500,000 warrants (“Warrants”) were issued to the purchasers of the Notes. The Warrants are exercisable for a period of five years and are exercisable at $0.40 per share. Interest on the Notes shall be paid to the purchasers at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Note is one year after the issuance date. The Notes are secured by all of the assets of the Company and the assets of MWTS, subject to prior liens and security interests. The warrants were valued at $203,337 and recorded as a discount to the notes payable. The discount will be amortized over the life of the notes payable.

 

On December 7, 2018 the Company issued a 6% note to the MWTS Member in the amount of $800,000 as part of the purchase price for MWTS. The note requires monthly payment of $7,500, matures December 8, 2023 and is secured by all the assets of the Company subject to prior security interests.

 

On January 11, 2019 the Company issued a 10% note in the amount of $100,000 to a shareholder with ownership interest of 13.9%. The note matured on December 7, 2019 and is secured by a junior lien against the Company assets. In April 2019, the Company issued 511,370 shares of its restricted common stock with a fair value of $203,525 to settle this $100,000 note payable and $2,274 of accrued interest in full. The transaction resulted in a loss on settlement of $101,251 during the year ended December 31, 2019.

 

In May 2019, the Company issued a secured promissory note in the amount of $100,000 with a maturity date of July 1, 2019 to an individual investor. The Company issued a five-year warrant to purchase 100,000 shares of the Company’s common stock at a fixed price of $0.30. The warrants were valued $44,091 and recorded as a debt discount that was fully amortized as of December 31, 2019. On June 18, 2019, the Company issued 150,000 warrants with an exercise price of $0.30 and a term of ten years in exchange for an extension of the maturity date of the note through September 30, 2019. The warrants were valued at $67,223 and will be amortized over the extension period of the note. On October 1, 2019, the Company issued 120,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through March 30, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued at $14,330 and which was amortized over the extension period of the note.

 

In June 2019, the Company issued a 10% secured promissory note in the amount of $80,000 to an individual investor. The Company issued a ten-year warrant to purchase 120,000 shares of the Company’s common stock at a fixed price of $0.30 per share. The warrants were valued at $53,780 and recorded as a debt discount. As of September 30, 2019, $53,780 was amortized leaving a discount balance of $0. On October 2, 2019, the Company issued 100,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through March 30, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued at $11,942 and was amortized over the extension period of the note.

 

On July 26, 2019, the Company paid a vendor payable that totaled $247,637, by issuing a secured promissory note in the name of its frac water company Jake Oilfield Solutions LLC for $123,819. The interest rate was 7% with principal and interest due at maturity July 25, 2020. The remaining balance of $123,818 was converted into 353,766 shares of SMG’s restricted common stock in July 2019.

 

F-16

 

 

On September 20, 2019, the Company issued a $200,000 12% promissory note. The note is due and payable in three monthly installments, the first two installments are interest only and the third and final installment for the balance of the principal and accrued interest. Note was refinanced in January 2020.

 

On October 4, 2019, we sold for $30,000 property categorized on our balance sheet as an asset held for sale. This vacant property acquired by MG Cleaners years earlier is located in Carthage, Texas and not a part of our current operations. The original MG Cleaners seller note was secured by this property and received the proceeds of this sale of approximately $30,000. The seller note had a balance of $147,608 at the time of the sale of property. The remainder of the note was retired and paid in full by issuing 400,000 restricted shares of our common stock. See Note 7 – Stockholders’ Deficit.

 

On December 12, 2019, the Company issued a $50,000 12% secured promissory note. The note is due and payable in monthly installments of the principal and accrued interest with the first payment of $25,000 due on or before December 19, 2019. The remaining balance shall be paid in $5,000 monthly installments until maturity on June 3, 2020. On December 12, 2019, the Company issued 75,000 warrants with an exercise price of $0.15 and a term of ten years in exchange for a second extension of the maturity date of the note through June 3, 2020 and is currently past due. If a default notice is received, the interest rate will be 14%. The warrants were valued at $17,947 which was amortized over the extension period of the note.

 

On February 27, 2020, the 5J Entities entered into a Master Lease Agreement with Utica Leaseco LLC (“Utica”) pursuant to which Utica refinanced substantially all of the 5J Entities equipment in the aggregate amount of $11,950,000 which amount was financed based on 75% of the net forced liquidation value of the equipment. Pursuant to the terms of the Utica Financing, the 5J Entities will pay a monthly fee to Utica for a period of 51 months, with a cash payment due at the end of the lease term in the amount of $831,880. The 5J Entities own all of the assets financed pursuant to the Utica Financing, subject to Utica’s security interest in all of the equipment of the 5J Entities pursuant to the terms of the security agreement. Each of the Company and Matthew Flemming, its CEO, have entered into guaranty agreements with Utica, whereby they have guaranteed all of the obligations of the 5J Entities under the Utica Master Lease Agreement, pursuant to the guaranty.

 

On May 19, 2020 the Company entered into its first amendment to Lease Documents with Utica, whereby for a six month period effective April 27, 2020 the Company’s payments were amended to $150,000 per month.

 

On August 31, 2020 the Company entered into its second amendment to Lease Documents with Utica, whereby for a two month period effective October 27, 2020 the Company’s payments were amended to $150,000 per month. Starting December 27, 2020, at the end of the modification period, the Company’s payment will resume at $379,400 through the maturity date of May 27, 2024. This amendment was accounted for as a modification of the debt. The Utica financing has an effective interest rate of approximately 18.6% following the amendments discussed above.

 

On June 17, 2020, our wholly-owned subsidiary, Momentum Water Transfer Services LLC, executed a note with the SBA for $90,000 in connection with the SBA’s EIDL program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $439 are due monthly beginning twelve months from the date of the Note. The Note grants the SBA a general security interest in Momentum’s collateral and has no penalty of prepayment.

 

On July 20, 2020, the 5J Specialized, LLC issued a secured promissory note for $1,641,060, which includes precomputed interest of $287,560. The precomputed interest is being accounted for as a debt discount and amortized through the maturity date of the note. The note is due and payable in thirty-six monthly installments of $45,585 commencing on July 20, 2020 and the final installment is due on July 1, 2023. The note is secured by machinery and equipment owned by SMG.

 

On August 30, 2020, SMG, executed a note with the SBA for $150,000 in connection with the SBA’s EIDL program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the note. The note grants the SBA a general security interest in SMG’s collateral and has no penalty of prepayment.

 

On September 2, 2020, our wholly-owned subsidiary, 5J Trucking, LLC, executed a note with the SBA for $150,000 in connection with the SBA’s EIDL program. The note has a thirty year term, an annual interest rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the note. The note grants the SBA a general security interest in 5J Trucking, LLC’s collateral and has no penalty of prepayment.

 

Notes Payable – Discontinued Operations

 

On January 23, 2020, the Trinity Services issued a secured promissory note for $1,272,780, which includes precomputed interest of $210,018. The note is due and payable in thirty-six monthly installments of $35,355 commencing on March 25, 2020 and the final installment is due on February 25, 2023. The note is secured by machinery and equipment owned by SMG. The balance of this note payable is included in Current Liabilities-Discontinued Operations on the Company’s Consolidated

 

On May 27, 2020, our wholly-owned subsidiaries, Trinity Services, LLC and MG Cleaners, LLC each executed notes with the SBA for $150,000 in connection with the SBA’s economic injury disaster loan (“EIDL”) program. The notes have a thirty year term, an annual interest rate of 3.75% and payments of $731 are due monthly beginning twelve months from the date of the note. The notes grant the SBA a general security interest in Trinity Services’ and MG Cleaners’ collateral and has no penalty of prepayment.

 

Future maturities of debt as of December 31, 2020 are as follows:

 

2021     $ 12,481,982  
2022       7,099,344  
2023       7,235,338  
2024       2,590,578  
2025       354,811  
Total     $ 29,762,053  

 

F-17

 

 

 

Notes Payable – Unsecured

 

   December 31,   December 31, 
   2020   2019 
Unsecured promissory notes with Small Business Administration Paycheck Protection Program, bearing interest 1.00% annually and matures in April 2022.  $3,148,100   $- 
           
Unsecured note payable with a shareholder who controls approximately 6.0% of votes.  Note issued on August 10, 2018 for $40.000, due December 30, 2018 (extended to June 30, 2020) and 10% interest per year, balance of payable is due on demand.  Additional $25,000 advanced and due on demand Note is currently past due. If a default notice is received, the interest rate will be 15%.   44,559    44,559 
           
Unsecured advances from the sellers of Momentum Water Transfer Services LLC, non-interest bearing and due on demand   35,000    35,000 
           
Notes payable – unsecured   3,227,659    79,559 
Less discount   -    (3,185)
    3,227,659    76,374 
           
Less current portion   (2,187,436)   (76,374)
           
Notes payable - unsecured, net of current portion  $1,040,223   $- 

 

On October 1, 2019, we entered into a second amendment to an unsecured promissory note to extend the maturity of the secured note held by a stockholder to June 30, 2020 and capitalizing the accrued interest of $4,559 where the total principal of the promissory note is now $44,559. All other terms of the note remained. In connection with this amendment, we issued a new common stock purchase warrant for 40,000 shares, with a ten-year term and a fixed exercise price of $0.15 per share and customary other provisions. The warrants were valued at $4,777 and which was amortized over the extension period of the note. This note is currently past due.

 

In April 2020, 5J Oilfield Services LLC was informed by Hancock Whitney Bank, its lender, that they received approval from the U.S. Small Business Administration (“SBA”) to fund 5J’s request for a loan under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, 5J has entered into a two-year promissory note. Per the terms of the PPP Loan, 5J will return $10,000 of the SBA advance and receive net cash proceeds of $3,148,100 from  the Hancock Whitney Bank. In accordance with the requirements of the CARES Act, 5J intends to use the proceeds from the PPP Loan primarily for payroll costs. The PPP Loan is scheduled to mature on August 22, 2022, has a 1.00% interest rate, and is subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.

 

In April and May 2020, SMG., Trinity, and Jake, (collectively the “Companies”) were informed by their lender, Prosperity Bank (the “Bank”), that the Bank received approval from the U.S. Small Business Administration (“SBA”) to fund the Companies’ request for loans under the SBA’s Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loans, the Companies have entered into two-year promissory notes. Per the terms of the PPP Loans, SMG received total proceeds of $72,500, Trinity received total proceeds of $195,000, and Jake received total proceeds of $21,200 from the Bank. In accordance with the requirements of the CARES Act, the Companies intend to use the proceeds from the PPP Loans primarily for payroll costs. The PPP Loans are scheduled to mature on August 20, 2022 for SMG, August 28, 2020 for Trinity and September 1, 2022 for Jake. The loans have a 1.00% interest rate and are subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act.

 

F-18

 

 

Accounts Receivable Financing Facility (Secured Line of Credit)

 

On June 19, 2019, 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 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 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. This arrangement was terminated in May 2020.

 

On February 27, 2020, the 5J Entities entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”).The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”). The Company recorded deferred financing costs of $223,558 recognized on the date of incurrence as a discount. During the year ended December 31, 2020, $82,349 of debt discount was amortized to interest expense, and unamortized discount was $144,890 as of December 31, 2020. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company.

 

The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 85% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Entities and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the AR Facility and the average daily revolving loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Entities with 60 days written notice. There is an early termination fee equal to two percent (2.0%) of the then maximum account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0%) of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing.

 

The balances under the above lines of credit was $4,046,256 and $10,204 as of December 31, 2020 and 2019, respectively.

 

F-19

 

 

Convertible Notes Payable

 

On September 28, 2018, the Company entered into a secured note purchase agreement with an individual investor for the purchase and sale of a convertible promissory note (“Convertible Note”) in the principal amount of $250,000. The Convertible Note is convertible at any time after the date of issuance into shares of the Company’s common stock at a conversion price of $0.50 per share. Interest on the Note shall be paid to the investor at a rate of 8.5% per annum, paid on a quarterly basis, and the maturity date of the Convertible Note is two years after the issuance date. The Convertible Note is secured by all of the assets of the Company, subject to prior liens and security interests. The Company evaluated the Convertible Note and determined is a conventional convertible instrument. As a result, a beneficial conversion feature was calculated as $100,000 at the time of issuance and recorded as a discount. During the year ended December 31, 2020, $39,075 of the discount was fully amortized. On February 27, 2020, the principal amount of $250,000 was converted into the Amerisource Stretch Note and is convertible into the Company’s common stock at a fixed exercise price of $0.25 per share anytime while the note is outstanding.

 

In April 2019, the Company issued a convertible promissory note in the amount of $50,000 to an individual investor. The note bears an interest rate of 8.50 %, payable in cash quarterly, matures in two years and is convertible at any time into shares of the Company’s common stock at a fixed conversion price of $0.50 (fifty cents) per share.

 

On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation, which has an equity ownership of 12.2% and is considered a related party, for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Stretch Note”). The Amerisource Stretch Note matures on February 27, 2023 and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Stretch Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s common stock with a fair value of $419,788 were issued to the noteholder in connection with the sale of the Amerisource Note. The Company recorded deferred financing costs of $419,788 recognized on the date of incurrence as a discount and will be amortized over the life of the loan. During the year ended December 31, 2020, $116,608 of debt discount was amortized to interest expense, and there was $303,180 of unamortized discount as of December 31, 2020. The Amerisource Stretch Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty.

 

During the year ended December 31, 2020, the Company entered into secured note purchase agreements with nine individual investors for the purchase and sale of convertible promissory notes (“Convertible Notes”) in the principal amount of $2,019,000. The Convertible Notes are convertible at any time after the date of issuance into shares of the Company’s common stock at a conversion price of $0.10 per share. Interest on the Convertible Notes shall be paid to the investors at a rate of 10.0% per annum, paid on a quarterly basis, and the maturity date of the Convertible Notes is two years after the issuance date. The Convertible Notes are secured by all of the assets of the Company, subject to prior liens and security interests. The Company also issued a total of 3,028,500 shares of common stock to the investors. The Company recognized a debt discount of $1,057,710 which is equivalent to the relative fair value of the 3,028,500 common shares and the beneficial conversion feature on the Convertible Notes. During the year ended December 31, 2020, $158,930 of the discount was amortized. Of the $2,019,000 principal amount, $1,669,000 of the convertible notes are held by investors who are considered related parties, primarily existing debt holders. As of December 31, 2020, there was $898,780 of unamortized discount remaining.

 

As of December 31, 2020, the convertible notes, net balance was $2,467,335 which long term convertible notes payable of $2,417,335 and current portion of convertible notes of $50,000. As of December 31, 2019, the convertible notes balance was $260,926.

 

NOTE 7 – STOCKHOLDERS’ DEFICIT

 

Year ended December 31, 2020

 

During the year ended December 31, 2020, the Company issued 2,498,736 shares of the common stock to the noteholders in connection with the sale of the Amerisource Stretch Note. Amerisource serves as agent for the note holders, beneficially owns approximately 33.8% of common shares including potential shares issuable upon conversion of debt, and has an officer on the Board of Directors of the Company.

 

In July 2020, the Company issued 445,926 shares of its common stock for the settlement of $15,000 of accounts payable and $29,593 of accrued interest. The fair value of the common stock issued was $66,000 resulting in a loss on settlement of $21,407.

 

On November 10, 2020, the Company filed an amendment to its certificate of incorporation with the Secretary of State of the State of Delaware, increasing its authorized number of shares of common stock to 250,000,000 in connection with our Definitive 14C information statement filed with the SEC on September 28, 2020, pursuant to which a majority of our stockholders entitled to vote thereon approved such action.

 

F-20

 

 

Year ended December 31, 2019

 

During the year ended December 31, 2018, the Company issued a total of 80,000 common shares to three consultants for services. During the year ended December 31, 2019, the Company recognized expense of $31,896 related to these services. In May 2019, the Company issued a total of 200,000 common shares to consultants for services. During the year ended December 31, 2019, the Company recognized expense of $246,099 related to these services.

 

During the year ended December 31, 2019, the Company issued 393,312 shares of its restricted common stock in settlement of $138,012 of liabilities. The fair value of the common stock issued was $124,688 resulting in a gain on settlement of $13,328.

 

During the year ended December 31, 2019, the Company issued 1,436,000 shares of its restricted common stock for proceeds of $359,000 from accredited investors.

 

In April 2019, the Company issued 511,370 shares of its restricted common stock with a fair value of $203,525 to settle $100,000 note payable and $2,274 accrued interest in full. The transaction resulted in a loss on settlement of $101,251.

 

On October 1, 2019, we entered into a second amendment to a secured promissory note to extend the maturity of the secured note held by a stockholder to June 30, 2020 and capitalizing the accrued interest of $4,559 where the total principal of the promissory note is now $44,559. All other terms of the note remained. In connection with this amendment, we issued a new common stock purchase warrant for 40,000 shares, with a ten-year term and a fixed exercise price of $0.15 per share and customary other provisions.

 

On October 4, 2019, we sold property categorized on our balance sheet as an asset held for sale for $30,000 of cash proceeds. This vacant property acquired by MG Cleaners years earlier is located in Carthage, Texas and not a part of our current operations. The original MG Cleaners seller note was secured by this property and the sellers of MG Cleaners received the proceeds of this sale of approximately $30,000. The seller note had a balance of $147,608 at the time of the sale of property. The remainder of the note was retired and paid in full by issuing 400,000 restricted shares of our common stock with a fair value of $99,200. The Company recognized a $18,408 gain on the settlement of note payable.

 

On October 17, 2019, we issued 30,000 shares of our restricted common stock with a fair value of $6,000 in settlement of accounts payable. No gain or loss was recognized on the settlement of accounts payable.

 

F-21

 

 

Preferred Stock – Series A Convertible Preferred stock

 

On June 4, 2019 the Company filed a Certificate of Designation of Preferences, Rights and Limitations of 3% Series “A” Convertible Preferred Stock to create a new class of stock in connection with its pending acquisition. This Series A Convertible Preferred stock has designated 2,000 shares, has a stated value of $1,000 per share and was delivered to the seller of Trinity Services LLC at closing. As of December 31, 2019, the Company has accrued $30,740 in dividends for the Series A preferred stock.

 

The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon liquidation, winding up or dissolution of the Corporation, rank senior to all classes of Common Stock and to each other class of Capital Stock of the Corporation or series of Preferred Stock of the Corporation existing or hereafter created. The Series A Preferred Stock shall pay a three percent (3%) annual dividend on the outstanding Series A Preferred Stock, all of which shall be accrued until the Series A Preferred Stock has been converted.

 

At any time from issuance, the stated value of each outstanding share of Series A Preferred Stock, plus accrued dividends thereon, shall be convertible (in whole or in part), at the option of the Holder into shares of the Company’s Common Stock at a fixed conversion price of $0.50 per share on the date on which the Holder notices a conversion.

 

All outstanding shares of Series A Preferred Stock shall automatically convert into shares of the Company’s Common Stock upon the earlier to occur of: (i) twelve months after the date of issuance of the Series A Preferred Stock; or (ii) six months after the date of issuance of the Series A Preferred Stock, provided that (a) all shares of the Company’s Common Stock issued upon conversion may be sold under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing price of the Company’s Common Stock has been at least of $0.60 per share during the twenty (20) trading days prior to the date of conversion.

 

On July 20, 2020, in connection with the sole holder of the Series A Convertible Preferred stock signing a personal guarantee on a 5J equipment note, the Company agreed and filed an amendment the Series A certificate of designation and terms to increase the coupon rate from 3% to 5% for the remainder of the term and to extend the term prior to non redeemable conversion from June 4, 2020 to July 20, 2021.

 

On August 5, 2020, the following terms of the Series A Preferred Stock were amended:

 

·The dividend was increased from 3% to 5%; and
·All outstanding shares of the nonredeemable Series A Convertible Preferred Stock shall automatically convert into the Company’s Common Stock on July 20, 2021.

 

The Holders shall have the right to receive notice of any meeting of holders of Common Stock or Series A Preferred Stock and to vote upon any matter submitted to a vote of the holders of Common Stock or Series A Preferred Stock, on an as-converted basis. Except as otherwise expressly set forth in the Certificate of Incorporation (including this Certificate of Designation), the Holders shall vote on each matter submitted to them with the holders of Common Stock and all other classes and series of Capital Stock entitled to vote on such matter, taken together as a single class, if any.

 

Preferred Stock – Series B Convertible Preferred stock

 

On February 27, 2020, the Company, James E. Frye (“Frye”) and 5J Oilfield Services LLC (“5J Oilfield”) entered into a membership interest purchase agreement (“Purchase Agreement”) pursuant to which the Company acquired 100% of the membership interests of 5J Oilfield from Frye in exchange for certain consideration, which included the issuance to Frye of 6,000 shares of the Company’s Series B Convertible Preferred Stock, with a stated value of $1,000 per share in accordance with the Certificate of Designation of Preferences, Rights and Limitations of 5% of Series B Convertible Preferred Stock dated effective January 1, 2020 ( “SMGI Preferred Shares”). See Note 9 for additional information.

 

On December 31, 2020, the Company, Frye and 5J Oilfield entered into an Amendment and Partial Recission of Membership Interest Purchase Agreement (“Recission Agreement”), effective as of February 27, 2020 (the “Effective Date”), pursuant to which the parties agreed to rescind the issuance of the Series B Convertible Preferred Shares to Frye as of the Effective Date. There have not been any distributions, payments or other transactions effected with respect to the SMGI Preferred Shares between the issuance date and the date of the Recission Agreement. After this transaction was completed, none of the SMGI Preferred Shares are issued and outstanding, and all accrued preferred dividends previously owed to Frye were forgiven.

 

NOTE 8 – STOCK OPTIONS AND WARRANTS

 

               Weighted 
   Aggregate   Aggregate   Exercise   Average 
   Number   Exercise Price   Price Range   Exercise Price 
Outstanding, December 31, 2018   640,000   $320,350     $0.24-2.18    $0.50 
Granted   325,000    141,250     0.25-0.79    $0.43 
Exercised   -    -    -    - 
Cancelled, forfeited or expired   (120,000)   (77,850)    0.37-2.18    $1.54 
Outstanding, December 31, 2019   845,000    383,750     0.24-2.18    $0.45 
Granted   2,210,000    663,000   $0.30   $0.30 
Exercised   -    -    -    - 
Cancelled, forfeited or expired   (995,000)   (358,000)    0.30-2.00    $0.36 
Outstanding, December 31, 2020   2,060,000   $688,750     $0.24-0.75    $0.33 
Exercisable, December 31, 2020   800,000   $307,000     $0.24-0.75    $0.38 

 

F-22

 

 

 

 

Summary of stock option information is as follows:

 

On February 28, 2020, the Company issued 2,025,000 common stock options to 5J and SMG employees. The options vest equally over a three-year period starting on February 28, 2021. The Company valued the stock options using the Black-Scholes model with the following key assumptions: Stock price, $0.168, Exercise price, $0.30, Term 5 years, Volatility 222.83%, Discount rate, 0.89%.

 

In October 2020, the Company awarded a total of 185,000 common stock options to certain employees to purchase common stock at an exercise price of $0.30 per share for a period of five years, vesting annually over three years. The Company valued the stock options using the Black-Scholes model with the following key assumptions: Stock price, $0.14 , Exercise price, $0.30, Term 5 years, Volatility 222.83%, Discount rate, 0.89%.

 

The weighted average remaining contractual life is approximately 2.24 years for stock options outstanding on December 31, 2020. At December 31, 2020 there was no intrinsic value to the outstanding stock options.

 

During the year ended December 31, 2020, the Company recognized $66,566 related to outstanding stock options. At December 31, 2020, the Company had $160,756 of unrecognized expenses related to options.

 

On July 26, 2019 the Company issued 100,000 common stock options to each of the three independent directors with a total fair value of $87,825. The options vest immediately, have an exercise price of $0.45 and a five-year term. During the year ended December 31, 2019, the Company recognized option expense of $87,825.

 

On October 17, 2019, we issued 30,000 shares of our restricted common stock and 25,000 fully vested common stock options with a five-year term and exercisable at $0.25 for accounting consulting services with a fair value of $3,677. During the year ended December 31, 2019, the Company recognized option expense of $3,677.

 

The weighted average remaining contractual life is approximately 3.03 years for stock options outstanding on December 31, 2019. At December 31, 2019 there was no intrinsic value of outstanding stock options. During the year ended December 31, 2019 share based compensation expense of $154,003 was recognized.

 

Summary Stock warrant information is as follows:

 

               Weighted 
   Aggregate   Aggregate   Exercise   Average 
   Number   Exercise Price   Price Range   Exercise Price 
Outstanding, December 31, 2018   525,001    218,750    $0.40-$0.75   $0.42 
Granted   905,000    211,250    $0.15-$0.30   $0.30 
Exercised   -    -    -    - 
Cancelled, forfeited or expired   -    -    -    - 
Outstanding, December 31, 2019   1,430,001    430,000    $0.15-$0.75   $0.30 
Granted   333,334    66,667   $0.20   $0.20 
Exercised   -    -    -    - 
Cancelled, forfeited or expired   -    -    -    - 
Outstanding, December 31, 2020   1,763,335   $496,667    $0.15-$0.75   $0.28 
 Exercisable, December 31, 2020   1,763,335   $496,667    $0.15-$0.75   $0.28 

 

In March 2020, the Company granted 333,334 warrants to two debt holders with a ten-year term and an exercise price of $0.20. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.18, Exercise price, $0.20, Term 10 years, Volatility 183.29%, Discount rate, 0.74%. During the year ended December 31, 2020, the fair value of $59,439 was recoded as a notes payable discount and will be amortized over the life of the notes payable.

 

The weighted average remaining contractual life is approximately 6.10 years for stock warrants outstanding on December 31, 2020. At December 31, 2020 there was no intrinsic value of outstanding stock warrants.

 

F-23

 

 

In May 2019, the Company granted 100,000 stock warrants to a debt holder with five-year terms and an exercise price of $0.30. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.45, Exercise price, $0.30, Term 5 years, Volatility 199%, Discount rate, 2.3%. During the year ended December 31, 2019, the fair value of $44,091 was recoded as a note payable discount and was fully amortized over the life of the note payable.

 

In June 2019, the Company granted 270,000 stock warrants to a debt holder with ten-year terms and an exercise price of $0.30. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.45, Exercise price, $0.30, Term 10 years, Volatility 175%, Discount rate, 2.1%. During the year ended December 31, 2019, the fair value of $121,004 was recoded as a note payable discount and was fully amortized over the life of the note payable.

 

In September 2019, the Company granted 200,000 stock warrants to a debt holder with five-year terms and an exercise price of $0.25. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.17, Exercise price, $0.25, Term 5 years, Volatility 206%, Discount rate, 1.7%. During the year ended December 31, 2019, the fair value of $33,155 was recoded as a note payable discount and was fully amortized over the life of the note payable.

 

In October 2019, the Company granted 260,000 stock warrants to three debt holders with ten-year terms and an exercise price of $0.15. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.12, Exercise price, $0.15, Term 10 years, Volatility 179%, Discount rate, 1.7%. During the year ended December 31, 2019, the fair value of $31,049 was recoded as a note payable discount and will be amortized over the life of the note payable.

 

In December 2019, the Company granted 75,000 stock warrants a debt holder with ten-year terms and an exercise price of $0.15. The warrants are fully vested at the time of issuance. The Company valued the warrants using the Black-Scholes model with the following key assumptions ranging from: Stock price, $0.24, Exercise price, $0.15, Term 10 years, Volatility 182%, Discount rate, 1.9%. During the year ended December 31, 2019, the fair value of $17,947 was recoded as a note payable discount and will be amortized over the life of the note payable.

 

The weighted average remaining contractual life is approximately 6.38 years for stock warrants outstanding on December 31, 2019. At December 31, 2019 there was $30,150 in intrinsic value of outstanding stock warrants.

 

F-24

 

 

NOTE 9 – ACQUISITION AND DISPOSITION OF BUSINESSES

 

5J Entities Acquisition

 

On February 27, 2020 we entered into Membership Interest Purchase Agreements for the acquisition of all of the membership interests of each of 5J Oilfield Services LLC, a Texas limited liability company (“5J Oilfield”) and 5J Trucking LLC, a Texas limited liability company (“5J Trucking”) (5J Oilfield and 5J Trucking shall be collectively referred to herein as the “5J Entities”) (the “Transaction”). The total purchase price for the 5J Entities was $12.7 million.

 

Pursuant to the terms of the 5J Oilfield Membership Interest Purchase Agreement ("5J Oilfield Agreement"), we acquired 100% of the issued and outstanding membership interests from the sole member of 5J Oilfield ("5J Oilfield Member"), pursuant to which 5J Oilfield has become a wholly-owned subsidiary of SMG. Pursuant to the terms of the 5J Oilfield Agreement, we have: (i) paid the 5J Oilfield Member $6,840,000 in cash; (ii) issued 6,000 shares of our 5% Series B Convertible Preferred Stock, with a fair value of $4,380,000; and (iii) caused 5J Oilfield to issue a note ("Seller Note") to the 5J Oilfield Member in the principal amount of $2,000,000 ("5J Oilfield Purchase Price").

 

The Series B Convertible Preferred Stock issued in connection with the acquisition of the 5J Entities is convertible at $1.25 per share at any time after its issuance and shall automatically convert into shares of the Company’s common stock, par value $.001 per share, three years from the date of issuance. The Company shall pay a quarterly dividend of 5% per annum to the holder of the Series B Convertible Preferred Stock, subject to certain conditions related to the EBITDA of the 5J Entities. In the event that the consolidated quarterly EBITDA of the 5J Entities is not in excess of the aggregate fixed monthly payments made to Amerisource and Utica, the 5J Oilfield Member will have the option of accruing the dividend, or converting such amount due into shares of the Company’s common stock at the market price at such time. The holder of the Series B Convertible Preferred Stock shall vote on all matters presented to the Company’s common stockholders on an as converted basis. All of the shares of Series B Convertible Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Transaction are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder.

 

F-25

 

  

The fair value of the Series B Convertible Preferred Stock was based on the Black-Scholes model with the following key assumptions ranging from: stock price $0.27, exercise price of between $0.25 and $1.25, term 3 years, dividend yield of 5%, volatility of 51% and Discount rate of 1.07%

 

The acquisition of the 5J Entities is being accounted for as a business combination under ASC 805. The following information summarizes the provisional purchase consideration and preliminary allocation of the fair values assigned to the assets at the purchase date:

 

Purchase Price:        
Cash, net   $ 6,320,168  
Preferred Series B shares issued     4,380,000  
Seller note issued     2,000,000  
Total purchase consideration   $ 12,700,168  
         
Purchase Price Allocation:        
Accounts receivable     8,177,713  
Prepaid expense     2,318,580  
Notes receivable     814,347  
Other current asset     338,222  
Right of use assets – operating     1,510,897  
Property and equipment     19,354,189  
Accounts payable and accrued expenses     (4,945,881 )
Line of credit     (5,840,622 )
Right of use liabilities – Operating     (1,510,897 )
Notes payable     (7,516,380 )
Total purchase consideration   $ 12,700,168  

  

The Company’s consolidated revenues and net loss for the year ended December 31, 2020 included the results of operations since the acquisition date of 5J Entities of $26,665,719 and net loss of $9,639,725, respectively.

 

Trinity Services LLC

 

On June 3, 2019 we entered into an Agreement and Plan of Share Exchange dated as of such date (the “Trinity Exchange Agreement”) with Trinity Services LLC, a Louisiana limited liability company (“Trinity”) and the sole member of Trinity (the “Trinity Member”). We completed the closing of the acquisition of Trinity on June 26, 2019 (“Closing Date”). On the Closing Date, pursuant to the Exchange Agreement, we acquired one hundred percent (100%) of the issued and outstanding membership interests of Trinity (“Trinity Membership Interests”) from the Trinity Member pursuant to which Trinity became our wholly owned subsidiary (“Trinity Acquisition”). In accordance with the terms of the Trinity Exchange Agreement, and in connection with the completion of the Acquisition, on the Closing Date we: (i) issued 2,000 shares of our 3% Series A Secured Convertible Preferred Stock (“Preferred Stock”), stated value $1,000 per share, (ii) paid $500,000 in cash to the Trinity Member, and (iii) assumed approximately $841,000 in notes related to equipment owned by Trinity (“Purchase Price”).

 

The Preferred Stock is convertible at $0.50 per share at any time after the issuance thereof and is secured by all of the unencumbered assets of Trinity. All outstanding shares of Preferred Stock shall automatically convert into shares of the Company’s common stock upon the earlier to occur of: (i) twelve months after the date of issuance of the Preferred Stock; or (ii) six months after the date of issuance of the Preferred Stock, provided that (a) all shares of the Company’s common stock issued upon conversion of the Preferred Stock may be sold under Rule 144 or pursuant to an effective registration statement without a restriction on resale, and (b) the average closing price of the Company’s common stock has been at least of $0.60 per share during the twenty (20) trading days prior to the date of conversion.

 

All of the shares of Preferred Stock, and the shares of the Company’s Common Stock underlying the Preferred Stock, issued in connection with the Acquisition are restricted securities, as defined in paragraph (a) of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated thereunder. The Preferred Stock issued has a stated value of $2,000,000. The fair value of the Preferred Stock was based on the Black-Scholes model with the following key assumptions ranging from: Stock price $0.50, Exercise price $0.42, Term 3 years, Volatility 36% and Discount rate of 1.7%.

 

F-26

 

 

The acquisition of Trinity was accounted for as a business combination under ASC 805. The following information summarizes the purchase consideration and allocation of the fair values assigned to the assets at the purchase date:

 

Purchase Price:     
Cash, net  $500,000 
Preferred stock issued   1,939,000 
Total purchase consideration  $2,439,000 
      
Purchase Price Allocation     
Accounts receivable  $1,195,534 
Cost in excess of billings   31,303 
Property and equipment   2,887,441 
Right of use assets – operating leases   87,900 
Accounts payable and accrued expenses   (834,363)
Right of use assets – operating leases   (87,900)
Notes payable   (840,915)
Total purchase consideration  $2,439,000 

 

In December 2020, management decided to sell or dissolve the Trinity Business. All assets and liabilities of Trinity are classified as held for sale and included within net loss from discontinued operations. The Company plans to auction the fixed assets in 2021 and recorded an impairment of $983,660 during the year ended December 31, 2020 to reflect expected proceeds from this auction. The impairment is included as part of net loss from discontinued operations on the consolidated statement of operations.

 

MG Cleaners LLC

 

On December 22, 2020, the Company, as the sole member of MG Cleaners LLC (“MG”), entered into a share exchange agreement (“Agreement”) with S&A Christian Investments L.L.C. (“S&A”) pursuant to which the Company transferred all of the membership interests of MG (“MG Interests”) to S&A in exchange for Stephen Christian, the control person of S&A, returning 1,408,276 shares of the Company’s common stock, par value $.001 per share (“Exchanged Shares”) to the Company for cancellation, additional consideration received by the Company in connection with the transaction included the removal of the Company as a guarantor of certain MG debt, as further disclosed in the Agreement and Plan of Share Exchange by and among MG, the Company and S&A attached hereto as Exhibit 10.19. Upon the Company’s receipt of the Exchanged Shares, the Exchanged Shares will be retired and returned to treasury resulting in a decrease of 1,408,276 shares of its common stock issued and outstanding, and all 750,000 unvested incentive stock options previously granted to Mr. Christian will expire. Mr. Stephen Christian, the Company’s former Executive Vice President and Secretary, is the control person of S&A. As a result of the terms of the transaction, S&A became the owner of all of the MG Interests. In connection with the sale of MG, Mr. Christian resigned as Executive Vice President and Secretary of the Company. The Company also agreed to pay $150,000 in cash to MG Cleaners, with $75,000 paid in December 2020.

 

F-27

 

  

The gain on disposal of MG is summarized below and included in the Net loss from discontinued operations as reported in the consolidated statement of operations for the year ended December 31, 2020:

  

Consideration paid to buyer of MG Cleaners        
Cash   $ 75,000  
Accounts payable     75,000  
Total consideration paid to buyer   $ 150,000  
         
Accounts receivable, net   $ 496,492  
Inventory     114,504  
Prepaid expenses and other current assets     74,494  
Property and equipment, net     121,801  
Other assets     3,273  
Right of use assets - operating lease     94,099  
Intangible assets, net     122,079  
Total assets   $ 1,026,742  
         
Accounts payable   $ 468,788  
Accrued expenses and other liabilities     321,246  
Right of use liabilities - operating leases short term     76,709  
Right of use liabilities -  finance leases short term     12,961  
Secured line of credit     188,690  
Current portion of unsecured notes payable     115,772  
Current portion of secured notes payable, net     295,887  
Notes payable - unsecured, net of current portion     74,228  
Notes payable - secured, net of current portion     148,289  
Right of use liabilities - operating leases, net of current portion     34,485  
Right of use liabilities -  finance leases, net of current portion     12,428  
Total liabilities   $ 1,749,483  
         
Gain on disposal of MG Cleaners   $ (572,741 )

 

F-28

 

 

The decision to sell Trinity assets and the MG sale agreement qualify as discontinued operations in accordance with U.S. GAAP, as each represents a significant strategy shift of the Company’s operations that will have a major effect on the Company’s operations. As a result, the Consolidated Balance Sheets as of December 31, 2020 and 2019 present the assets and liabilities of MG and Trinity as assets and liabilities of discontinued operations. The Consolidated Statements of Operations for the years end December 31, 2020 and 2019 present the results of MG and Trinity as Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the years end December 31, 2020 and 2019 present operating, investing, and financing activities of MG and Trinity as cash flows from or used in discontinued operations.

 

The balance sheets of Trinity and MG combined are summarized below:

 

    December 31,     December 31,  
    2020     2019  
Cash and cash equivalents   $ 591     $ 786  
Accounts receivable, net     360,541       1,172,697  
Cost in excess of billings     -       71,185  
Inventory     -       129,959  
Prepaid expenses and other current assets     76,655       197,500  
Current assets of discontinued operations     437,787       1,572,127  
Property and equipment, net     1,500,000       2,997,922  
Other assets     1,500       17,189  
Right of use assets - operating lease     67,200       219,276  
Intangible assets, net     -       131,242  
Other assets of discontinued operations     1,568,700       3,365,629  
Total assets of discontinued operations   $ 2,006,487     $ 4,937,756  
                 
Accounts payable     597,266     $ 1,526,346  
Accrued expenses and other liabilities     198,833       333,076  
Right of use liabilities - operating leases short term     38,206       84,166  
Right of use liabilities -  finance leases short term     -       47,382  
Deferred revenue     -       6,379  
Secured line of credit     278,301       834,832  
Current portion of note payable - related party     -       98  
Current portion of unsecured notes payable     440,331       234,505  
Current portion of secured notes payable, net     690,100       975,271  
Current liabilities of discontinued operations     2,243,037       4,042,055  
Notes payable - secured, net of current portion     855,995       408,089  
Notes payable - unsecured, net of current portion     101,374       -  
Right of use liabilities - operating leases, net of current portion     50,993       147,110  
Right of use liabilities -  finance leases, net of current portion     -       24,315  
Long term liabilities of discontinued operations     1,008,362       579,514  
Total liabilities of discontinued operations   $ 3,251,399     $ 4,621,569  

 

F-29

 

 

The statements of operations of Trinity and MG combined are summarized below:

 

   December 31,   December 31, 
   2020   2019 
Revenues  $4,310,013   $5,965,609 
Cost of revenues   (3,501,669)   (4,564,394)
Selling, general and administrative   (1,805,556)   (1,555,230)
Impairment expense   (983,660)   (12,300)
Bad debt expense   (54,009)   (68,344)
Loss from operations   (2,034,881)   (234,659)
Gain on settlement of notes payable   -    18,408 
Other income   20,000    17,791 
Other expense   (7,566)   - 
Loss on asset disposal   (2,806)   (2,371)
Gain on disposal of business   572,741    - 
Interest expense, net   (311,320)   (324,037)
Net loss from discontinued operations  $(1,763,832)  $(524,868)
           

 

Unaudited Pro Forma Financial Information

 

The following table sets forth the pro-forma consolidated results of operations for the years ended December 31, 2020 and 2019 as if the 5J acquisition occurred on January 1, 2019, and reflect the operations of MG Cleaners and Trinity Services as discontinued operations based on their current year presentation. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisitions had taken place on the dates noted above, or of results that may occur in the future.

 

   For the year ended 
   December 31, 2020   December 31, 2019 
   Pro Forma   Pro Forma 
Revenue  $34,226,229   $55,177,732 
Operating loss   (9,985,480)   (7,945,341)
Net loss attributable to common shareholders   (15,958,617)   (10,548,909)
Net loss per common share  $(0.89)  $(0.76)

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

As of December 31, 2020, the Company has an open letter of credit in the amount of $414,638 as collateral for its insurance policy.

 

Employment Agreements

 

On October 31, 2017, and made effective October 1, 2017, the Company entered into an employment agreement with Matthew Flemming, our Chief Executive Officer. The term is for three years with a monthly salary of $15,000 for the period. The terms of the agreement also include providing health care, auto allowance of $750 per month if a car is not provided by the Company, and other customary benefits. Termination without cause, as defined in the agreement, grants Mr. Flemming six months’ severance pay. The agreement automatically renews every three months after October 1 2020. In December 2020, Mr. Flemming resigned as the Company’s CEO and became the Company’s Chief Development Officer.

 

Litigation

 

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

 

F-30

 

 

NOTE 11 – LEASES

 

The Company has operating and finance leases for sales and administrative offices, motor vehicles and certain machinery and equipment. The Company’s leases have remaining lease terms of 1 year to 4 years. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend the lease when it is reasonably certain that the Company will exercise those options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company's lease agreements do not contain any material restrictive covenants.

 

The components of lease cost for operating and finance leases for the years ended December 31, 2020 and 2019 were as follows:

 

   December 31, 2020   December 31, 2019 
Lease Cost           
Operating lease cost within cost of sales   $387,439   $31,438 
Finance lease cost           
Amortization of right-of-use assets   -    - 
Interest on lease liabilities   -    - 
Total finance lease cost    $-   $- 
Short-term lease cost    $283,873   $336,679 
Variable lease cost    -    - 
Sublease income    -    - 
Total lease cost   $671,312   $368,117 

 

Supplemental cash flow information related to leases was as follows:

 

    December 31, 2020     December 31, 2019  
Other Lease Information                
Cash paid for amounts included in the measurement of lease liabilities:                
Operating cash flows from operating leases   $ 136,050     $ 21,790  

 

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at December 31, 2020 and 2019:

 

Lease Position  December 31, 2020   December 31, 2019 
Operating Leases          
Operating lease right-of-use assets  $1,270,989   $46,882 
Right of use liability operating lease current portion  $575,517   $29,313 
Right of use liability operating lease long term   846,212    17,569 
Total operating lease liabilities  $1,421,729   $46,882 
           
Finance Leases – included as part of Discontinued Operations          
Equipment  $-   $190,241 
Accumulated depreciation   -    (38,691)
Net Property  $-   $151,550 
Long-term debt due within one year   -    47,382 
Long-Term Debt   -    24,315 
Total finance lease liabilities  $-   $71,697 

 

Assets and liabilities held for sale as of December 31, 2020 included a right of use asset balance of $67,199, a short term lease liability of $38,207 and a long term lease liability of $50,992. Assets and liabilities held for sale as of December 31, 2019 included a right of use asset balance of $219,276, a short term lease liability of $84,167 and a long term lease liability of $147,110. The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.

 

F-31

 

 

Lease Term and Discount Rate   December 31, 2020     December 31, 2019  
Weighted-average remaining lease term (years)                
Operating leases     3.6       3.6  
Finance leases     -       1.6  
Weighted-average discount rate                
Operating leases     8.4 %     13.0 %

 

F-32

 

 

The following table provides the maturities of lease liabilities at December 31, 2020:

 

   Operating 
   Leases 
Maturity of Lease Liabilities at December 31, 2020     
2021  $592,081 
2022   423,001 
2023   391,501 
2024   192,000 
2025 and thereafter   10,750 
Total future undiscounted lease payments  $1,609,333 
Less: Interest   (187,604)
Present value of lease liabilities  $1,421,729 

 

At December 31, 2020, the Company had no additional leases which had not yet commenced.

 

The Company acquired six operating leases for equipment, office and warehouse space as part of the 5J Acquisition and recognized a right of use asset and operating lease liability of $1,510,897 as part of the purchase price accounting. The remaining terms of the acquired leases range from 36 and 60 months.

 

NOTE 12 – RELATED PARTY TRANSACTIONS

 

Newton Dorsett, who received $2 million Series A Convertible Preferred Stock in connection with the sale of Trinity Services to us also owns or has control over Dorsett Properties LLC, an entity that is the lessor to a lease with the Company. The lease is for $2,000 per month from July 1, 2019 until June 1, 2024.

 

James Frye, who currently serves as a director on our Board and President of our 5J subsidiary, and received 6,000 shares of Series B Convertible Preferred Stock in connection with the sale of 5J to us, also owns or has control over 5J Properties LLC, an entity that is the lessor to three leases with the Company. 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. On December 31, 2020, the Company entered into an agreement whereby James Frye returned all of his Series B Convertible Preferred Stock to the Company for no consideration and forgave all accumulated dividends. There is no Series B preferred outstanding today.

 

On June 15, 2020, the Company entered into an Interim Management Services Agreement with Apex Heritage Group, Inc. (the “Consultant”), of which Steven H. Madden, a related party, has sole voting and investment control over. The Consultant will provide Jeffrey Martini to serve as the Company’s Chief Financial Officer, reporting to both the Company’s Chief Executive Officer and its Board of Directors. The Company shall pay to Consultant an amount and in a form to be mutually agreed by both parties. In December 2020, Mr. Martini was also appointed as Chief Executive officer.

  

During the year ended December 31, 2020, the Company entered into new convertible notes payable with related parties totaling approximately $1,669,000 in principal. See Note 6.

 

The Company engaged the services of a Director, Mr. John Boylan, effective February 11, 2019, whereby Mr. Boylan was paid as a consultant to the Company in connection with its mergers and acquisition work, whereby Mr. Boylan provided us with mergers and acquisition support including economic analysis, financial modeling and due diligence. Mr. Boylan was paid $13,000 per month for his services. In June 2019 Mr. Flemming and Mr. Boylan were each awarded a bonus of $12,500 related to their efforts in closing the Trinity acquisition.

 

On July 30, 2019 the Company appointed R. Michael Villarreal to the Board of Directors filling the position left by the passing in early July 2019 of Director John Boylan. The Company appointed Mr. Boylan Board member Emeritus status in honor of his service to the Company.

 

On October 20, 2020 the Company expanded the Board of Directors by filling a vacant seat and adding two seats including installing Messer’s Brady Crosswell, Todd Riedel and James E. Frye Jr to the board.

 

Mr. Martini serves as our Chief Executive Officer and Chief Financial Officer, however, we are not party to an employment agreement with Mr. Martini. Instead, APEX Heritage Group, Inc. (“Apex”) has contracted directly with Mr. Martini for such management services, and is routinely compensated in turn via the provision of debt and/or equity instruments under the terms of an interim management services agreement, among other arrangements. During 2020, Apex was reimbursed via convertible debt valued at $225,000, which was in part compensation for such employment. The Company expects to continue such arrangement in 2021.

 

F-33

 

 

NOTE 13 – INCOME TAXES

 

The components of income taxes are as follows, in thousands:

 

    For the Year Ended  
    December 31,     December 31,  
    2020     2019  
Current income tax expense (benefit)   $ -     $ -  
Deferred income tax expense (benefit)     (2,648,000 )     (245,000 )
Valuation allowance     2,648,000       245,000  
Income tax expense (benefit)   $ -     $ -  

 

F-34

 

 

The components of deferred tax assets are as follows, in thousands:

 

    December 31,     December 31,  
    2020     2019  
Deferred tax asset:                
Net operating loss carryforwards   $ 4,122,000     $ 1,216,000  
Income not currently incurred     (335,000 )     (77,000 )
Total     3,787,000       1,139,000  
Valuation allowance     (3,787,000 )     (1,139,000 )
Net deferred tax asset   $ -     $ -  

 

A valuation allowance is provided when it is more likely than not that a portion or all of the deferred tax asset will not be realized. The differences between book income and tax income relate principally to revenue recognition and to differences between accelerated methods of depreciation allowed on income tax returns and straight-line methods of depreciation used for book purposes. At December 31, 2020, the Company has net operating losses available for the indefinite carryforward of approximately $19,630,000 and $5,425,000 prior year loses available to be carried forward, net of $3,415,000 of prior year losses being mitigated due to the Section 382 limitation.

 

The New Tax Act signed into law on December 22, 2017 made significant changes to the Internal Revenue Code. These changes include of corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. Additionally, the NOL carryforward period for new NOLs will change from 20 succeeding taxable years to an indefinite period. With the elimination of the alternative minimum tax, NOLs for taxable years beginning after December 31, 2017, can offset 80% of Federal taxable income. Due to CARES Act, for years prior to December 31, 2020, the 80% taxable income offset has been eliminated and the 5-year carryback of NOL’s generated in 2018 through 2020 has been reinstated. After January 1, 2021, NOL’s can only be carried forward and the 80% Federal taxable income limitation applies. Since the Company is using the asset and liability method of accounting for income taxes and because deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which temporary differences are expected to reverse, the Company is revaluing the net deferred assets, fully offset by a valuation allowance, to account for future changes in tax law.

 

NOTE 14 – SUBSEQUENT EVENTS

 

Subsequent to December 31, 2020, the 1,408,276 shares related to the sale of MG Cleaners were returned to the Company and cancelled. On January 11, 2021, the Company organized 5J Brokerage LLC as a Texas limited liability company of which the sole member is SMG industries Inc.

 

On January 14, 2021 an affiliate and stockholder invested $150,000 into the Company’s secured convertible note offering, that matures after twenty four months, pays a 10% per annum interest rate, paid quarterly, and has a fixed conversion rate at $0.10 per share. The lender also received 225,000 shares in connection with the convertible note.

 

On January 28, 2021, the 5J Oilfield Services subsidiary received a loan from the payroll protection program PPP2 from the SBA via its commercial bank for approximately $1,769,000. If the loan is not forgiven under the terms of the program, the loan carries a 1% per annum interest rate and matures in five years.

 

On March 8, 2021, the Company organized 5J Transportation LLC as a Texas limited liability company of which the sole member is SMG industries Inc.

 

Effective March 9, 2021, the Company entered into a third amendment and surrender agreement with Utica requiring weekly payments of $23,750 until May 28, 2021. Upon the occurrence of an event of default under such amendment, and after the expiration of any cure period related to any such default, the surrender agreement entered into between the parties shall govern the surrender of the ownership and possession of the 5J equipment to Utica, or their designee, pursuant to the terms of the Lease agreement between the parties. The surrender agreement directs any third party in possession of any of such equipment to surrender the equipment in their possession to Utica and for Lessee to comply with any related paperwork requests to transfer ownership of the equipment to Utica. The surrender agreement shall terminate on the earlier to occur of: (i) June 25, 2021, or (ii) the occurrence of an event of default, that is not cured within any applicable cure period. From June 4, 2021 to June 25, 2021 the weekly payments shall increase to $112,000 per week, and thereafter commencing on July 27, 2021 the payments shall be $448,000 per month.

 

In March 2021, the Company executed an auction agreement to sell all of its Trinity Services assets with a national auctioneer firm. The auction is expected to take place within the next three months.

 

F-35