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

Our wholly-owned operating subsidiaries are:

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

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

Our Corporate History and Background

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

Acquire, grow, buy & build history and focus

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

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

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

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

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

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

Domestic United States Industry Overview by Segment

Heavy Haul and Over size loan Transportation Segment

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

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

Midstream Services Segment

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

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

Oilfield Services Segment

Rig Count 

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

5J Trucking and 5J Oilfield Services business description

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

Trinity Services business description 

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

MG Cleaners Products and Services

Proprietary Products

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

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

Service Crews

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

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

Equipment and Parts Sales

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

Rentals

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

SMG Oil Tools – Rentals

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

Momentum Water Transfer Services – Frac Water Services

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

Our Strategies

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

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

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

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

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

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

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

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

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

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

Geographic Operations

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

Competition

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

Cyclical Nature of Industry

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

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

Dependence on One or a Few Major Customers

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

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

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

Seasonality

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

Raw Materials

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

Intellectual Property

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

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

Government Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Property

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

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

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

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

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

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

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

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

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

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

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