SMG Industries (SMGI) 10-K 2021 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2021

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.)
20475 State Hwy 249, Suite 450
Houston, Texas 77070	(713) 955-3497
(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   ⌧

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 ⌧

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   ⌧     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   ⌧     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  ⌧

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 ⌧	Smaller reporting company ⌧

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 ⌧

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, 2021 was $3,017,526.

The number of shares of the registrant’s common stock outstanding as of April 14, 2022 was 35,124,930.

Documents Incorporated by Reference

None

SMG Industries Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2021

TABLE OF CONTENTS

		Page
Cautionary Note on Forward-Looking Statements			1
PART I
ITEM 1.	Business		2
ITEM 1A.	Risk Factors		5
ITEM 1B.	Unresolved Staff Comments		18
ITEM 2.	Properties		18
ITEM 3.	Legal Proceedings		18
ITEM 4.	Mine Safety Disclosure		18
PART II			19
ITEM 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		19
ITEM 6.	Selected Financial Data		19
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		26
ITEM 8.	Financial Statements		26
ITEM 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure		26
ITEM 9A.	Controls and Procedures		27
ITEM 9B.	Other Information		28
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance		28
ITEM 11.	Executive Compensation		36
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		37
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.”

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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 and Build growth strategy of acquiring transportation companies and generating organic growth post-acquisition when possible, by removing business constraints and strategic cross-selling of services in an effort to raise equipment utilization and grow market share. We believe our business focus and equipment fleet position us to be growing 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 Logistics Services LLC

Our operating subsidiaries provide a range of services in transportation, 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 natural gas 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

We are headquartered in Houston, Texas with facilities in Floresville, Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill, South Carolina. Our web sites are www.5J-Group.com and 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.

Domestic Industry Overview by Business line

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

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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 such as blades, production equipment used in energy, midstream natural gas 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 one-hundred mile radius. These moves can include cold stack rigs coming out of storage into the field.

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.

Company Strategies

Buy and Build for Company Growth

Our strategy involves growth resulting from making acquisitions of private lower or middle-market size transportation services and related businesses operating in the domestic United States with a plan to grow an acquired company 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 have recently formed a transportation brokerage subsidiary in Fort Mill, South Carolina with operations throughout the domestic United States that further diversifies our business and customer base. Given the volatility of hydrocarbon prices and its affect on upstream oil and gas (“O&G”) customer activity, this diversification strategy assists in the drilling rig mobilization services which was a legacy offering of the Company. Strategically, we have pivoted over the last few years in an attempt to reduce concentration in the oil and gas markets by focusing on the infrastructure business of hauling bridge

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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, and as such, our strategy is to reduce the overall percentage to a minority share of our total business.

Add Owner Operator Trucking Companies to Enhance Transportation Business

For independent trucking company fleets with less than 100 tractors, it can be customary to ‘lease on’ with a larger transportation firms benefitting from their back-office infrastructure, insurance policies and access to additional ancillary equipment. 5J has historically sought a balance between company owned drivers and equipment and owner/operators who have leased on to 5J’s operating authority. We have enhanced our fleet with approximately 100 tractors through several owner operators that have lease on. Our 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.

Expand Service Offerings within Existing Customers

We currently have over 600 customers, many of which are leading companies in their respective fields. Our strategy is to deepen our relationship with those customers by expanding our service offerings with them. For instance, in 2021 one of our natural gas compressor customers using our heavy haul services requested additional flatbed services for other items allowing us to grow with that customer.

Our company headquarters are located in Houston, Texas.

Sales Plan

The Company’s sales plan includes utilizing employed sales personnel based in our various locations that are engaged to generate sales. 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.

Safety

Our Company emphasizes a safety-focused culture and conducts mandatory orientations for all of its drivers and includes safety moments in its weekly staff meetings. The U.S. Department of Transportation (DOT) requires that the Company perform drug and alcohol testing that meets DOT regulations, and its safety program includes pre-employment, random and post-accident drug testing and all other testing required by the DOT. The Company also utilizes safety in the field programs on a customary basis.

Employees

As of December 31, 2021, we had 258 employees of whom 21 were administrative, 7 were in sales and marketing and 230 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

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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) 955-3497.

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.

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, 2021, we had fully drawn the availability under our credit facility. Due to this limited liquidity 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

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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 line of credit facility 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, including 5J Logistics Services LLC. In the event that the 5J Entities were unable to comply with the payment terms of the Amerisource accounts receivable agreement, Amerisource could terminate the facility with 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 borrow working capital funds and operate 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 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 most likely will need additional financing to further our business plans.

We believe we will 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.

Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

We have sustained losses from operations during each of the last two years, which as of December 31, 2021, accumulated to $33,032,536, including an operating loss of $8,978,273 and $10,649,175 for the years ended December 31, 2021 and 2020, respectively. Accordingly, our auditor has concluded that substantial doubt exists regarding our ability to continue as a going concern. Our audited financial statements appearing at the end of this prospectus have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties related to our ability to operate on a going concern basis. In its report on our financial statements for the years ended December 31, 2021 and 2020, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations and negative cash flows since inception and our need to raise additional funding to finance our operations raise substantial doubt about our ability to continue as a going concern. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.

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Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

We are currently in a very difficult operating environment.

We faced a very difficult operating environment in 2021 and believe it could continue into 2022, with labor shortages, the reduced but continued economic effects of the global COVID pandemic and working capital business liquidity constraints can from time to time make it a challenge for us to provide services. We cannot give any assurances about possible future pandemics, their effects on the economy or our business. We cannot give any assurances that we will raise future capital to provide more additional working capital and liquidity, and on terms acceptable to us, if at all. Due to liquidity constraints from time to time, 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 in part on domestic (United States) spending by the crude oil and natural gas industry which suffered significant price volatility in 2020 and 2021, 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 currently benefitting from increased oil and gas prices in the United States, we are trying to reduce the percentage of revenues and activity received from oil and gas customers over time. If future hydrocarbon prices decline, it could have a negative effect on our business as customers would potentially reduce their operating and capital expenditures which would reduce demand for our services.

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.

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,

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· 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.

The Company’s contractual agreements with its owner-operators expose it to risks that it does not face with its company drivers.

Approximately 46% of the Company’s revenue was carried by owner-operators in 2021. The Company’s reliance on independent owner-operators creates numerous risks for the Company’s business. For example, the Company from time to time provides financing to certain of its independent owner-operators purchasing tractors from the Company. If owner-operators operating the tractors the Company financed default under or otherwise terminate the financing arrangement and the Company is unable to find a replacement owner-operator, the Company may incur losses on amounts owed to it with respect to the tractor in addition to any losses it may incur as a result of idling the tractor. Further, if the Company is unable to provide such financing in the future, due to liquidity constraints or other restrictions, the Company may experience a shortage of owner-operators.

If the Company’s independent owner-operators fail to meet the Company’s contractual obligations or otherwise fail to perform in a manner consistent with the Company’s requirements, the Company may be required to utilize alternative service providers at potentially higher prices or with some degree of disruption of the services that the Company provides to customers. If the Company fails to deliver on time, if its contractual obligations are not otherwise met, or if the costs of its services increase, then the Company’s profitability and customer relationships could be harmed. Furthermore, independent owner-operators typically use tractors, trailers and other equipment bearing the Company’s trade names and trademarks. If one of the Company’s independent owner-operators is subject to negative publicity, it could reflect on the Company and have a material adverse effect on the Company’s business and brand. Under certain laws, the Company could also be subject to allegations of liability for the activities of its independent contractor owner-operators.

Owner-operators are third-party service providers, as compared to company drivers who are employed by the Company. As independent business owners, the Company’s owner-operators may make business or personal decisions that conflict with the Company’s best interests. For example, if a load is unprofitable, route distance is too far from home or personal scheduling conflicts arise, an owner-operator may deny loads of freight from time to time. In these circumstances, the Company must be able to timely deliver the freight in order to maintain relationships with customers. In addition, adverse changes in the financial condition of the Company’s independent contractor owner-operators or increases in their equipment or operating costs could cause them to seek higher revenues. The prices the Company charges its customers could be impacted by such issues, which may in turn limit pricing flexibility with customers.

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

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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.

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

These customers do not have any ongoing commitment to purchase our services. While additional customers have been sourced since December 31, 2021, 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.

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 Steven Madden, our Chief Transition Officer, Matthew Flemming, our Interim Chief Executive Officer, Interim Chief Financial Officer and Chief Business Development 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 Group. 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.

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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.

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,

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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.

The methodology used to determine a carrier’s safety rating could be changed by the Federal Motor Carrier Safety Administration (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 FMCSA 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

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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.

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

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

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resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and serval strict liability for remediation of spills and release of hazardous substances.

Stricter enforcement of existing laws and regulations, new laws and regulations or the imposition of new or increased requirements could require us to incur costs and penalties or become the basis of new or increased liabilities that could reduce its revenue and available cash for operations. The Company believes it is currently in compliance with environmental laws and regulations.

Compliance with climate change legislation or initiatives could negatively impact our business.

The U.S. Congress has considered legislation to mandate reductions of greenhouse gas emissions and certain states have already implemented, or may be in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisions that carbon dioxide can be regulated as an “air pollutant” under the Clean Air Act, which could result in future regulations even if the U.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict how legislation or new federal or state government mandates regarding the emission of greenhouse gases could impact our business; however, any such future laws or regulations could require us or our customers to devote potentially material amounts of capital or other resources in order to comply with such regulations. These expenditures could have a material adverse impact on our financial condition, results of operations, or cash flows.

Changes in accounting pronouncements 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.

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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, or

· 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).

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

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

Risks Related to Our Securities

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

Our common stock is traded on the 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,

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the average daily trading volume of our common stock was approximately 7,000 shares traded per day, on average, and currently is thinly traded. As of April 13, 2022, we had 84 record holders of our common stock (not including an indeterminate number of stockholders whose shares are held by brokers in “street name”). There has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely. We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock.

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

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

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

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

Our Officers, Directors and ten percent or greater shareholders collectively own a substantial portion of our outstanding common stock and fixed exercise price convertible notes, 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 76.6% of the outstanding shares of our common stock as of the date of this report. As long as our Officers, Directors and ten percent or greater shareholders collectively own a significant percentage of our common stock, our other shareholders may generally be unable to affect or change the management or the direction of our company without the support of our Officers, Directors and ten percent or greater shareholders. As a result, some investors may be unwilling to purchase our common stock. If the demand for our common stock is reduced because our Officers, Directors and ten percent or greater shareholders have significant influence over our company, the price of our common stock could be materially depressed. Upon the conversion of all of our outstanding convertible notes, an additional 79,467,400 shares of our common stock would be issued and outstanding resulting in substantial dilution of our current shareholders voting power and ownership interests. 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.

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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. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment.

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

Our Certificate of Incorporation permits us to issue, without approval from our shareholders, a total of 1,000,000 shares of preferred stock, none of which are outstanding. 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

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execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly. Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.

There are delays in order communication on the OTC Markets.

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

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

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

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

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

Increased dealer compensation could adversely affect our stock price.

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

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal executive office is located at 20475 State Hwy 249, Suite 450, Houston, Texas 77070, where we lease approximately 4,319 square feet of office space pursuant to a thirty-nine-month term that commenced on December 1, 2021, at a rate of $9,570 per month. We also have facilities throughout Texas. Our 5J Oilfield Services and 5J Trucking subsidiaries both have 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 member of our board of directors, and an affiliate of our Company. Additionally, 5J has leased an office in Fort Mill, South Carolina comprised of approximately 1,969 square feet of office space, for approximately $5,238 per month, expiring on October 31, 2023. Our East Houston Texas facility and terminal lease is comprised of approximately 45 acres at a monthly rent of $55,000 and is a five-year lease ending April 30, 2026.

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.

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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, 2021	$	0.36	$	0.06
June 30, 2021	$	0.25	$	0.12
September 30, 2021	$	0.25	$	0.15
December 31, 2021	$	0.46	$	0.16
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

As of April 13, 2022, the closing sales price of our common stock on the OTCQB was $0.24. As of April 13, 2022, there were approximately 84 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.

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.

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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 and 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 Logistics Services 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 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

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We are headquartered in Houston, Texas with facilities in Floresville, Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill, South Carolina. Our web site is www.5J-Group.com and www.SMGIndustries.com.

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 results of operations of MG are reflected in the Consolidated Statements of Operations for the year ended December 31, 2020 as “net loss from discontinued operations”.

In December 2020, the Company decided to cease the operations of Trinity Services LLC (“Trinity”), an O&G drilling pad dirt construction company. The assets and operations of Trinity are reflected on the December 31, 2021 and 2020 Consolidated Balance Sheets as “assets or liabilities of discontinued operations” and the results of operations are reflected in the Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 as “net loss from discontinued operations”.

Management believes certain comparisons of 2021 to 2020 are not meaningful as the variances are due almost entirely to the 5J acquisition (as disclosed in Note 9). Where applicable, this analysis provides explanation of any meaningful causes of variances that are in addition to variances resulting from the 5J acquisition.

In the second quarter of 2021 we formed 5J Transportation LLC in connection with leasing the East Houston terminal operations for our flatbed services. In the first quarter of 2021, we formed 5J Brokerage LLC, which was renamed 5J Logistics Services LLC during the fourth quarter of 2021, our transportation brokerage business, in connection with offering those services.

All of our 5J subsidiaries are referred to as the 5J Transportation Group.

Results of Operations

Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

The Consolidated Balance Sheets as of December 31, 2021 and 2020 present the assets and liabilities of MG and Trinity as discontinued operations. The Consolidated Statements of Operations for the years end December 31, 2021 and 2020 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, 2021 and 2020 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, 2021 increased to $52,113,827, an increase of 95.4% from $26,665,719 for the year ended December 31, 2020. The increase in sales in the year end 2021 was primarily driven by increased revenues in our industrial transportation segment from higher customer activity transporting drilling rigs, and in our heavy haul business transporting bridge beams, over-dimensional infrastructure items and large natural gas compressors. Our increase in revenues was also attributable to the new contribution of revenues from our 5J Transportation flat bed and 5J Logistics brokerage division, not present in the previous year period along with the general improvement in the domestic United States economy from COVID-19 pandemic. This was partially offset by the absence of revenues during the periods from the discontinued operations that were present in the prior period.

During the year ended December 31, 2021, cost of sales increased to $52,714,418, or approximately 101.2% of sales, compared to $29,477,208, or about 110.5% of sales for the 2020 period. The decrease in cost of sales as a percentage of revenues is the result of higher revenues covering more fixed costs in cost of sales compared to the previous year. The increase in cost of sales as a total amount is due primarily to higher direct labor costs, higher freight expense, higher fuel

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costs, and higher depreciation expenses, a non-cash expense, allocated in cost of sales compared to the previous year period 2020. Our Cost of Sales includes non-cash depreciation expense of $5,398,529 for the year ended December 31, 2021, and $4,901,689 for the comparable period in 2020.

Selling, general and administrative (SG&A) expenses for the year ended December 31, 2021 increased to $8,375,682, or approximately 16.1% of revenues, compared to $5,267,186, or 19.8% of revenues for the year ended December 31, 2020. The increase in total amount was due primarily to higher wage expense, professional fees and higher consulting costs from accounting and other consultants. The non-cash share based compensation expense included in SG&A expenses was $67,460 for the year ended December 31, 2021 compared to $66,566 for the same period in 2020. Bad debt expense included in SG&A expenses for the year ended December 31, 2021 was $454,990, as compared to bad debt expense of $474,708 in 2020 resulting from uncollectable accounts receivables from certain customers.

Impairment expenses for the year ended December 31, 2021 was $0 and $1,084,671 in the prior year. The expenses in 2020 related primarily to the full impairment of the net book value for the oil tools and the frac water equipment from our discontinued operations at Momentum and Trinity.

Acquisition costs for the year ended December 31, 2021 were $2,000, compared to acquisition costs of $1,485,829 for the year ended December 31, 2020 related to the acquisition of 5J in February 2020.

Interest expense, net, increased to $7,618,889 during the year ended December 31, 2021 from $3,801,020 during the year ended December 31, 2020, resulting from increased convertible note issuances and associated debt discount amortization. Gain on the US SBA’s PPP loan forgiveness program for the years ended December 31, 2021 and 2020 was $5,023,089 and $94,339, respectively.

Gain on sale of assets for the year ended December 31, 2021 and 2020 was $43,624 and $220,315 and was primarily related to the disposal of 5J assets.

The net loss from continuing operations for the year ended December 31, 2021 was $11,484,636 as compared to a net loss of $14,105,158 for the year ended December 31, 2020. Our decrease in net loss in 2021 was primarily attributable to lower SG&A expenses, no impairment expense and the gain on PPP loan forgiveness described above.

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 raising prices for our services as the market bears, a better sales mix adding more higher margin service revenues such as super heavy haul, and reducing general and administrative costs including professional fees.

Liquidity and Capital Resources

Cash Flows

Operating activities

Net cash used in operating activities was $8,176,146 for the year ended December 31, 2021, compared to $3,972,667 for the year ended December 31, 2020, including $568,519 of cash provided by discontinued operations during the year ended December 31, 2021, and $242,162 of cash used by discontinued operations during the year ended December 31, 2020.

For the year ended December 31, 2021, net cash used in continuing operating activities of $8,744,665 consisted of net loss of $11,484,636, which included non-cash costs of depreciation and amortization of $5,398,529, gain on PPP forgiveness loan of $5,022,102, gain on sale of assets of $43,624, amortization of deferred financing costs of $2,208,291, loss on settlement of liabilities of $41,397 and bad debt expense of $454,990. Changes in working capital accounts included changes in accounts receivable of $7,237,370, other assets of $241,940 and right of use operating lease liabilities of

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$537,616, partially offset by changes in accounts payable of $2,677,329, prepaid expenses and other current assets of $3,118,119 and accrued expenses and other labilities of $1,525,563.

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.

Investing activities

Net cash used in investing activities was $132,026 for the year ended December 31, 2021, compared to $6,837,536 for the year ended December 31, 2020, with $0 and $42,368, respectively, related to discontinued operations.

For the year ended December 31, 2021, net cash used in investing activities consisted of $97,026 of fixed asset additions, and $35,000 paid to the buyer of MG Cleaners. 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.

Financing activities

Net cash provided by financing activities was $8,445,260 for the year ended December 31, 2021, compared to $11,759,723 for the year ended December 31, 2020, including $226,932 of cash used in and $484,235 of cash provided, respectively, related to discontinued operations.

For the year ended December 31, 2021, net cash provided by financing activities consisted of net proceeds from secured line of credit of $5,326,060, net proceeds from notes payable of $15,064,003 and proceeds from convertible notes payable of $3,906,079, partially offset by payments on notes payable of $15,553,327, payment on convertible notes payable of $50,000 and payment of deferred finance costs of $20,623.

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.

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 partially depressed given the current perceived in progress economic recovery of the COVID-19 pandemic and recent rebound and growth in current commodity prices. 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 debt and equity securities and through commercial leasing and financing programs.

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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 was secured by all instruments and proceeds related thereto. The Catalyst AR Facility had 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 were no origination fees, monitoring or early termination fees. The Catalyst AR Facility could be terminated by the Company with thirty days written notice. The Company was a guarantor of the financing facility and our subsidiaries as borrowers have cross-collateralized their accounts receivable with this facility.

On June 27, 2019, an accounts receivable financing company funded a total of $1,317,304 pursuant to an accounts receivable 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 September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Brokerage and 5J Specialized LLC (the “5J Entities”) entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) in the total amount of $12,740,000. Pursuant to the terms of the Loan Agreement, the 5J Entities will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Entities will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. 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.

Pursuant to the terms of the Security Agreement, the 5J Entities granted a security interest in all of their assets to Amerisource as collateral for the repayment of the Amerisource loan, however, until such time as Utica has been paid in full pursuant to the master lease agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on February 27, 2020, Utica will continue to have a priority security interest in a significant portion of the 5J Entities assets.

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In connection with the Loan Agreement, the Company, the parent company of each of the 5J Entities, entered into a pledge agreement pursuant to which the Company has granted a security interest in all of its assets to Amerisource and a guaranty agreement pursuant to which the Company has guaranteed the timely payment of all amounts due under the Loan Agreement. The Loan Agreement includes customary covenants, including a negative convent that the 5J Entities may not create or permit for any lien to exist on the collateral nor enter into any new debt agreement.

The proceeds from the issuance of the Note were used to pay down the outstanding balance owed to Utica pursuant to a Second Forbearance Agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on September 7, 2021 (“Forbearance Agreement. The Utica agreement was paid in full through the Amerisource Loan Agreement in November 2021.

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 90% 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.

During the year ended December 31, 2021, we sold an aggregate of $5,287,740 principal amount of convertible promissory notes and issued 7,931,612 shares of restricted common stock in connection therewith. During the year ended

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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.

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

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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 Acting Chief Executive Officer and Chief Financial Officer has concluded that, at December 31, 2021, 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 Acting 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 Acting 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and is a process designed by, or under the supervision of, our Acting Chief Executive Officer 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, 2021. 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, 2021, our internal control over financial reporting was not effective. The lack of separation of duties between the Acting 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.

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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.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

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

Name	Age	Position
Matthew C. Flemming	53	Interim Chief Executive Officer, Interim Chief Financial Officer, Chief Business Development Officer and Chairman
Steven H. Madden	53	Chief Transition Officer and Director
Joseph Page	55	Director
Brady Crosswell	53	Director
Todd Riedel	56	Director
James E. Frye	64	Director
Newton Dorsett	66	Director

Mr. Madden has served as our Chief Transition Officer since August 2021 and as a member of our board of directors since November 2021. Mr. Madden has assembled and grown a portfolio of companies over the past 30 years and serve as Chairman and CEO of Apex Heritage Group. Mr. Madden and his management teams have globally built, acquired, merged, and sold businesses, real estate and investments in and around the industrial, automotive, aerospace and energy industries. His experience and expertise include manufacturing, engineering, distribution, service companies and top-grading management teams. Mr. Madden has also served on a variety of non-profit boards in the role of Chairman, President, Long Range Planning Chair and Educational Chair for organizations including international commerce and industry associations, recreational clubs, youth sports associations, continuing educational groups, churches, and Vanderbilt University. Mr. Madden graduated from Vanderbilt University with a B.S. in 1991 and also attended the University of Innsbruck, Austria.

Mr. Flemming has served as our Interim Chief Executive Officer and Interim Chief Financial Officer since April 14, 2022 and as our Chief Business Development Officer since December 2020. Mr. Flemming previously served as our Chief Executive Officer from September 2017 through December 2020 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.

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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. 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 BS 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.

Mr. Dorsett was appointed to serve as a member of the Company’s board of directors on November 8, 2021. Mr. Dorsett has over 40 years of experience in the oil and gas industry as an operator, investor and mineral owner. Additionally, Mr. Dorsett has significant experience in various other industries including real estate, oil & gas services, solar and wind energy investments. Mr. Dorsett has been the President and managing member of LouTex Production Company since September 1990. As an entrepreneur and business person, Mr. Dorsett founded Marshall Properties, Inc., LouTex, Trinity Services LLC, Diamond Drilling and various other start-ups past and present. Mr. Dorsett is the proprietor of The Remington Suite Hotel and Spa located in Shreveport, Louisiana. Mr. Dorsett owns and operates extensive farming operations in Southwest Arkansas. Mr. Dorsett has several philanthropic interests serving on Boards, past and present, of

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Shreveport’s Downtown Development Authority, Christus Highland Foundation, Biomedical Research Foundation, Shreveport/Bossier Rescue Mission. He also served 25 years on the Harrison County Texas Soil & Water Conservation Board. Mr. Dorsett also currently serves on the Louisiana Public Broadcasting Board and is currently President-elect. Mr. Dorsett received a Bachelors of Business Administration and Bachelor of Fine Arts from Southern Methodist University in 1978. He additionally attended Centenary College Executive MBA Program in 1987.

On April 14, 2022, Allen R. Parrott resigned as our Chief Financial Officer. Mr. Parrott’s resignation was not the result of any disagreement related to the operations, policies or practices of the Company.

Director Independence and Qualifications

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

·the Director is, or at any time during the past three years was, an employee of the Company,

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

· a family member of the Director is, or at any time during the past three years was, an Executive Officer of the Company,

· the director or a family member of the Director is a partner in, controlling stockholder of, or an Executive Officer of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions),

· the Director or a family member of the Director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity, or,

· the Director or a family member of the Director is a current partner of the Company’s outside auditor, or at any time during the past three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit.

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

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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.

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 seven 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

We have not appointed any of the members of our board of directors to any of our board committees. Our entire Board currently performs the functions of each of the Audit Committee, Nominating and Governance Committee and the Compensation Committee. Each of the Audit Committee, Nominating and Governance Committee, and a Compensation Committee, are 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.  At such time as we appoint members to our Audit Committee, our Audit Committee will oversee 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 is designed to perform several functions.

The Audit Committee’s primary functions will be to:

· 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,

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· 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. At such time as we appoint members of our board of directors to the Compensation Committee, the Compensation Committee primary functions will be to:

· 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.

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

Nominating and Governance Committee. The Nominating and Governance Committee has a charter, which is reviewed periodically.

Our Nominating and Governance Committee’s primary functions will be to:

· 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

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judgment, relevant business experience, diversity, reputation, and high-performance standards. While the Board values a diversity of viewpoints and backgrounds, it does not have a formal policy regarding the consideration of diversity in identifying director nominees. The Nominating and Governance Committee may engage the services of third-party search firms to assist in identifying and assessing the qualifications of Director candidates.

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

The Nominating and Governance Committee will consider properly and timely submitted Director candidates recommended by stockholders of the Company. Stockholders who wish to suggest qualified candidates for election to the Board should write to 20475 State Hwy 249, Suite 450, Houston, Texas 77070 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, Interim Chief Executive Officer, Interim Chief Financial Officer 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 Interim Chief Executive Officer, Interim Chief Financial Officer, 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 20475 State Hwy 249, Suite 450, Houston, Texas 77070, Attn: President.

Executive Compensation

On August 24, 2021, the Company’s board of directors appointed Mr. Parrott to serve as the Chief Financial Officer of the Company. We are not a party to an employment agreement with Mr. Parrott. Through December 31, 2021, Mr. Parrott’s salary was $225,000 per annum and included customary company benefits. Commencing on January 1, 2022, Mr. Parrott compensation has been revised to $3,000 per week for his services.

From December 2020 to August 2021, Mr. Martini served as our Chief Executive Officer, however, we were not party to an employment agreement with Mr. Martini. Instead, APEX Heritage Group, Inc. (“Apex”) contracted directly with Mr. Martini for such management services, and is routinely compensated in turn via the provision of debt and/or

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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.

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, the $10 million Amerisource accounts receivable revolving line of credit financing transactions, the approximately $600,000 Volvo Financial truck note payments, the $1.6 million Equify Financial trailer note and the $200,000 Red River Bank term note. Where 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 which is still his present rate as of the date of this report.

Certain Relationships and Related Transactions and Director Independence

The following is a description of the transactions we have engaged in since January 1, 2021, with our Directors and Officers and beneficial owners of more than five percent of our voting securities and their affiliates:

Newton Dorsett, who received 2,000 shares of Series A Convertible Preferred Stock with a stated value of $1,000 per share 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 was for $2,000 per month from July 1, 2019 until June 1, 2024. The lease was terminated May 30, 2021. The 2,000 shares of Series A non-redeemable convertible preferred stock of the Company matured on July 20, 2021 and is convertible at a fixed price of $0.50 per share. The Company issued 4,443,292 restricted common shares to the holder and family members in October 2021.

On October 4, 2021, Newton Dorsett was issued a $77,592 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 116,388 shares of the Company’s restricted common stock in connection with this convertible note investment.

James E. 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. 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. 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. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. During the year ended December 31, 2021, we purchased $655,760 in rental services and have charged the crane company $99,799 that are included in our revenues.

On September 1, 2021, James Frye was issued a $176,000 secured convertible note in exchange for cash proceeds, 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. Mr. Frye also received 264,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 29, 2021, James Frye was issued a $212,000 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 318,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

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On October 30, 2021 James Frye was issued a $232,709 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 349,064 shares of the Company’s restricted common stock in connection with this convertible note investment.

During the year ended December 31, 2021, the Company and Steven Madden entered into a total of $3,939,439 of convertible promissory notes in exchange for cash proceeds of $3,080,000 and paid in kind services of $859,439. The convertible notes mature two years from issuance, are convertible at $0.10 per share, and bear interest at 10% per annum. Apex Heritage received a total of 5,909,160 shares of common stock related to these agreements.

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

Director Independence

Our Board of Directors has determined that Messrs. Page, Crosswell 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.

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Item 11. Executive Compensation

Summary Compensation Table

The following table shows the total compensation earned during the fiscal years ended December 31, 2021 and 2020 to (1) our Chief Executive Officer, and (2) our other named executive officers during the fiscal years ended December 31, 2021 and 2020 (collectively, the “named executive officers”):

						Non-equity	Non-qualified
						incentive	deferred
				Stock	Option	plan	compensation	All other
Name and principal		Salary	Bonus	awards	awards	compensation	earnings	compensation	Total
position	Year	($)	($)	($)	($)	($)	($)	($)	($)
Jeffrey Martini
Chief Executive Officer and Chief Financial Officer*	2021	215,000	—	—	—	—	—	—	215,000
*through August 2021	2020	118,760							118,760
Matthew Flemming(1)(2)	2021	146,401	5,000	—	—	—	—		151,401
Chief Business Development Officer, Interim Chief Executive Officer and Interim Chief Financial Officer	2020	180,000		—	—	—	—	1,685	181,685
Stephen Christian		—	—	—	—	—	—	—	—
Former Executive Vice President and Secretary and President of MG Cleaners	2020	195,113	—	—	—	—	—	—	195,113

(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, 2021, none of our non-executive independent directors received compensation for their Board service.

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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 2021, no members of our Board of Directors received any cash or equity consideration for their services.

Outstanding Equity Awards at 2021 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, 2021.

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

The following table sets forth, as of April 13, 2022, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for: (i) each person known by us to own beneficially five percent (5%) or more of our outstanding common stock, (ii) each of our officers and directors, and (iii) all of our officers and directors as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares beneficially owned by them. As of April 13, 2022, there were 35,124,930 shares of our common stock issued and outstanding. Except as otherwise listed below, the address of each person is 20475 State Hwy 249, Suite 450, Houston Texas 77070.

	Amount of Beneficial
	Ownership of Common	Percent of Common
Name	Stock (1)	Stock
George Gilman (7)	3,037,630	8.4	%
Dane Stewart (8)	4,025,000	10.4	%
Richard Fallin (9)	11,500,000	25.5	%
Directors and Executive Officers:
Matthew Flemming (2)	1,600,000	7.7	%
Steven Madden (3)	56,868,507	67.8	%
Newton Dorsett (4)	1,500,084	4.2	%
Joseph Page	—	—
Brady Crosswell (5)	5,200,000	13.3	%
Todd Riedel	0	0
James E. Frye (6)	10,214,263	23.3	%
All Directors and Executive Officers as a group (7 persons) (1)-(6)	75,382,854	76.6	%

*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.

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(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: (i) 45,144,390 shares of common stock issuable upon the conversion of convertible promissory notes held by Mr. Madden, (ii) 1,299,000 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.

(4) Includes 775,920 shares of common stock issuable upon the conversion of convertible promissory notes held by Mr. Dorsett. The address for Mr. Dorsett is 220 Travis Street, 5^th Floor, Shreveport, LA 71101.

(5) Includes 4,000,000 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.

(6) Includes 8,707,090 shares of common stock issuable upon the conversion of convertible promissory notes held by Mr. Frye.

(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: (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.

(9) Includes 3,500,000 shares of common stock issuable upon the conversion of convertible promissory notes held by Mr. Fallin. The address for Mr. Fallin is 9545 Katy Freeway, Houston, Texas 77024.

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.

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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, 2021.

	Number of			Number of
	securities to			securities
	be issued			remaining
	upon			available
	exercise of			for
	outstanding			future issuance
	options			under equity
	and	Weighted-average exercise		compensation
Plan Category	rights	price of outstanding options		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.

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

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

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

· increase the number of shares that may be issued under the Plan;

· materially modify the requirements for eligibility for participation in the Plan;

· materially increase the benefits to participants provided by the Plan; or

· otherwise disqualify the Plan for coverage under Rule 16b-3 promulgated under the Exchange Act.

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

Transferability

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

Change of Control Event

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

Termination of Employment/Relationship

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

Dilution; Substitution

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

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2018 Stock Option Plan

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

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

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

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

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

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

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

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

In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each optionee at least thirty days prior to such proposed action. To the extent not previously exercised, all options will terminate immediately prior to the consummation of such proposed action; provided, however, that the Administrator, in the exercise

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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

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Date). If an optionee dies or becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Code) while employed by the Company or an Affiliate or within the period that the option remains exercisable after Termination, options then held (to the extent then exercisable) may be exercised, in whole or in part, by the optionee, by the optionee’s personal representative or by the person to whom the option is transferred by devise or the laws of descent and distribution, at any time within twelve months after the death or twelve months after the permanent and total disability of the optionee or any longer period specified in the Option Agreement or by amendment thereof (but in no event after the Expiration Date). “Employment” includes service as a Director or as a Consultant. For purposes of the Plan, an optionee’s employment shall not be deemed to terminate by reason of sick leave, military leave or other leave of absence approved by the Administrator, if the period of any such leave does not exceed 90 days or, if longer, if the optionee’s right to reemployment by the Company or any Affiliate is guaranteed either contractually or by statute.

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

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

New Plan Benefits

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

Information Regarding Options Granted

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

Item 13. Certain Relationships and Related Transactions and Director Independence

The following is a description of the transactions we have engaged in since January 1, 2021, with our directors and officers and beneficial owners of more than five percent of our voting securities and their affiliates:

On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Brokerage and 5J Specialized LLC (the “5J Entities”) entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) in the total amount of $12,740,000. Pursuant to the terms of the Loan Agreement, the 5J Entities will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Entities will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. Joseph Page, a board member of the Company, serves as Chief Administrative Officer and General Counsel at Amerisource.

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Newton Dorsett, who received 2,000 shares of Series A Convertible Preferred Stock with a stated value of $1,000 per share 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 was for $2,000 per month from July 1, 2019 until June 1, 2024. The lease was terminated May 30, 2021. The 2,000 shares of Series A non-redeemable convertible preferred stock of the Company matured on July 20, 2021 and is convertible at a fixed price of $0.50 per share. The Company issued 4,443,292 restricted common shares to the holder and family members in October 2021.

On October 4, 2021, Newton Dorsett was issued a $77,592 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 116,388 shares of the Company’s restricted common stock in connection with this convertible note investment.

James E. 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. 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. 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. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. During the year ended December 31, 2021, we purchased $655,760 in rental services and have charged the crane company $99,799 that are included in our revenues.

On September 1, 2021, James Frye was issued a $176,000 secured convertible note in exchange for cash proceeds, 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. Mr. Frye also received 264,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 29, 2021, James Frye was issued a $212,000 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 318,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 30, 2021 James Frye was issued a $232,709 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 349,064 shares of the Company’s restricted common stock in connection with this convertible note investment.

During the year ended December 31, 2021, the Company and Steven Madden entered into a total of $3,939,439 of convertible promissory notes in exchange for cash proceeds of $3,080,000 and paid in kind services of $859,439. The convertible notes maturity two years from issuance, are convertible at $0.10 per share, and bear interest at 10% per annum. Apex Heritage received a total of 5,909,160 shares of common stock related to these agreements.

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.

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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:

	2021			2020
Audit Fees (1):	$	174,000	$	105,650
Tax Fees (2):		—		—
All Other Fees:		—		—
Total	$	174,000	$	105,650

(1)Audit fees include fees for professional services by Malone in 2021 and 2020 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.

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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 (PCAOB ID: 206)	F-1
Consolidated Balance Sheets as of December 31, 2021 and 2020	F-2
Consolidated Statements of Operations for the years ended December 31, 2021 and 2020	F-3
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2021 and 2020	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020	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).

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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).
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).

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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).
10.21***	Loan agreement entered into by and among Amerisource Funding Inc. and each of 5J Trucking LLC, 5J Oilfield Services LLC, 5J Transportation LLC, 5J Brokerage LLC and 5J Specialized LLC dated September 7, 2021 (incorporated by reference to Exhibit 10.21 to the Company’s Form 8-K filed on September 13, 2021).
10.22***	Security agreement entered into by and among Amerisource Funding Inc. and each of 5J Trucking LLC, 5J Oilfield Services LLC, 5J Transportation LLC, 5J Brokerage LLC and 5J Specialized LLC dated September 7, 2021(incorporated by reference to Exhibit 10.22 to the Company’s Form 8-K filed on September 13, 2021).
10.23***	Pledge agreement entered into by and between Amerisource Funding Inc. and SMG Industries Inc. dated September 7, 2021(incorporated by reference to Exhibit 10.23 to the Company’s Form 8-K filed on September 13, 2021).
10.24***	Guaranty agreement entered into by and between Amerisource Funding Inc. and SMG Industries Inc. dated September 7, 2021(incorporated by reference to Exhibit 10.24 to the Company’s Form 8-K filed on September 13, 2021).
10.25***	Amendment Number One to That Certain Loan Agreement dated September 7, 2021 entered into by and between AMERISOURCE FUNDING INC., a Texas corporation (“Lender”) and 5J TRUCKING, LLC, a Texas limited liability company, and 5J OILFIELD SERVICES, LLC, a Texas limited liability company, and 5J SPECIALIZED LLC, a Texas limited liability company, and 5J TRANSPORTATION, LLC, a Texas limited liability company, and 5J Logistics, LLC, a Texas limited liability company dated March 15, 2022 (incorporated by reference to Exhibit 10.24 to the Company’s Form 8-K filed on March 21, 2022).
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.

48

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).
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 15, 2022	By:	/s/ Matthew C. Flemming
		Matthew C. Flemming
		Interim Chief Executive Officer, Interim Chief Financial Officer and Chief Business Development 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/  Matthew C. Flemming	Interim Chief Executive Officer, Interim Chief Financial Officer, Chairman of the Board and Chief Business Development Officer	April 15, 2022
Matthew C. Flemming
/s/ Steven H. Madden	Chief Transition Officer and Director	April 15, 2022
Steven H. Madden
/s/ Joseph Page	Director	April 15, 2022
Joseph Page
/s/ Brady Crosswell	Director	April 15, 2022
Brady Crosswell
/s/ Todd Reidel	Director	April 15, 2022
Todd Reidel
/s/ James E. Frye	Director	April 15, 2022
James E. Frye
/s/ Newton Dorsett	Director	April 15, 2022
Newton Dorsett

52

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, 2021 and 2020, 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, 2021, and 2020, 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 audit(s) 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 15, 2022

F-1

SMG INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,		December 31,
	2021		2020
ASSETS
Current assets:
Cash and cash equivalents	$	257,768	$	263,814
Restricted cash		858,408		715,274
Accounts receivable, net of allowance for doubtful accounts of $1,041,387 and $691,098 as of December 31, 2021 and 2020, respectively		11,703,347		4,920,967
Prepaid expenses and other current assets		2,162,238		1,409,996
Current assets of discontinued operations		17,446		437,787
Total current assets		14,999,207		7,747,838
Property and equipment, net of accumulated depreciation of $11,262,193 and $5,991,572 as of December 31, 2021 and 2020, respectively		10,463,352		16,337,914
Right of use assets - operating lease		3,312,710		1,270,989
Other assets		448,887		499,707
Other assets of discontinued operations, net		1,500		1,568,700
Total assets	$	29,225,656	$	27,425,148
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	3,958,515	$	2,906,936
Accounts payable – related party		94,602		205,444
Accrued expenses and other liabilities		4,055,113		2,637,207
Current portion of right of use liabilities - operating leases		816,671		575,517
Deferred revenue		0		30,000
Secured line of credit		9,468,759		4,046,256
Current portion of unsecured notes payable		1,168,420		2,187,436
Current portion of secured notes payable, net		3,527,960		4,010,627
Current portion of convertible note, net		1,616,672		50,000
Current liabilities of discontinued operations		588,283		2,243,037
Total current liabilities		25,294,995		18,892,460
Long term liabilities:
Convertible note payable, net		2,620,145		2,417,335
Notes payable - unsecured, net of current portion		0		1,040,223
Notes payable - secured, net of current portion		14,535,751		14,038,409
Right of use liabilities - operating leases, net of current portion		2,545,950		846,212
Long term liabilities of discontinued operations		381,746		1,008,362
Total liabilities		45,378,587		38,243,001
Commitments and contingencies
Stockholders’ deficit
Preferred stock 1,000,000 shares authorized:
Series A preferred stock - $0.001 par value; 2,000 shares authorized; NaN and 2,000 shares issued and outstanding at December 31, 2021 and 2020, respectively		0		2
Series B convertible preferred stock - $0.001 par value; 6,000 shares authorized; no shares issued and outstanding at December 31, 2021 and 2020, respectively		0		0
Common stock - $0.001 par value; 250,000,000 shares authorized; 33,731,162 and 19,446,258 shares issued and outstanding at December 31, 2021 and 2020, respectively		33,732		19,447
Additional paid in capital		16,845,873		10,978,254
Accumulated deficit		(33,032,536)		(21,815,556)
Total stockholders’ deficit		(16,152,931)		(10,817,853)
Total liabilities and stockholders’ deficit	$	29,225,656	$	27,425,148

F-2

SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2021 and 2020

	December 31, 2021		December 31, 2020
REVENUES	$	52,113,827	$	26,665,719
COST OF REVENUES		52,714,418		29,477,208
GROSS LOSS		(600,591)		(2,811,489)
OPERATING EXPENSES:
Selling, general and administrative		8,375,682		5,267,186
Impairment expense		0		1,084,671
Acquisition costs		2,000		1,485,829
Total operating expenses		8,377,682		7,837,686
LOSS FROM OPERATIONS		(8,978,273)		(10,649,175)
OTHER INCOME (EXPENSE)
Interest expense, net		(7,618,889)		(3,801,020)
Other income		46,620		74,587
Other expense		0		(30,000)
Loss on settlement of notes payable		(807)		(14,204)
Gain on sale of assets		43,624		220,315
Gain on PPP loan forgiveness		5,023,089		94,339
Total other expense		(2,506,363)		(3,455,983)
NET LOSS FROM CONTINUING OPERATIONS		(11,484,636)		(14,105,158)
Gain on disposal of discontinued operations		0		572,741
Income (loss) from discontinued operations		342,656		(2,336,573)
NET LOSS		(11,141,980)		(15,868,990)
Preferred stock dividends		(75,000)	���	(254,041)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(11,216,980)	$	(16,123,031)
Net loss per common share
Continuing operations	$	(0.50)	$	(0.80)
Discontinued operations	$	0.01	$	(0.10)
Net loss attributable to common shareholders	$	(0.49)	$	(0.90)
Weighted average common shares outstanding
Basic		23,316,751		17,860,452
Diluted		23,316,751		17,860,452

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, 2021 and 2020

	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, 2019	2,000	$	2	—	$	—	14,881,372	$	14,881	$	4,756,194	$	(5,692,525)	$	(921,448)
Shares issued for acquisition of 5J Entities	0		0	6,000		6	0		0		4,379,994		0		4,380,000
Shares issued for deferred financing cost	0		0	—		—	2,498,736		2,499		417,289		0		419,788
Share based compensation	0		0	—		—	0		0		66,566		0		66,566
Warrant issued for notes payable - debt discount	0		0	—		—	0		0		59,439		0		59,439
Shares issued to settle liabilities	0		0	—		—	445,926		446		65,554		0		66,000
Shares issued with debt and beneficial conversion feature on convertible notes payable	0		0	—		—	3,028,500		3,029		1,054,681		0		1,057,710
Preferred stock dividends	0		0	—		—	0		0		0		(254,041)		(254,041)
Returned shares of MG Cleaners LLC	0		0	—		—	(1,408,276)		(1,408)		1,408		0		0
Cancellation of Series B preferred stock and accrued dividends	0		0	(6,000)		(6)	0		0		177,129		0		177,123
Net loss	0		0	—		—	0		0		0		(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)
Share based compensation	0		0	—		—	0		0		67,460		0		67,460
Shares issued for deferred financing cost	0		0	—		—	1,125,000		1,125		336,375		0		337,500
Shares issued with debt and beneficial conversion feature on convertible notes payable	0		0	—		—	7,931,612		7,932		5,130,138		0		5,138,070
Shares issued to settle note payable	0		0	—		—	375,000		375		74,250		0		74,625
Shares issued to settle accounts payable	0		0	—		—	410,000		410		81,180		0		81,590
Series A Convertible Preferred Stock converted into common shares	(2,000)		(2)	—		—	4,443,292		4,443		178,216		0		182,657
Preferred stock dividends	0		0	—		—	0		0		0		(75,000)		(75,000)
Net loss	0		0	—		—	0		0		0		(11,141,980)		(11,141,980)
Balances at December 31, 2021	0	$	0	—	$	—	33,731,162	$	33,732	$	16,845,873	$	(33,032,536)	$	(16,152,931)

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, 2021 and 2020

	December 31, 2021		December 31, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations	$	(11,484,636)	$	(14,105,158)
Adjustments to reconcile net loss to net cash used in operating activities:
Share based compensation		67,460		66,566
Depreciation and amortization		5,398,529		4,901,689
Amortization of deferred financing costs		2,208,291		609,396
Amortization of right of use assets - operating leases		436,787		286,790
Impairment expense		0		1,084,671
Bad debt expense		454,990		474,708
Loss on settlement of liabilities		41,397		21,407
Gain on disposal of assets		(43,624)		(220,315)
Gain extinguishment of debt		(5,022,102)		(94,339)
Changes in:
Accounts receivable		(7,237,370)		2,782,038
Prepaid expenses and other current assets		3,118,119		558,182
Other assets		(241,940)		0
Accounts payable		2,677,329		(2,158,362)
Accounts payable – related party		(75,842)		130,444
Accrued expenses and other liabilities		1,525,563		2,067,828
Right of use operating lease liabilities		(537,616)		(136,050)
Deferred revenue		(30,000)		0
Net cash used in operating activities from continuing operations		(8,744,665)		(3,730,505)
Net cash provided by (used in) operating activities from discontinued operations		568,519		(242,162)
Net cash used in operating activities		(8,176,146)		(3,972,667)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of 5J Entities, net		0		(6,320,168)
Cash paid for disposition of MG Cleaners, LLC		(35,000)		(75,000)
Cash received from sale of property and equipment		0		4,200
Cash paid for purchase of property and equipment		(97,026)		(404,200)
Net cash used in investing activities from continuing operations		(132,026)		(6,795,168)
Net cash used in investing activities from discontinued operations		0		(42,368)
Net cash used in investing activities		(132,026)		(6,837,536)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing costs		(20,623)		(223,558)
Proceeds from secured line of credit, net		5,326,060		4,156,238
Proceeds from notes payable		15,064,003		5,584,048
Payments on notes payable		(15,553,327)		(1,385,535)
Payments on convertible notes payable		(50,000)		0
Proceeds from convertible notes payable		3,906,079		3,144,295
Net cash provided by financing activities from continuing operations		8,672,192		11,275,488
Net cash provided by financing activities from discontinued operations		(226,932)		484,235
Net cash provided by financing activities		8,445,260		11,759,723
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		137,088		949,520
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period		979,088		29,568
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	1,116,176	$	979,088
Supplemental disclosures:
Cash paid for income taxes	$	0	$	0
Cash paid for interest	$	5,534,279	$	1,979,483
Noncash investing and financing activities
Right of use assets capitalized	$	2,478,508	$	0
Non-cash consideration paid for business acquisitions	$	0	$	4,380,000
Cancellation of Series B Convertible Preferred stock and accrued dividends	$	0	$	177,123
Non-cash consideration paid for increase in secured notes payable	$	203,010		5,840,622
Non-cash consideration paid for prepaids from debt financing	$	0	$	331,065
Non-cash consideration increase in convertible notes payable	$	0	$	225,000
Debt discount from issuance of common stock warrants	$	0	$	59,439
Preferred stock dividend	$	75,000	$	254,041
Settlement of note payable and accrued interest with common stock issuance	$	73,818	$	0
Settlement of accounts payable with common stock issuance	$	41,000	$	66,000
Note receivable for property and equipment	$	616,683	$	0
Expenses paid by related party	$	0	$	69,516
Shares issued for deferred financing costs	$	337,500	$	419,788
Prepaid expenses financed with note payable	$	3,253,678	$	100,997
Equipment received in exchange for settlement of notes receivable	$	0	$	223,200
Note payable for property and equipment	$	0	$	1,353,500
Shares issued with debt and beneficial conversion feature on convertible notes payable	$	5,138,070	$	1,057,710
Series A Convertible Preferred Stock converted into common shares	$	182,657	$	0
Convertible notes payable issued to settle accounts payable and accrued expenses	$	1,381,740	$	0

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 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.

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 ("MWTS"), Jake Oilfield Solutions LLC ("Jake") and Trinity Services LLC ("Trinity"), 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.

F-6

Customer Concentration and Credit Risk

During the year ended December 31, 2021, no one customer accounted for more than 10% of our total gross revenues. During fiscal year 2020, 1 customer accounted for approximately 11% of our total gross revenues. NaN customer accounted for more than 10% of accounts receivable as of December 31, 2021 and 1 customer accounted for 10% of accounts receivable as of December 31, 2020.

No vendors exceeded 10%of accounts payable at December 31, 2021 and 2020.

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, 2021 and 2020, the allowance for bad debts was $1,041,387 and $691,098, respectively.

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 consolidated balances sheet 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:

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

Intangible Assets, and Long-Lived Assets

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.

F-7

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, 2021 and 2020, the Company evaluated long lived assets for impairment and recorded impairment losses of $0 and $1,084,671, respectively.

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.

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Discontinued Operations

In December 2020 we sold MG and decided to cease the operations of Trinity. An entity that is disposed of by sale or ceasing of operations 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. As such, MG and Trinity are reported as discontinued 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, 2021 and 2020. The results of discontinued operations are aggregated and presented separately in the Consolidated Statements of Operations as net income (loss) from discontinued operations for the years ended December 31, 2021 and 2020. The cash flows of the discontinued operations are reflected as cash flows of discontinued operations within the Company’s Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020.

Amounts presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical basis of assets, liabilities, results of operations, and cash flows of MG and Trinity. 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.

Fair Value of Financial Instruments

The carrying value of short-term instruments, including cash, accounts receivable, 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, 2021, the Company did 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, the Company recorded non-recurring fair value measurements related to the 5J acquisition. These fair value measurements were classified as Level 3 within the fair value hierarchy. See Note 9.

F-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, 2021, 1,575,000 of stock options, 1,763,335 of warrants and 79,467,400 shares issuable from convertible notes were considered for their dilutive effects. 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. As a result of the Company’s net losses for the years ended December 31, 2021 and 2020, all potentially dilutive instruments were excluded as their effective would have been anti-dilutive.

Basic and Diluted Loss	December 31, 2021		December 31, 2020
Net loss from continuing operations	$	(11,484,636)	$	(14,105,158)
Net income (loss) from discontinued operations		342,656		(1,763,832)
Net loss		(11,141,980)		(15,868,990)
Preferred stock dividends		(75,000)		(254,041)
Net loss attributable to common shareholders		(11,216,980)		(16,123,031)
Basic and Dilutive Shares:
Weighted average basic shares outstanding		23,316,751		17,860,452
Net dilutive stock options		0		0
Dilutive shares		23,316,751		17,860,452

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 sheets.

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.

F-10

The fair value of each option granted during the year ended December 31, 2020 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the weighted average assumptions in the following table. There were no common stock option grants during the year ended December 31, 2021:

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

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

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.

NOTE 3 – GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, no adjustments to the consolidated 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 notes that loans obtained under the Paycheck Protection Program in 2020 and 2021 have been forgiven in accordance with the terms of the program. During the year ended December 31, 2021, a total of $5,023,089 in principal on PPP loans was forgiven in full. An additional $328,018 of principal related to PPP loans from discontinued operations were also forgiven during the year ended December 31, 2021.

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NOTE 4 – PROPERTY AND EQUIPMENT, NET

Property and equipment

Property and equipment at December 31, 2021 and 2020 consisted of the following:

	December 31, 2021		December 31, 2020
Equipment	$	7,768,597	$	8,549,824
Trucks and Trailers		11,167,001		11,062,588
Downhole oil tools		659,873		659,873
Vehicles		1,538,528		1,550,335
Buildings		493,529		493,626
Furniture, fixtures and other		98,017		13,240
Property and equipment, gross		21,725,545		22,329,486
Less: accumulated depreciation		(11,262,193)		(5,991,572)
Property and equipment, net	$	10,463,352	$	16,337,914

Depreciation expense for the years ended December 31, 2021 and 2020 was $5,398,529 and $4,901,689, respectively.

During the years ended December 31, 2021 and 2020, the Company evaluated long lived assets for impairment and recorded impairment losses for continuing operations of $0 and $1,084,671, respectively, and $0 and $983,660 for discontinued operations, respectively.

NOTE 5 – ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses as of December 31, 2021 and 2020 included the following:

	December 31, 2021		December 31, 2020
Payroll and payroll taxes payable	$	1,929,414	$	754,183
Sales tax payable		2,291		1,627
State income tax payable		323,280		144,800
Property tax payable		97,210		—
Interest payable		482,950		839,240
Credit cards payable		—		31,422
Accrued operational expenses		1,006,343		664,710
Accrued general and administrative expenses		178,561		79,067
Accrued dividend		0		107,658
Other		35,064		14,500
Total Accrued Expenses	$	4,055,113	$	2,637,207

F-12

NOTE 6 – NOTES PAYABLE

Notes payable included the following as of December 31, 2021 and 2020:

v
	December 31,		December 31,
	2021		2020
Secured notes payable:
Secured note payable issued January 2, 2018, bearing interest of 6.29% per year. Note was paid off March 16, 2021.	$	0	$	22,293
Secured note payable issued December 7, 2018 to a shareholder, 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%.		100,000		100,000
Secured note payable issued December 7, 2018 to a shareholder, 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%.		100,000		100,000
Secured note payable issued December 7, 2018, bearing interest of 10% per year, due one year after issuance. 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 MWTS, 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 May 1, 2019 to a shareholder, bearing interest of 10% per year, due July 1, 2019, principal balance $100,000. 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 June 17, 2019 to a shareholder, 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 December 12, 2019 to a shareholder, bearing interest of 12% per year, due June 3, 2020. During the year ended December 31, 2021, the note was paid in full.		0		25,000
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%. On September 29, 2021 we entered into a settlement agreement for $50,000 in cash which was paid on September 29, 2021.		0		123,818
Secured note payable with a related party issued February 27, 2020 in connection with the 5J acquisition, bearing interest of 10% per year, due February 1, 2023.		2,000,000		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.		343,723		568,589
Secured note payable with a related party issued on February 27, 2020, bearing interest of 10.0% per year, due March 1, 2023.		545,050		1,012,237
Secured Master Lease Agreement refinanced substantially all of the 5J Entities equipment and a guarantee by an officer of the Company in the aggregate amount of $11,950,000 which amount was financed based on 75% of the net forced liquidation value of the equipment. The note matures on May 27, 2024. The effective interest rate on this agreement is approximately 18.7%. Effective September 10, 2021, the monthly payment is $208,000. The Company repaid a total of $5,381,005 and accrued interest of $1,018,995 through the new Amerisource term loan described below. Deferred financing costs associated with this agreement were $0 as of December 31, 2021.		0		11,708,919
Secured promissory notes for Jake, SMG Industries, Inc, and 5J Trucking LLC, with Small Business Administration Economic Injury Disaster Loans, bearing interest 3.75% annually and matures in June, August, and September 2050.		390,000		390,000
Secured promissory note issued on June 20, 2020. The note is due and payable in NaN monthly installments of $45,585 commencing on July 20, 2020 and the final installment is due on July 1, 2023. Unamortized deferred financing costs associated with this agreement were $287,560 as of December 31, 2021.		1,071,821		1,570,617
Secured promissory note with Amerisource, a related party, issued on September 7, 2021 in the amount of $6,400,000, bearing interest at 12%, maturing September 7, 2026. The Company is required to make monthly payments of interest only beginning October 1, 2021, with payments of principal and interest beginning in October 2022. An additional $6,340,000 was paid by Amerisource to Utica to settle the Utica promissory note in full in November 2021. Unamortized deferred financing costs associated with this agreement were $11,793 as of December 31, 2021.		12,740,000		0
		18,363,064		18,693,943
Less discounts and deferred finance costs		(299,353)		(644,907)
Less current maturities		(3,527,960)		(4,010,627)
Long term secured notes payable, net of current maturities and discounts	$	14,535,751	$	14,038,409

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

F-13

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 Interim CEO and Interim CFO, 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.

On 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.

On June 10, 2021, the Company entered into a fourth amendment and surrender agreement with Utica requiring weekly payments of $60,000 until July 2, 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

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of: (i) June 25, 2021, or (ii) the occurrence of an event of default, that is not cured within any applicable cure period. From July 9, 2021, until August 27, 2021 the weekly payments shall increase to $104,654 per week, and thereafter commencing on August 27, 2021 the payments shall be between $418,616 and $523,270 per month through the maturity date.

On August 10, 2021, the Company entered into an amendment of the forbearance agreement and surrender agreement on June 10, 2021 with Utica and 5J Trucking LLC which provided for weekly payments under the terms of the February 2020 lease for $104,654 until August 31, 2021 and a fixed buy out equal to $12,725,000. After August 31, 2021, the payment schedule returns to its original terms as per the June 10, 2021 amendment.

On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Brokerage and 5J Specialized LLC (the “5J Entities”) entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) in the total amount of $12,740,000. Pursuant to the terms of the Loan Agreement, the 5J Entities will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Entities will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. 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.

Pursuant to the terms of the Security Agreement, the 5J Entities granted a security interest in all of their assets to Amerisource as collateral for the repayment of the Amerisource loan, however, until such time as Utica has been paid in full pursuant to the master lease agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on February 27, 2020, Utica will continue to have a priority security interest in a significant portion of the 5J Entities assets. In connection with the Loan Agreement, the Company, the parent company of each of the 5J Entities, entered into a pledge agreement pursuant to which the Company has granted a security interest in all of its assets to Amerisource and a guaranty agreement pursuant to which the Company has guaranteed the timely payment of all amounts due under the Loan Agreement. The Loan Agreement includes customary covenants, including a negative convent that the 5J Entities may not create or permit for any lien to exist on the collateral nor enter into any new debt agreement.

The proceeds from the issuance of the Note were used to pay down the outstanding balance owed to Utica pursuant to a Second Forbearance Agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on September 7, 2021. The Utica agreement was paid in full through the Amerisource Loan Agreement in November 2021.

On July 12, 2021, the Company paid in full a December 12, 2019 promissory note with a principal balance of $25,000 that matured including all accrued interest for $29,973.

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 NaN 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. During the year ended December 31, 2021, the secured promissory note was retired in full. As of December 31, 2020, the balance of this note payable is included in Current Liabilities-Discontinued Operations on the Company’s Consolidated Balance Sheet.

On September 19, 2019, the Company issued an unsecured note with vendor for $135,375. The promissory note has an annual interest rate of 10.0% and was due at October 30, 2019. The note was issued in exchange for of settlement of accounts payable. As of December 31, 2021 and 2020, the $45,708 balance of this note payable is included in Current Liabilities-Discontinued Operations on the Company’s Consolidated Balance Sheet.

On March 6, 2020, Trinity Services, LLC entered into an unsecured line of credit agreement with Red River Bank. The revolving line of credit provides for a maximum balance of $200,000, accrues interest at 5.750% annually, and matures on March 6, 2021. Trinity will pay this loan in full immediately upon Red River’s demand. If no demand is made, Trinity will pay this loan in one payment of all outstanding principal plus all unpaid interest at maturity. As of December 31, 2021

F-15

and 2020, the $200,000 and $186,037 balance of this note payable is included in Current Liabilities-Discontinued Operations on the Company's Consolidated Balance Sheet.

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.

Notes Payable – Unsecured

	December 31,		December 31,
	2021		2020
Unsecured promissory note for 5J Oilfield Services LLC with Small Business Administration (“SBA”) Paycheck Protection Program (“PPP1”), bearing interest 1.00% annually and was scheduled to mature in April 2022. The loan was forgiven on June 3, 2021.	$	0	$	3,148,100
Insurance premium financing note with original principal of $1,487,202, monthly payments of $153,537, with stated interest of 6.99%, maturing on May 1, 2022.		743,576		0
Insurance premium financing note with original principal of $292,065, monthly payments of $7,793, with stated interest of 5.78%, maturing on February 14, 2022.		58,413		0
Unsecured note payable with a shareholder. 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
Unsecure advances from the sellers of MWTS, non-interest bearing and due on demand		35,000		35,000
Unsecured payable for settlement of lawsuit with an original settlement of $196,188, monthly payments of $6,822 for 24 months, with an interest rate of 6% and a default interest rate of 18%.		98,433		0
Unsecured note payable with a shareholder, a related party. Note issued on December 22, 2021 for $150,000, due January 31, 2022 and 12% interest per year. Deferred financing costs associated with this agreement were $87,187 as of December 31, 2021.		150,000		0
Unsecured note payable with a shareholder, a related party. Note issued on December 22, 2021 for $150,000, due January 31, 2022 and 12% interest per year. Deferred financing costs associated with this agreement were $87,187 as of December 31, 2021.		150,000		0
Unsecured note payable with a shareholder. Note issued on December 22, 2021 for $150,000, due January 31, 2022 and 12% interest per year. Deferred financing costs associated with this agreement were $87,187 as of December 31, 2021.		150,000		0
Notes payable - unsecured		1,429,981		3,227,659
Less discounts and deferred finance costs		(261,561)		0
Less current portion		(1,168,420)		(2,187,436)
Notes payable - unsecured, net of current portion	$	0	$	1,040,223

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

F-16

("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. The loan was forgiven on June 3, 2021. The gain on the forgiveness of the loan is included in other income on the Company’s Consolidated Statement of Operations for the year ended December 31, 2021.

On January 28, 2021, 5J Oilfield Services LLC received proceeds of $1,769,002 under the SBA PPP2 program. On February 3, 2021, Jake Oilfield Solutions LLC received proceeds of $35,000 under the SBA PPP2 program. On February 4, 2021, SMG Industries, Inc. received proceeds of $70,000 under the SBA PPP2 program. The Jake Oilfield Solutions LLC and the SMG Industries, Inc. SBA PPP2 loans of $35,000 and $70,000, respectively were forgiven on September 29, 2021. In October 2021, the 5J Oilfield Services LLC PPP2 loan was forgiven in full. The gain on the forgiveness of the loans are included in other income on the Company’s Consolidated Statement of Operations for the year ended December 31, 2021.

Unsecured Notes Payable – Discontinued Operations

On April 28, 2020, Trinity, received proceeds of $195,000 under the SBA PPP1 program. In accordance with the requirements of the CARES Act, the Companies used the proceeds from the PPP1 Loan primarily for payroll costs. 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. The PPP Loan was scheduled to mature on, August 28, 2020. The Trinity loan was forgiven February 16, 2021. On February 1, 2021, Trinity, received proceeds of $133,018 under the SBA PPP2 program. 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. The PPP Loan was scheduled to mature on, August 1, 2021. An additional $133,018 under the PPP2 program was forgiven in September 2021. The Trinity loans were included in Current Liabilities-Discontinued Operations on the Company’s December 31, 2020 Consolidated Balance Sheet and the gain on the forgiveness of the loan is included in loss from discontinued operations on the Company’s Consolidated Statement of Operations for the year ended December 31, 2021.

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 years ended December 31, 2021 and 2020, $96,442 and $82,349 of debt discount was amortized to interest expense, and unamortized discount was $28,428 and $124,870 as of December 31, 2021 and 2020, respectively. Amerisource is a related party of the Company due to its

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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 90% 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 $9,468,759 and $4,046,256 as of December 31, 2021 and 2020, respectively.

Convertible Notes Payable

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

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 years ended December 31, 2021 and 2020, $151,590 and $116,608 of debt discount was amortized to interest expense, and there was $151,589 and $303,180 of unamortized discount as of December 31, 2021 and 2020, respectively. 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 9 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

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investors who are considered related parties, primarily existing debt holders. As of December 31, 2020, there was $898,780 of unamortized discount remaining.

During the year ended December 31, 2021, the Company received $3,906,079 of cash, $522,301 of reduction of outstanding payables, and $859,439 of expenses paid on behalf of the Company in the form of new convertible notes under the terms above from related parties. The lenders received 7,931,612 shares of the Company’s restricted common stock. The Company recognized a debt discount of $5,138,070 based on the relative fair value of these shares and the beneficial conversion feature on the Convertible Notes. During the year ended December 31, 2021, $1,518,142 of debt discount was amortized to interest expense, and there was $4,518,708 of unamortized discount as of December 31, 2021.

The convertible promissory notes issued for non-cash consideration described above included the following:

During the year ended December 31, 2021, the Company issued multiple convertible promissory notes in the aggregate amount of $609,439, in exchange for payment of Company expenses of $609,439 to Steve Madden. The convertible notes mature after twenty-four months, pays 10% per annum interest rate, paid quarterly, and have a fixed conversion rate at $0.10 per share. This lender also received 914,160 shares of the Company’s restricted common stock in connection with this convertible note investment

On October 4, 2021, Newton Dorsett was issued a $77,592 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 116,388 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 29, 2021, James Frye was issued a $212,000 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 318,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

On October 30, 2021 James Frye was issued a $232,709 secured convertible note, paid in kind to settle outstanding payables, 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. This lender also received 349,064 shares of the Company’s restricted common stock in connection with this convertible note investment.

On December 16, 2021, Steve Madden was issued a $250,000 secured convertible note, paid in kind for services as Chief Transition Officer, 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 convertible note was recorded as a prepaid expense to be amortized over a one year period. This lender also received 375,000 shares of the Company’s restricted common stock in connection with this convertible note investment.

On July 12, 2021, the Company paid in full a secured convertible note originally issued April 2019 with a principal balance of $50,000 that matured including all accrued interest for $54,896.

Of the $8,907,035 principal amount, $7,906,740 of the Convertible Notes are held by investors, officers and board members, who are considered related parties, primarily existing debt holders.

As of December 31, 2021, the convertible notes, net balance was $4,236,817 which long term convertible notes payable of $2,620,145 and current portion of convertible notes of $1,616,672. As of December 31, 2020, the convertible notes, net balance was $2,467,335, including long term convertible notes payable of $2,417,335, net and current portion of convertible notes of $50,000.

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Future maturities of all Company debt as of December 31, 2021 are as follows:

2022	$	16,453,549
2023		11,261,405
2024		3,757,989
2025		3,461,280
2026		3,016,440
Thereafter		213,938
Total	$	38,164,601

NOTE 7 – STOCKHOLDERS’ DEFICIT

Year ended December 31, 2021

During the year ended December 31, 2021, a total of 6,956,612 shares of restricted common stock were issued to related parties, and 975,000 shares were issued to non-related parties pursuant to the convertible notes payable described in Note 6.

The 2,000 Series A non-redeemable convertible preferred stock with a stated value of $1,000 per share held by an affiliate of the Company matured on July 20, 2021. The Series A Preferred Stock is convertible at a fixed price of $0.50 per share. The Company issued 4,443,292 restricted common shares to the holder and family members in October 2021.

In October 2021, the Company issued 785,000 shares of its common stock for the settlement of $41,000 of accounts payable and $73,818 of secured note payable. The fair value of the common stock issued was $156,215 resulting in a loss on settlement of accounts payable of $40,490 and a loss on the settlement of liabilities of $807.

On December 22, 2021, the Company issued a total of 1,125,000 shares of common stock to three lenders in connection with unsecured notes payable. These shares had a fair value of $337,500 and were recorded as deferred finance costs.

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.

Preferred Stock – Series A Convertible Preferred stock

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

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● 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 Series A Convertible Preferred stock was converted in full in October 2021 and the Company issued 4,443,292 restricted common shares to the holder and family members.

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, 2019	845,000	$	383,750	$	0.24-2.18	$	0.45
Granted	2,210,000		663,000		0.30		0.30
Exercised	0		0		0		0
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
Granted	0		0		—		0
Exercised	0		0		0		0
Cancelled, forfeited or expired	(485,000)		(127,500)		0.24-0.30		0.26
Outstanding, December 31, 2021	1,575,000	$	561,250	$	0.25-0.75		0.36
Exercisable, December 31, 2021	1,127,778	$	427,083	$	0.25-0.75	$	0.38

Summary of stock option information is as follows:

During the year ended December 31, 2021, the Company recognized $67,460 related to outstanding stock options. At December 31, 2021, the Company had $73,894 of unrecognized expenses related to options.

The weighted average remaining contractual life is approximately 2.86 years for stock options outstanding on December 31, 2021. At December 31, 2021 there was 0 intrinsic value to the outstanding stock options.

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

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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 0 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.

Summary Stock warrant information is as follows:

					Weighted
	Aggregate	Aggregate		Exercise	Average
	Number	Exercise Price		Price Range	Exercise Price
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	0		0	0		0
Cancelled, forfeited or expired	0		0	0		0
Outstanding, December 31, 2020	1,763,335		496,667	0.15-0.75		0.28
Granted	—		—	—		0.20
Exercised	0		0	0		0
Cancelled, forfeited or expired	0		0	0		0
Outstanding, December 31, 2021	1,763,335	$	496,667	$0.15-$0.75	$	0.28
Exercisable, December 31, 2021	1,763,335	$	496,667	$0.15-$0.75	$	0.28

The weighted average remaining contractual life is approximately 5.10 years for stock warrants outstanding on December 31, 2021. At December 31, 2021 there was $58,850 of intrinsic value of outstanding stock warrants.

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 0 intrinsic value of outstanding stock warrants.

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

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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.

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”).

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

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

The acquisition of Trinity 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 planned 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. 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 $35,000 and $75,000 paid in December 2021 and 2020, respectively.

F-24

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)

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, 2021 and 2020 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, 2021 and 2020 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, 2021 and 2020 present operating, investing, and financing activities of MG and Trinity as cash flows from or used in discontinued operations.

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

	December 31,		December 31,
	2021		2020
Cash and cash equivalents	$	11	$	591
Accounts receivable, net		17,011		360,541
Prepaid expenses and other current assets		424		76,655
Current assets of discontinued operations		17,446		437,787
Property and equipment, net		—		1,500,000
Other assets		1,500		1,500
Right of use assets - operating lease		—		67,200
Other assets of discontinued operations		1,500		1,568,700
Total assets of discontinued operations	$	18,946	$	2,006,487
Accounts payable		400,659	$	597,266
Accrued expenses and other liabilities		187,624		198,833
Right of use liabilities - operating leases short term		—		38,206
Secured line of credit		—		278,301
Current portion of note payable - related party		—		—
Current portion of unsecured notes payable		—		440,331
Current portion of secured notes payable, net		—		690,100
Current liabilities of discontinued operations		588,283		2,243,037
Notes payable - secured, net of current portion		150,000		855,995
Notes payable - unsecured, net of current portion		231,746		101,374
Right of use liabilities - operating leases, net of current portion		—		50,993
Long term liabilities of discontinued operations		381,746		1,008,362
Total liabilities of discontinued operations	$	970,029	$	3,251,399

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

	December 31,		December 31,
	2021		2020
Revenues	$	157,620	$	4,310,013
Cost of revenues		(196,543)		(3,501,669)
Selling, general and administrative		(310,569)		(1,805,556)
Impairment expense		0		(983,660)
Bad debt expense		0		(54,009)
Loss from operations		(349,492)		(2,034,881)
Gain on forgiveness of PPP loan and Federal tax credits		373,712		—
Other income		27,635		20,000
Other expense		0		(7,566)
Gain (loss) on asset disposal		393,577		(2,806)
Gain on disposal of business		0		572,741
Interest expense, net		(102,776)		(311,320)
Net income (loss) from discontinued operations	$	342,656	$	(1,763,832)

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NOTE 10 – COMMITMENTS AND CONTINGENCIES

As of December 31, 2021, 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

During the year ended December 31, 2021, 5J Trucking LLC and James E. Frye entered into a settlement and release agreement with a third party equipment provider to settle outstanding claims by the provider. The Company agreed to pay a total of $196,188 to settle outstanding accounts payable, with $50,000 due upon execution and 24 monthly payments of $6,822. The Company recorded the liability as an unsecured note payable, as described in Note 6, which has a balance of $118,900 as of December 31, 2021.

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

NOTE 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.

On April 19, 2021, 5J Transportation LLC entered into a five year lease with Miller Investments & Properties for 45 acres in N.E. Houston, Texas, of which 24 acres is stabilized, and office and warehouse facilities, with monthly payments starting at $55,000 per month, escalating annually to a maximum of $58,191 per month by year five. The lease has an early termination option at the end of year three with appropriate notice. 5J Transportation also entered into an equipment lease agreement with BJJ Trailer Leasing on the same day to lease approximately 40 trailers used in hauling equipment and pipe for a twelve-month term at a rate of $22,500 per month. At its option, 5J may extend the equipment lease. The Company capitalized new right of use assets and lease liabilities of $2,478,508 related to the real estate lease, which utilized an incremental borrowing rate of 13%. The equipment is accounted for as a short-term lease based on the lease term under the Company's accounting policy election.

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The components of lease cost for operating and finance leases for the years ended December 31, 2021 and 2020 were as follows:

	December 31, 2021		December 31, 2020
Lease Cost
Operating lease cost	$	944,508	$	387,439
Short-term lease cost		485,824		283,873
Variable lease cost		—		0
Sublease income		—		0
Total lease cost	$	1,430,332	$	671,312

Supplemental cash flow information related to leases was as follows:

	December 31, 2021		December 31, 2020
Other Lease Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	537,616	$	136,050

The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at December 31, 2021 and 2020:

Lease Position	December 31, 2021		December 31, 2020
Operating Leases
Operating lease right-of-use assets	$	3,312,710	$	1,270,989
Right of use liability operating lease current portion	$	816,671	$	575,517
Right of use liability operating lease long term		2,545,950		846,212
Total operating lease liabilities	$	3,362,621	$	1,421,729

Assets and liabilities held for sale as of December 31, 2021 and 2020, included a right of use asset balance of $0 and $67,199, a short term lease liability of $0 and $38,207 and a long term lease liability of $0 and $50,992, respectively. The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable.

Lease Term and Discount Rate	December 31, 2021		December 31, 2020
Weighted-average remaining lease term (years)
Operating leases	3.7		3.6
Weighted-average discount rate
Operating leases	10.9	%	8.4	%

The following table provides the maturities of lease liabilities at December 31, 2021:

	Operating
	Leases
Maturity of Lease Liabilities at December 31, 2021
2022	$	1,163,869
2023		1,140,798
2024		952,872
2025		718,375
2026 and thereafter		232,765
Total future undiscounted lease payments	$	4,208,679
Less: Interest		(846,058)
Present value of lease liabilities	$	3,362,621

At December 31, 2021, the Company had no additional leases which had not yet commenced.

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The Company acquired 6 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 2,000 shares of Series A Convertible Preferred Stock with a stated value of $1,000 per share 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 was for $2,000 per month from July 1, 2019 until June 1, 2024. The lease was terminated May 30, 2021. The 2,000 shares of Series A non-redeemable convertible preferred stock of the Company matured on July 20, 2021 and is convertible at a fixed price of $0.50 per share. The Company issued 4,443,292 restricted common shares to the holder and family members in October 2021.

James E. 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 3 leases with the Company. 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. 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. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. During the year ended December 31, 2021, we purchased $655,760 in rental services and have charged the crane company $99,799 that are included in our revenues.

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. In December 2021, the Company issued a convertible promissory note with a principal amount of $250,000 to the Consultant for services as Chief Transition Officer for the period from August 1, 2021 until August 1, 2022.

During the year ended December 31, 2021 and 2020, the Company entered into new convertible notes payable with related parties totaling approximately $4,637,740 and $1,669,000 in principal, respectively. See Note 6.

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.

While Mr. Martini served as our Chief Executive Officer and Chief Financial Officer, 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, and during the year ended December 31, 2021, $931,034 was reimbursed through the issuance of convertible debt from the Company. Mr. Martini resigned as the Company's Chief Executive Officer and Chief Financial Officer on August 23, 2021 and serves as a consultant to us contracted through the Apex Management Services Agreement. On August 24, 2021, Steven H. Madden was elected as our Chief Transition Officer.

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NOTE 13 – INCOME TAXES

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

	For the Year Ended
	December 31,		December 31,
	2021		2020
Current income tax expense (benefit)	$	0	$	0
Deferred income tax expense (benefit)		(1,468,000)		(2,648,000)
Valuation allowance		1,468,000		2,648,000
Income tax expense (benefit)	$	0	$	0

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

	December 31,		December 31,
	2021		2020
Deferred tax asset:
Net operating loss carryforwards	$	2,430,000	$	4,122,000
Income (expenses) not currently earned (incurred)		(962,000)		(335,000)
Total		1,468,000		3,787,000
Valuation allowance		(1,468,000)		(3,787,000)
Net deferred tax asset	$	0	$	0

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, 2021, the Company has net operating losses available for the indefinite carryforward of approximately $11,572,000 and $35,409,000 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

On January 6, 2022, Newton Dorsett, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matures on January 31, 2022, and pays a 12% per annum interest rate. Mr. Dorsett also received 375,000 shares issued in the first quarter of 2022 as an equity incentive in connection with this note.

On January 6, 2022, Grey Fox Investments which is controlled by Brady Crosswell, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the loan to us in December 2021 of $150,000, totals $250,000. This bridge note matures on January 31, 2022, and pays a 12% per annum interest rate. Grey Fox Investments also received 375,000 shares issued in the first quarter of 2022 as an equity incentive in connection with this note.

F-30

On January 7, 2022, Mr. Madden loaned us $100,000 pursuant to short term bridge note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matures on January 31, 2022, and pays a 12% per annum interest rate. Mr. Madden also received 375,000 shares issued in the first quarter of 2022 as an equity incentive in connection with this note.

On January 27, 2022, the Company issued a secured promissory note for $843,844, which includes precomputed interest of $147,818. The note is due on May 1, 2026 and secured by machinery and equipment owned by the Company. The Company paid an initial installment of $95,025, with monthly payments of approximately $15,275 per month beginning in June 2021 through maturity.

On February 11, 2022, Mr. Madden loaned us $95,025 pursuant to a short term bridge note that matures on March 31, 2022. Mr. Madden also received 142,538 shares issued in the first quarter 2022 as an equity incentive in connection with this note.

On February 14, 2022, Mr. Madden loaned us $250,000 pursuant to a short term bridge note that matures on March 31, 2022. Mr. Madden also received 375,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note.

On February 14, 2022, James Frye, a member of our board of directors, loaned us $134,073 pursuant to a short term bridge note that matures on March 31, 2022. Mr. Frye also received 201,110 shares issued in the first quarter 2022 as an equity incentive (equity kicker) in connection with this note.

On March 3, 2022, Mr. Madden loaned us $450,000 pursuant to a short term bridge note that matures on March 31, 2022. Mr. Madden also received 675,000 shares issued after the first quarter 2022 as an equity incentive in connection with this note.

On March 15, 2022, each of our 5J subsidiaries entered into an agreement with Amerisource Funding Inc. (“Amerisource”), our senior lender, to amend the Loan Agreement dated September 7, 2021, pursuant to which Amerisource agreed to increase the loan commitment to the 5J entities from $12,740,000 to $16,740,000.

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