UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the Fiscal Year Ended
or
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(IRS
Employer Identification No.) | |
| (Address of principal executive office) | (Zip code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The (Nasdaq Capital Market) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
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 requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth 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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
The
aggregate market value of the 13,361,835 voting common stock held by non-affiliates of the registrant as of June 30, 2022 was $
As of May 5, 2023, there were shares of registrant’s common stock outstanding.
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that present our current expectations or forecasts of future events. These statements do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties and include statements regarding, among other things, our projected revenue growth and profitability, our growth strategies and opportunity, anticipated trends in our market and our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under the sections entitled “Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this Annual Report on Form 10-K generally. In particular, these include statements relating to future actions, prospective products, market acceptance, future performance or results of current and anticipated products, sales efforts, expenses, and the outcome of contingencies such as legal proceedings and financial results.
Examples of forward-looking statements in this Annual Report on Form 10-K include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, operating expenses, working capital, liquidity and capital expenditure requirements. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products and services, the cost, terms and availability of components, pricing levels, the timing and cost of capital expenditures, competitive conditions and general economic conditions. These statements are based on our management’s expectations, beliefs and assumptions concerning future events affecting us, which in turn are based on currently available information. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
| ● | changes in the market acceptance of our products and services; | |
| ● | increased levels of competition; | |
| ● | changes in political, economic or regulatory conditions generally and in the markets in which we operate; | |
| ● | our relationships with our key customers; | |
| ● | adverse conditions in the industries in which our customers operate; | |
| ● | our ability to retain and attract senior management and other key employees; | |
| ● | our ability to quickly and effectively respond to new technological developments; | |
| ● | our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company; and | |
| ● | other risks, including those described in the “Risk Factors” discussion of this Annual Report on Form 10-K. |
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this Annual Report on Form 10-K are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.
ii
In this Annual Report on Form 10-K, unless the context otherwise requires, all references to “the Company,” “we,” “our”, “us” and “Vivakor” refer to Vivakor, Inc., a Nevada corporation.
On February 14, 2022, we effected a 1-for-30 reverse split of our authorized and outstanding shares of preferred and common stock (the “Reverse Stock Split”) via the filing of a certificate of change with the Nevada Secretary of State which was effective at the commencement of trading of our Common Stock. No fractional shares of the Company’s common stock will be issued as a result of the Reverse Stock Split. Any fractional shares resulting from the Reverse Stock Split will be rounded up to the nearest whole share. Unless otherwise noted the share and per share information in this Annual Report on Form 10-K reflects the Reverse Stock Split.
Following the Reverse Stock Split, the Company has 41,666,667 shares of common stock authorized and 15,000,000 shares of preferred stock authorized. All share and per share information in this Annual Report on Form 10-K have been retroactively adjusted for all periods presented, unless otherwise indicated, to give effect to the Reverse Stock Split, including the financial statements and notes thereto.
iii
PART I
Item 1 - Business
Vivakor, Inc. is a socially responsible operator, acquirer and developer of technologies and assets in the oil and gas industry, as well as, related environmental solutions. Currently, our efforts are primarily focused on operating crude oil gathering, storage and transportation facilities, as well as contaminated soil remediation services. One of our facilities sells crude oil in amounts up to 60,000 barrels per month under agreements with a large energy company. A different facility owns a 120,000 barrel crude oil storage tank near Colorado City, Texas. The storage tank is presently connected to the Lotus pipeline system, and we plan to further connect the tank to major pipeline systems. Our soil remediation services specialize in the remediation of soil and the extraction of hydrocarbons, such as oil, from properties contaminated by, or laden with, heavy crude oil and other hydrocarbon-based substances. Our patented process allows us to successfully recover the hydrocarbons which we believe could then be used to produce asphaltic cement and/or other petroleum-based products.
Recent Developments
Acquisition of Silver Fuels Delhi, LLC and White Claw Colorado City, LLC
On June 15, 2022, we entered into a Membership Interest Purchase Agreement(the “MIPA”), with Jorgan Development, LLC, a Louisiana limited liability company (“Jorgan”) and JBAH Holdings, LLC, a Texas limited liability company (“JBAH” and, together with Jorgan, the “Sellers”), as the equity holders of Silver Fuels Delhi, LLC, a Louisiana limited liability company (“SFD”) and White Claw Colorado City, LLC, a Texas limited liability company (“WCCC”) whereby, at closing, which occurred on August 1, 2022, the Company acquired all of the issued and outstanding membership interests in each of SFD and WCCC (the “Membership Interests”), making SFD and WCCC wholly owned subsidiaries of the Company. The purchase price for the Membership Interests is approximately $32.9 million, after post-closing adjustments, paid for by the Company with a combination of shares of the Company’s common stock, amount equal to 19.99% of the number of issued and outstanding shares of the Company’s common stock immediately prior to issuance, secured three-year promissory notes made by the Company in favor of the Sellers. The MIPA is also subject to unwinding in the event of a breach of a material term of the MIPA, as set forth in the MIPA.
The MIPA contains customary representations and warranties, pre- and post-closing covenants of each party and customary closing condition.
The principal amount of the Notes, together with any and all accrued and unpaid interest thereon, will be paid to the Sellers on a monthly basis in an amount equal to the Monthly Free Cash Flow beginning on August 20, 2022, and continuing thereafter on the twentieth (20th) calendar day of each calendar month thereafter, as set forth in the MIPA.
Without in any way limiting the foregoing, the then outstanding principal amount of the Notes, together with any and all accrued and unpaid interest thereon, will be due and payable in full in cash or unrestricted common stock of the Company on or prior to the three-year anniversary of the date of issuance, as set forth in the MIPA.
The obligations of the Company under the MIPA are secured by the membership units of SFD and WCCC.
The timely and full payment of any and all principal, interest and other amounts due and owing to the Sellers pursuant to the Notes and the other transaction documents and the payment of any and all other obligations owed to the Sellers by the Company under the Notes or thereunder are guaranteed solely by, and to the extent set forth in, the Guaranty Agreements between each of the Sellers and SFD and WCCC.
SFD operates a crude oil gathering, storage, and transportation facility located on approximately 9.3 acres near Delhi, Louisiana. Under existing agreements, a subsidiary of a large NYSE traded energy company (the “Purchaser”) is obligated to purchase crude oil from SFD in amounts up to 60,000 barrels per month. With prior approval, SFD is eligible to sell to the Purchaser amounts greater than 60,000 barrels of crude oil per month. Additionally, for a period of 10 years, SFD is, under existing crude oil supply agreements with WC Crude, guaranteed a minimum gross margin of $5.00 per barrel on all quantities of crude oil sold thereunder. At present, SFD is gathering and selling approximately 1,400 to 1,700 barrels of crude oil on a daily basis. Additionally, the acquisition of SFD would provide the Company with the infrastructure needed to place a Remediation Processing Machine (“RPC”) to clean soil which has been contaminated by hydrocarbons as well as tank bottom sludge. Management believes SFD’s location in the heart of the Smackover formation would provide the Company with access to significant amounts of tank bottom sludge and contaminated soil.
1
WCCC operates a 120,000 barrel crude oil storage tank, in the heart of the Permian Basin, located near Colorado City, Texas. The storage tank is presently connected to the Lotus pipeline system and the Company intends to further connect the tank to a major pipeline system. Under the terms of an existing agreement, WC Crude has agreed to lease the oil storage tank for a period of 10 years. As with SFD, WCCC would provide the Company with the infrastructure to process and sell oil which has been recovered via a RPC machine from tank bottom sludge and contaminated soil which exists in the Permian Basin.
Off-Take Agreement
On April 26, 2022, our subsidiary Vivaventures Energy Group, Inc., entered into a Product Off-Take Agreement (the “Off-Take Agreement”), with Hot Oil Transport, LLC, a Nevada limited liability company (“HOT”). Pursuant to the Off-Take Agreement, the Company plans to produce asphalt that meets certain specifications from its Vernal, Utah RPC plant. HOT will be obligated to purchase from the Company certain quantities of the product from the plant once the plant begins to produce the product, on the terms and conditions set forth in the Off-Take Agreement. The quantity of the product to be sold and purchased pursuant to this Agreement will be (i) 1,000 tons of the product per week, or (ii) the entirety of any lesser amount that may be produced by the Company during any given week. The Off-Take Agreement sets for forth the rates for the sale and purchase of up to 1,000 tons of product per week. The Off-Take Agreement provides for an initial term of ten years. The Off-Take Agreement will automatically renew for two successive ten-year terms, subject to the Company’s right to continue operating at the current Plant site, unless either party terminates the Off-Take Agreement by written notice to the other party not less than three months prior to the expiration of the term. During a term, the Off-Take Agreement can only be terminated for (i) abandonment or termination of Project by the Company; (ii) default by the other party; or (iii) in connection with occurrence of a force majeure. Currently the operations at our Vernal plant are limited due to recent, temporary supply and personnel limitations. We are not currently producing product toward the Off-Take Agreement due to these recent developments. We continue to assess the impact of these limitations on this agreement and ancillary agreements.
Land Lease Agreement
On December 16, 2022, our subsidiary, Vivaventures Remediation Corp. entered into a Land Lease Agreement (the “Land Lease”) with W&P Development Corporation, under which we agreed to lease approximately 3.5 acres of land in Houston, Texas (commonly known as The San Jacinto River & Rail Park, 18511 Beaumont Highway, Houston, Texas). The Land Lease is for an initial term of 126 months and may be extended for an additional 120 months at our discretion. Our monthly rent is $0 for the first three months and then at month 4 it is approximately $7,000 (based on a 50% reduction) and increases to approximately $13,000 in month 7 and then increases annually up to approximately $16,000 per month by the end of the initial term. We plan to place one or more of our RPC machines on the property, as well as store certain equipment.
Our Operations and Resulting Financial Impact
Crude Oil Gathering, Storage and Transportation
As a result of our acquisitions of WCCC and SFD we entered into the crude oil gathering, storage and transportation industry.
SFD operates a crude oil gathering, storage, and transportation facility located on approximately 9.3 acres near Delhi, Louisiana. Under existing agreements, a subsidiary of a large NYSE traded energy company (the “Purchaser”) is obligated to purchase crude oil from SFD in amounts up to 60,000 barrels per month. With prior approval, SFD is eligible to sell to the Purchaser amounts greater than 60,000 barrels of crude oil per month. Additionally, for a period of 10 years, SFD is, under existing crude oil supply agreements with WC Crude, guaranteed a minimum gross margin of $5.00 per barrel on all quantities of crude oil sold thereunder. At present, SFD is gathering and selling approximately 1,400 to 2,000 barrels of crude oil on a daily basis. The facility has a daily capacity to gather and sell approximately 4,000 barrels of crude oil. For the year ended December 31, 2022, we recognized $27,300,210 in revenue from SFD’s operations.
2
WCCC operates a 120,000 barrel crude oil storage tank, in the heart of the Permian Basin, located near Colorado City, Texas. The storage tank is presently connected to the Lotus pipeline system and the Company intends to further connect the tank to major pipeline systems. Under the terms of an existing agreement, WC Crude has agreed to lease the oil storage tank for a period of 10 years. For the year ended December 31, 2022, we recognized $758,164 in revenue from WCCC’s operations.
Remediation Processing Centers
We presently have two projects utilizing our first two manufactured RPCs - our project in Kuwait and our project in Vernal, Utah.
In Kuwait, pursuant to an agreement with Al Dali International Co., a company organized under the laws of Kuwait (“DIC”), we will be due $50,000 upon the successful remediation of the first 100 tons ($500 per ton) of contaminated soil under its subcontractor services for the Kuwait Oil Company (“KOC”) Remediation Contract. In addition, we will be due $20 per treated ton of soil after the initial 100 tons. The treatment process using the RPC plants is also anticipated to generate a bitumen sub-product. We have agreed with DIC to sell this sub-product and share the net profits equally (50% to the us and 50% to DIC), after allocating 30% of the net profits to DIC in the form of a sales and marketing payment, which will be invoiced on a monthly basis, in accordance with the Agreement. Pursuant to the Agreement, we will have a stockpile of at least 444,311 tons with at least 5% oil contamination for us to remediate. The operations surrounding our first RPC for this project were temporarily suspended until recently. Pursuant to the Agreement, in 2023 we finished refurbishing the RPC and have commenced the testing operations of the first 100 tons and thereafter plan to begin remediating the 444,311 ton stockpile.
Our RPC situated in Vernal, Utah has the capacity to process 500 tons or more of naturally occurring oil sands deposits per day. We estimate that if the extracted material is composed of at least 10% oil, we will recover approximately 250 barrels of extracted hydrocarbons each day, which could then be sold for energy or converted to asphaltic cement and sold for use in roads at higher prices. Currently the operations at our Vernal plant are limited due to recent, temporary supply and personnel limitations. We are not currently producing product toward the Off-Take Agreement due to these recent developments. We continue to assess the impact of these limitations on this agreement and ancillary agreements.
Ancillary to our Vernal, Utah operations, we have an exclusive license agreement with TBT Group, Inc., under which we are exploring the possibilities of embedding self-powered sensors directly into the asphaltic cement we may generate from the Vernal, Utah RPC utilizing TBT Group’s piezo electric and energy harvesting technologies. For the year ended December 31, 2022 we realized an impairment loss of $447,124 on this license agreement with TBT Group due to the current disruptions at the Vernal, Utah facility.
Precious Metals Extraction Services
We previously extracted and sold precious metals using our extraction machinery and held extracted precious metals from those operations for monetization. The operations surrounding our precious metals extraction services were suspended until recently, although due to these suspended activities and a shift in 2022 of the Company’s focus to the oil and gas industry, we have realized an impairment loss of $1,166,709 surrounding our precious metal concentrate and an impairment loss of $6,269,998 surrounding the extraction machinery, which fully impairs the precious metals assets.
Market Opportunity
Crude Oil Gathering, Storage and Transportation
We are presently seeking additional acquisition or development opportunities within the traditional midstream oil and gas sector which are complementary to our existing facilities which provide us with an opportunity to capture more of the energy value chain.
3
Remediation Processing Centers
Houston
In April 2022, we contracted with an industrial solutions service company as independent contractor to assist us in placing a RPC in the Houston, Texas market for the purpose of processing hydrocarbon tank bottoms. The contractor will assist in our operations in the Gulf Coast Region, including Texas, Louisiana, Arkansas, Oklahoma, and New Mexico. In conjunction with our contractor, we secured a site location to mobilize, commission, and operate the Company’s RPC technology, which is anticipated to be on the land lease we entered into in December 2022 for approximately 3.5 acres of land in Houston, Texas (commonly known as The San Jacinto River & Rail Park). The Land Lease is for an initial term of 126 months and may be extended for an additional 120 months. Our contractor has begun acquiring required state and local permits, which are prerequisites to us being able to deliver and set up a RPC we had manufactured in 2022 and 2023. After the RPC is set up and tested in Houston, Texas we intend to contract with the independent contractor to assist us in operating the RPC and to supply us with a workforce to do so.
Kuwait
The United Nations (UN) had allocated up to $14.7 billion for post-Iraq war reparations in order to clean up Kuwait. Kuwait suffered extensive contamination as a result of the 1991 Persian Gulf War.
As a result of successfully testing our technology on the contaminated material in Kuwait, including reducing the amount of contaminated material in Kuwait from 20% hydrocarbon contamination to just 0.2% hydrocarbon contamination, based on third party independent testing performed by ALS Arabia in March 2020, we were engaged by a subcontractor, DIC, which is approved by KOC for the Kuwait Environmental Remediation Program (“KERP”) project.
The KERP project is anticipated to involve approximately 26 million cubic meters of contaminated oil sands requiring remediation. We expect that as much as 20% of the contaminated soil will contain more than 5% hydrocarbon contamination. Our agreement with DIC is for clean up of a portion of the KERP project.
The oil recovered from these projects in Kuwait is considered a sovereign asset, so the ability to reclaim this asset also creates a social value for the country. In order to remediate all of the contaminated sand exhibiting greater than 7% contamination in the timeframe required by the UN, we anticipate obtaining further agreements through KOC to expand its service contract over the next several years.
On December 14, 2021, we, together with our subsidiary, Vivaventures Energy Group, Inc., entered into a Services Agreement (the “Services Agreement”) with Al Dali International Co., a company organized under the laws of Kuwait (“DIC”). The Government of Kuwait and the United Nations, acting through the Kuwait Oil Company (“KOC”) has awarded to Enshaat Al Sayer rights to remediate contaminated soil under the Kuwait Remediation Program pursuant to the South Kuwait Excavation, Transportation and Remediation Project (“KOC Remediation Contract”). To fulfill its role, Enshaat Al Sayer has engaged the Company, through the Company’s agreement with DIC, to perform contaminated soil treatment for the KOC Remediation Contract using the Company’s patented technology for extracting hydrocarbons, through the Company’s Remediation Processing Center (“RPC”) plants.
We are due to receive $50,000 upon the successful remediation of the first 100 tons ($500 per ton) of contaminated soil under its subcontractor services for the KOC Remediation Contract. In addition, we are due to receive $20 per treated ton of soil after the initial 100 tons. The treatment process using the RPC plants is anticipated to generate a bitumen sub-product. The Company and DIC have agreed to sell this sub-product and share the net profits equally (50% to the Company and 50% to DIC), after allocating 30% of the net profits to DIC in the form of a sales and marketing payment, which will be invoiced on a monthly basis, in accordance with the Agreement. Pursuant to the Agreement, we will have a stockpile of at least 444,311 tons with at least 5% oil contamination for us to remediate.
Pursuant to the Agreement, one of our pilot RPC plants is on location and we are currently running test runs with the pilot plant. Assuming the test runs with the pilot plant prove successful, then within one year of certain contract milestones being met, we will provide a larger RPC plant capable of processing 40 tons of soil per hour. We will bear the cost of the related manufacturing, deployment, break-down and spare parts of the RPCs. The RPC plant remediation services must reduce TPH contamination to less than 1%. DIC will provide all other costs for bonds, infrastructure, and operations of the plant.
4
Vernal, Utah Project
The State of Utah has, according to the U.S. Geological Survey, approximately 14 billion barrels of measured oil in place with an additional estimated 23 to 28 billion barrels of oil contained in contaminated oil sands that are deposited near the ground surface. We believe that the crude from these oil sands can be turned into asphaltic cement for making roads or upgraded for polymers or fuel. In June 2021, we entered into an agreement with the owner of such parcel of land that permitted us to continue to operate on the land on a month-to-month basis. In March 2022, we entered into a land lease with the Vernal, Utah landowner for a five year term, with an optional 5 year extension, allowing us to process up to 2,000 tons per day of oil sand material, with a guarantee by the land owner to deliver material with a minimum of 10% hydrocarbon by weight.
The Vernal property contains approximately 100 million cubic yards of oil sand material available for processing. The property is located on approximately 600 acres. We believe that we could ultimately recover as much as 40 million barrels of oil from this property as a whole if we are able to economically scale our operations and obtain further land leases from the landowner.
Currently the operations at our Vernal plant are limited due to recent, temporary supply and personnel limitations. We are not currently producing product toward the Off-Take Agreement due to these recent developments. The Company continues to assess the impact of these limitations on this agreement and ancillary agreements.
Ancillary to our Vernal, Utah operations, we have an exclusive license agreement with TBT Group, Inc., under which we are exploring the possibilities of embedding self-powered sensors directly into the asphaltic cement we may generate from the Vernal, Utah RPC utilizing TBT Group’s piezo electric and energy harvesting technologies. For the year ended December 31, 2022 we impaired the license agreement with TBT Group due to the current disruptions at the Vernal, Utah facility.
Our Technologies
We own and/or license a number of technologies that allow us to effectively operate our remediation and recovery business along with other technologies that provide synergies with our core business. The description of these various technologies follows.
Hydrocarbon Extraction Technology
In 2015, we acquired and improved technology aimed at remediating contaminated soil and recovering usable hydrocarbons, which is used in our remediation plants (also known as Remediation Processing Centers or RPCs). We presently have two US patents and pending foreign applications related to our RPCs. Our RPCs each have the potential to clean a minimum of 20 tons of contaminated material per hour, depending on the oil contamination percentage in the processed material. Each RPC has the capacity to process 500 tons or more of contaminated material per day on a 24-hour operation. The amount of extracted hydrocarbon recovered depends on the extent to which the material is contaminated. We estimate that for every 480 tons of contaminated material processed per day that contains at least 10% oil, we will recover approximately 250 barrels of extracted hydrocarbons.
We believe our RPCs are significantly more advanced than other oil remediation technologies or offerings presently available on the market. Our RPCs have successfully cleaned contaminated soil containing greater than 7% hydrocarbon content, while, to our knowledge, our competitors are limited to projects containing less than 5% hydrocarbon contamination. We believe our ability to clean soil with higher percentages of hydrocarbon contamination is a distinctive advantage that will allow us to operate on a global basis in any location that has suffered from oil spills or naturally occurring oil sands deposits.
Automation and Machine Learning
The RPC systems we build are automated and controlled by software enabling us to maximize efficiencies. We believe that these automations may ultimately allow us to operate the RPCs twenty-four hours a day, resulting in continuous feed capabilities that will allow us to manage our systems remotely world-wide. Each RPC unit is designed with a focus on automation to achieve our Key Performance Indicators (KPIs). We have deployed data analytics and machine learning, to enable operations to be predictive, reduce risk, improve safety, and reduce costs.
5
Hydrocarbon Upgrading Technologies
We have acquired and/or licensed two separate technologies described below that will enable us to upgrade the hydrocarbons recovered from our remediation process. These processes have been proven in laboratory tests, but we have not yet performed this upgrading in a commercial setting.
On September 30, 2020, we entered into an Intellectual Property License Agreement (“BGreen License Agreement”) with BGreen, LLC (“BGreen”), pursuant to which we have been granted a worldwide, exclusive, non-transferable license to the intellectual property embodied in BGreen’s cavitation technology to develop, manufacture, have manufactured, use market, import, have imported, offer for sale and sell cavitation devices built from the licensed intellectual property. The BGreen License Agreement also grants us the first right of refusal to purchase all devices and all intellectual property associated with the cavitation technology. To date we have only deployed limited resources to this project, and we are not sure when, or if, we will deploy additional resources to further explore the possibilities of this technology.
In addition, in 2017, we acquired from CSS Nanotech an exclusive right to use their nano-sponge technology for $2,416,572 in Series C Preferred Stock, which has since converted to common stock. The technology essentially serves as a micro-upgrader, transforming hydrocarbon product into a more useful product, such as petroleum or gasoline, as an addition to our hydrocarbon extraction technology. The inventor of this technology subsequently joined us as our Chief Scientific Officer. This patented technology allows for hydrocarbon material to be absorbed by a specialized sponge. Low energy microwaves are then introduced into the process and the sponge, which is made of a highly thermally conductive material, absorbs this energy causing an instant thermal effect, which essentially refines the crude by cutting or cracking the carbon chains. We intend to add this system to our process of upgrading the heavy crude recovered by our RPCs.
We believe that each of these technologies has the ability to upgrade the heavy crude that is recovered from our recovery and remediation process based on our needs and demand, and we intend to fully integrate these technologies into our process.
Competitive Strengths and Growth Strategy
Our two primary growth strategies for our crude oil gathering, storage and transportation services is to attempt to acquire additional barrels of oil for our services, and to seek to acquire businesses that have operations that are synergistic with our current operations.
Regarding our remediation services, we are focused on the remediation of contaminated soil and water resulting from either man-made spills or naturally occurring deposits of oil. Historically, our primary focus has been the remediation of oil spills resulting from the Iraqi invasion of Kuwait and naturally occurring oil sands deposits in the Uinta basin located in Eastern Utah. However, we plan to expand into other markets where we believe our technology and services will provide a distinct competitive advantage over our competition.
To that end, in April 2022, we contracted with an industrial solutions service company as independent contractor to assist us in placing a RPC in the Houston, Texas market for the purpose of processing hydrocarbon tank bottoms.
Additionally, in the future we intend to focus on placing additional RPCs in the Gulf Coast Region, including Texas, Louisiana, Arkansas, as well as in Oklahoma, and New Mexico. In order to place RPCs at these locations we will need to secure the necessary financing and manufacture additional RPCs, as well as contract with the site locations in order to install the RPCs.
In addition to our growth strategies set forth above, we are also focused on growth through the acquisition of synergistic businesses and are regularly reviewing potential acquisition targets.
6
Competitive Strengths
We believe the following strengths provide us with a distinct competitive advantage and will enable us to effectively compete on a global basis:
| ● | Proprietary patented technology; | |
| ● | Environmental advantages; and | |
| ● | Experienced and highly-skilled management, Board of Directors and Advisory Board. |
Proprietary Patented Technology
In total, we, together with our subsidiaries, have intellectual property that is in the form of both proprietary knowledge and patents. Our patent portfolio consists of four issued U.S. patents, and several pending patent applications internationally. In addition, we have licensed from our partners the right to use additional patented technologies.
We believe, based on direct and ongoing conversations with our customers and third-party independent test results, that our technology is the only commercially available technology that can not only clean soil that contains greater than 7% hydrocarbon, but also preserves the hydrocarbons extracted from such soil for future use. We believe that this provides us with a true competitive advantage.
Our main technology has been tested and validated for all of its claims by separate, independent expert firms both in the United States and the Middle East, whose reports confirm that we have reclamation technology, which has been tested and reviewed, that possesses the ability to clean soil with more than 7% hydrocarbon contamination and still leave the recovered hydrocarbons in a usable state.
Environmental Advantages
Among our key corporate objectives is to be at the forefront of social responsibility for its technological impact. We strive for all of our systems to ultimately become closed loop systems, to minimize adverse impacts on air quality and reduce the need for use of clean water. Our ability to turn waste into value is in line with this core objective. Our remediation projects in Kuwait are expected to reduce emissions from vaporization of the oil spilled in the soil. The ability to clean produced water from oil production can eliminate the need for evaporation ponds, improving air quality and saving on the use of clean water.
We believe our technology and service offerings will position us well to conduct our business in any geographical region in which soil or water has been contaminated by hydrocarbons.
Experienced and Highly Skilled Management, Board of Directors and Advisory Board
Our management team has started and successfully grown numerous companies and has utilized this experience to develop a strategic vision for the Company. We have demonstrated the effectiveness of our technologies in both Vernal, Utah and Kuwait, accomplishing the clean-up of contaminated areas.
Our Board of Directors is comprised of accomplished professionals who bring decades of experience to the Company. Our Board of Directors includes our Chief Executive Officer, who brings more than two decades of experience in midstream oil and gas senior management roles, our Chief Financial Officer, who is a CPA and previously worked at Deloitte LLP (USA) and later at Withum+Brown, PC, where he worked with clients with assets of more than $100 billion and annual revenues of more than $15 billion, a director who has served as chief financial officer for five listed companies, including working as point person for over 20 acquisition transactions and as audit committee chair for numerous public companies, a director with over 35 years of experience in Board of Directors, CEO and Senior Management positions in a variety of industries including technology services, telecommunications, healthcare, and business process outsourcing, and a director who brings over 25 years of experience in operations and senior management in the midstream and downstream sectors of the oil and gas industry.
7
In addition, we have an Advisory Board comprised of former senior members of oil and gas companies, both in the United States and in the Middle East. Our Advisory Board is led by one member who is an accomplished business professional and a member of a royal family based in the Middle East and another member who is an experienced health and safety expert operating in the oil and gas industries.
We rely on our Board of Directors and Advisory Board to provide it both high level advice and guidance along with using their contacts to help open various markets. Additionally, the Advisory Board acts as a preliminary informal sounding board for the Board and management for these particular areas in which the Advisory Board members have expertise. We believe the combination of our management team, Board of Directors and Advisory Board provides us with a significant competitive advantage over our competitors due to their breadth of experiences and relationships.
Growth Strategies
Crude Oil Gathering, Storage and Transportation
We plan to grow our crude oil gathering, storage and transportation business by pursuing the following strategies:
| ● | Increasing the number of barrels of oil gathered, stored, and transported pursuant to our existing long-term contracts; |
| ● | Construction of wash plant facilities for oil transportation trucks to gather, store and transport reclaimed oil from these facilities; |
| ● | Acquisition of additional gathering, storage, and transportation assets or companies; and |
| ● | The development or acquisition of complementary midstream oil and gas companies or projects. |
WCCC operates a 120,000 barrel crude oil storage tank, in the heart of the Permian Basin, located near Colorado City, Texas. We intend to further connect the tank to major pipeline systems.
SFD operates a crude oil gathering, storage, and transportation facility, which is presently gathering and selling approximately 1,400 to 2,000 barrels of crude oil on a daily basis. We plan to increase operations at the SFD facility. This facility has the capacity to gather and sell up to 4,000 barrels of crude oil per day.
In April 2022, we contracted with an industrial solutions service company as an independent contractor to assist us in constructing an oil truck wash and remediation facility to be used in conjunction with operating a RPC in Houston, Texas for the purpose of processing hydrocarbon tank bottoms from the wash plant operations. Once the oil truck wash and remediation facility is completed it will allow us to charge tipping fees for our service to take in tank bottoms for our plant to remediate. Our independent contractor is working to secure feed stock contractors through their industry relationships.
Remediation Processing Centers
We will strive to grow our RPC business by pursuing the following strategies:
| ● | Expansion into new and complementary markets; | |
| ● | Operating our Remediation Project in Kuwait; | |
| ● | Increase of revenue via new service and product offerings; | |
| ● | Strategic acquisitions and licenses targeting complementary technologies; and | |
| ● | Redeployment of the metallic separation technologies. |
8
Expansion into New and Complementary Markets
We intend to explore expansion opportunities on a global basis, including in places with extreme contamination and naturally occurring oil sands deposits, where we believe our technology and service offerings may provide a distinct competitive advantage. We are currently in discussions with several groups for deploying our RPCs for remediation projects (primarily for oil spills, tank bottom sludge and drill cuttings) domestically in Houston, TX, Corpus Christ, TX, Midland, TX Cushing OK, Lake Charles, LA. Our technology is able to process tank bottom sludge, drill cuttings, and soils form hydrocarbon spills, returning the sand to less than 0.5% contamination while reclaiming the oil for waste energy use. In furtherance of that strategy, as noted above, in April 2022, we contracted with an industrial solutions service company as independent contractor to assist us in placing a RPC in the Houston, Texas market where we have leased property (the San Jacinto River & Rail Park) for the purpose of processing hydrocarbon tank bottoms. Once our contractor has acquired the required state and local permits, which are prerequisites to us being able to deliver and set up a RPC on the site, and after the RPC is set up and tested, we intend to contract with the independent contractor to provide us with the workforce to begin operating the plant. Once the oil truck wash and remediation facility is completed it will allow us to charge tipping fees for our service to take in tank bottoms for our plant to remediate. Our independent contractor is working to secure feed stock contractors through their industry relationships.
Additionally, in the future we intend to focus on placing additional RPCs in the Gulf Coast Region, including Texas, Louisiana, Arkansas, as well as in Oklahoma, and New Mexico. In order to place RPCs at these locations we will need to secure the necessary financing and manufacture additional RPCs, as well as contract with the site locations in order to install the RPCs.
Operating our Remediation Project in Kuwait
Our RPC technology was successfully used in our initial project for KOC in Kuwait, where we removed hydrocarbons from soil with more than 7% contamination and, following the process, the hydrocarbon contamination level of the soil was reduced to less than 0.5%, which was lower than the level needed to meet the project specifications. There is still approximately 26 million cubic meters of soil contaminated by oil from the Iraqi invasion of Kuwait. Pursuant to our Services Agreement with DIC, we will receive $50,000 for the successful remediation of the first 100 tons ($500 per ton) under its subcontractor services for the KOC Remediation Contract. In addition, we will receive $20 per treated ton of soil after the initial 100 tons. The treatment process using the RPC plants is anticipated to generate a bitumen sub-product. We have agreed with DIC to sell this sub-product and share the net profits equally (50% to us and 50% to DIC), after allocating 30% of the net profits to DIC in the form of a sales and marketing payment, which will be invoiced on a monthly basis, in accordance with the Agreement. Pursuant to the Agreement, we will have a stockpile of at least 444,311 tons with at least 5% oil contamination for us to remediate. Other technologies may also be used for the less contaminated soils.
Increase of Revenue via New Service and Product Offerings
To date, we have focused on the remediation of soil contaminated by oil. We intend to target other hydrocarbon remediation businesses that focus on, among other things, the cleaning of tank bottom sludge, and the cleaning of the water used from drilling oil wells. Oil producers generally pay to dispose of sludge that has accumulated at the bottom of storage tanks. We believe that our technologies could be used to separate the contaminated water from heavy crude produced from drilling, while simultaneously recovering the heavy crude. We believe we will be able to offer these services at a cost that is very competitive with current methods and that our ability to recover the heavy crude for resale will give us a competitive advantage. We are currently in early stage discussions relating to some of these remediation projects.
Strategic Acquisitions and Licenses Targeting Complementary Technologies
We intend to seek out opportunities to acquire or license only specific technologies that are either complementary to our existing product offerings or that will allow us to expand into the environmental infrastructure markets. We entered into a worldwide, exclusive license agreement with TBT Group, Inc. to license piezo electric and energy harvesting technologies for creating self-powered sensors for making smart roadways, which we believe could be embedded directly into the asphaltic cement we intend to produce from the hydrocarbons we extract, providing the basis for smart roads and infrastructure. We believe that these sensors, which are self-powered, could be used to provide information about traffic, road conditions and repair needs as well as allowing the roads to communicate directly with autonomous vehicles enabling these vehicles to sense the road in all weather conditions. By complementing the asphaltic cement,we expect to produce with integrated sensors for automated vehicles, we believe that we will be able to offer a smart road.
9
Other Holdings
Historically, as part of our strategy to find and invest in technologies that might develop synergies with our existing businesses, we have invested in other companies and/or entities. Not all of our investments to date have developed into complementary technologies and/or businesses, but with our management’s assistance, many of them have still become successful and accretive to our Company’s value. Over time, we intend to divest our ownership of companies that are not synergistic with our business.
Scepter Holdings
We currently hold 826,376,882 (approximately 17.5% of the outstanding common) shares of Scepter Holdings, Inc. (OTC Markets: BRZL), a company that manages the sales and development of consumer-packaged goods. Our holdings of 826,376,882 common shares have a market value of approximately $1,322,203 as of April 18, 2023.
Odyssey Group International
In 2014, we acquired a minority interest in Odyssey Group International, Inc. (“Odyssey”) (OTCQB: ODYY), a trans-disciplinary product development enterprise involved in the discovery, development and commercialization of a broad range of products applied to targeted segments of the health care industry. We owned 3,309,578 shares of Odyssey common stock through December 2021 at which time we sold such 3,309,578 shares of Odyssey in a private transaction for a purchase price of $860,491, reflecting the market price as of such time. Such purchase price was paid in the form of $10,000 cash delivered at signing and a note issued in favor of Vivakor in the amount of $850,491 accruing interest at 3% per annum, with payments due quarterly over a five-year term. The purchaser made their initial payment in the first quarter of 2022 but has not made further payments. We have reserved against the note in the amount of $828,263.
Future Products; Research and Acquisition
We intend to identify, develop or acquire products and/or services with a primary focus on the petroleum, mining and minerals, and alternative energy industries. Our general approach is to select products or services that are at or near commercial viability, or that we believe can be substantially developed for commercialization. We then negotiate agreements to either acquire or to provide secured loan financing to these companies to complete their development, testing and product launches in exchange for control of, or a significant ownership interest in, the products or companies.
History
The Company was originally organized on November 1, 2006 as a limited liability company in the State of Nevada as Genecular Holdings, LLC. The Company’s name was changed to NGI Holdings, LLC on November 3, 2006. On April 30, 2008, the Company was converted to a Nevada corporation and changed its name to Vivakor, Inc. pursuant to Articles of Conversion filed with the Nevada Secretary of State.
We have the following direct and indirect wholly-owned active subsidiaries: Silver Fuels Delhi, LLC, a Louisiana limited liability company, White Claw Colorado City, LLC, a Texas limited liability company, RPC Design and Manufacturing LLC (“RDM”), a Utah limited liability company, Vivaventures Remediation Corp., a Texas corporation, Vivaventures Management Company, Inc., a Nevada corporation, Vivasphere, Inc., a Nevada corporation, Vivaventures Oil Sands, Inc., a Utah corporation. We have a 99.95% ownership interest in Vivaventures Energy Group, Inc., a Nevada Corporation; the 0.05% minority interest in Vivaventures Energy Group, Inc. is held by a private investor unaffiliated with the Company. We also have an approximate 49% ownership interest in Vivakor Middle East Limited Liability Company, a Qatar limited liability company.
10
Regulations Affecting our Business
Our business is subject to federal, state and local laws, regulations and policies, including laws regulating the removal of natural resources from the ground and the discharge of materials into the environment. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Exploration and exploitation activities are also subject to federal, state and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of exploration methods and equipment. Environmental and other legal standards imposed by federal, state or local authorities are constantly evolving, and typically in a manner which will require stricter standards and enforcement, and increased fines and penalties for noncompliance. Such changes may prevent us from conducting planned activities or increase our costs of doing so, which would have material adverse effects on our business. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages that we may not be able to or elect not to insure against due to prohibitive premium costs and other reasons. Unknown environmental hazards may exist on our mining claims, or we may acquire properties in the future that have unknown environmental issues caused by previous owners or operators, or that may have occurred naturally.
Failure to comply with applicable federal, state, local or foreign laws or regulations could subject our company to enforcement action, including product seizures, recalls, withdrawal of marketing clearances and civil and criminal penalties, any one or more of which could have a material adverse effect on our company’s businesses. We believe that our company is in substantial compliance with such governmental regulations. However, federal, state, local and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. There can be no assurance that such changes would not have a material adverse effect on our company.
Intellectual Property
We own four issued US patents and two pending international PCT patent application covering our propriety technology, specifically:
| ● | US Patent 7,282,167 for methods for producing nano-scale particles by vaporizing raw material and then cooling the vaporized raw material using a cooling gas, granted October 16, 2007 and expiring July 23, 2025; | |
| ● | US Patent 9,272,920 for methods for producing ammonia by mixing a first catalyst including a millimeter-sized, granular, ferrous material and a promoter and a second catalyst including discrete nano-sized ferrous catalyst particles that comprise a metallic core with an oxide shell and then reacting hydrogen and nitrogen in the presence of the mixture, granted March 1, 2016 and expiring November 7, 2028; | |
| ● | US Patent 10,913,903 for SYSTEM AND METHOD FOR USING A FLASH EVAPORATOR TO SEPARATE BITUMEN AND HYDROCARBON CONDENSATE granted February 9, 2021 and expiring August 28, 2039; | |
| ● | US Patent 7,282,167 for US Patent 10,947,456 for SYSTEMS FOR THE EXTRACTION OF BITUMEN FROM OIL SAND MATERIAL granted on March 16, 2021 to expire on December 3, 2038; and | |
| ● | Pending Kuwait application KW/P/2020/000111 relating to systems and processes for extracting bitumen from oil sands material which employ a centrifuge and a flash evaporator, pending Kuwait application KW/P/2021/00060 and pending Saudi Arabia patent application 521421341, both relating to systems and processes for recycling condensate that is used to extract bitumen from oil sands material by employing a flash distillation drum and a throttle valve that causes the pressure of a mixture of bitumen and condensate to drop as the mixture is sprayed into the flash distillation drum to thereby vaporize the condensate to separate the condensate from the bitumen. |
11
Employees
As of the date of this Annual Report on 10-K, we have 10 full-time employees, consisting of our CEO, CFO, and additional administrative and direct operations personnel, as well as numerous independent contractors. None of these employees are represented by a labor union or subject to a collective bargaining agreement. We have never experienced a work stoppage and our management believes that our relations with employees are satisfactory.
Properties
We own approximately 9 acres of land near Delhi, Louisiana where we operate a crude oil gathering, storage, and transportation facility.
We currently lease executive office space in Lehi, Utah, Las Vegas, Nevada, Houston, Texas, and Irvine, California. The Company also leases warehouses in Las Vegas, Nevada and Houston, Texas, and have paid to be on a land site in Vernal, UT and Houston, Texas. We believe these facilities are in good condition but that we may need to expand our leased space and warehouses as business increases.
Legal Proceedings
From time to time, we may become involved in various legal actions that arise in the normal course of business. We are not currently involved in any material disputes and do not have any material litigation matters pending.
Item 1A - Risk Factors
Risks Related to Our Company
Our RPC services are at an early operational stage, and the success of these services is subject to the substantial risks inherent in the establishment of a new business venture.
Our RPC services are in an early stage, and our initial operations focused on the remediation of soil and the extraction of hydrocarbons, such as oil, from properties contaminated by or laden with heavy crude oil and hydrocarbon-based substances. We intend to, but have not yet, completed the second stage of our operational strategy related to our RPCs, which involves the selling the asphaltic cement and/or other petroleum-based products we are able to produce from the hydrocarbons we recover. Our business and operations related to SFD and WCCC, the gathering, storage and transportation, are also in their early stages.
Our services related to our RPCs may not prove to be successful. We have deployed only two RPC units to date, including one unit to Kuwait (for which operations were temporarily suspended due to COVID-19) and another to Vernal, Utah. We will need to scale our remediation business beyond these two RPCs and demonstrate that our scaled-up recovery and remediation business can be profitable. Any future success that we may enjoy related to our RPC business will depend on many factors, some of which may be beyond our control, and others which cannot be predicted at this time. Although we began operations in 2008 as a technology acquisition company primarily focused on medical technologies, we have been operating under our current business plan focused on soil remediation since 2011, and we have not yet proven to be profitable. We have not yet sold any substantial amount of products or services commercially and have not proven that our business model will allow us to identify and develop commercially feasible products or technologies. Likewise, SFD and WCCC have limited operating histories and subject to similar risks as new business ventures.
We have historically suffered net losses, and we may not be able to sustain profitability.
We had an accumulated deficit of $55,169,781 as of December 31, 2022, and we expect to continue to incur significant development expenses in the foreseeable future related to the completion of the development and commercialization of our RPC products. As a result, we are incurring operating and net losses, and it is possible that we may never be able to sustain the revenue levels necessary to achieve and sustain profitability. If we fail to generate sufficient revenues to operate profitably on a consistent basis, or if we are unable to fund our continuing losses, you could lose all or part of your investment.
12
We rely upon a few, select key employees who are instrumental in our ability to conduct and grow our business. In the event any of those key employees would no longer be affiliated with the Company, it may have a material detrimental impact as to our ability to successfully operate our business.
Our future success will depend in large part on our ability to attract and retain high-quality management, operations, and other personnel who are in high demand, are often subject to competing employment offers, and are attractive recruiting targets for our competitors. The loss of qualified executives and key employees, or our inability to attract, retain, and motivate high-quality executives and employees required for the planned expansion of our business, may harm our operating results and impair our ability to grow.
We depend on the continued services of our key personnel, including James Ballengee, our Chief Executive Officer, Tyler Nelson, our Chief Financial Officer, and Daniel Hashim, our Chief Scientific Officer. Our work with each of these key personnel are subject to changes and/or termination, and our inability to effectively retain the services of our key management personnel, could materially and adversely affect our operating results and future prospects.
We may have difficulty raising additional capital, which could deprive us of necessary resources, and you may experience dilution or subordinate stockholder rights, preferences and privileges as a result of our financing efforts.
We expect to continue to devote significant capital resources to fund the continued development of our RPCs and related technologies, as well as for potential acquisitions. In order to support the initiatives envisioned in our business plan, we will need to raise additional funds through the sale of public or private debt or equity financing or other arrangements. Our ability to raise additional financing depends on many factors beyond our control, including the state of capital markets, the market price of our common stock and the development or prospects for development of competitive technologies by others. Sufficient additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.
We expect to obtain additional capital during 2023 through financing lease structures for our RPCs or other financing structures related to our RPCs. We also expect that our current cash position, will enable us to fund our operating expenses and capital expenditure requirements for the next twelve months. Thereafter, unless we can achieve and sustain profitability, we anticipate that we will need to raise additional capital to fund our operations while we implement and execute our business plan.
Any future equity financing may involve substantial dilution to our then existing shareholders. Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. There can be no assurance that such additional capital will be available, on a timely basis, or on terms acceptable to us. If we are unsuccessful in raising additional capital or the terms of raising such capital are unacceptable, then we may have to modify our business plan and/or curtail our planned activities and other operations.
If we raise additional funds through government or other third-party funding, collaborations, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue stream or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products that we would otherwise prefer to develop and market ourselves.
Additionally, we have certain potential dilutive instruments, of which the conversion of these instruments could result in dilution to shareholders: As of December 31, 2022, the maximum potential dilution is 1,621,429, and includes convertible notes payable convertible into approximately 14,560 shares of common stock, vested stock options granted to current and previous employees of 1,131,730 shares of common stock. Vested stock options granted to Board members of 395,139 shares of common stock were granted as of December 31, 2022. There was also a warrant issued and outstanding to EF Hutton for the purchase of 80,000 shares of common stock as of December 31, 2022. These warrants were related to and granted during the close of the underwritten public offering in February 2022.
13
The COVID-19 pandemic has had and may continue to have a negative impact on our business and operations.
Our Kuwait operations were suspended to comply with the social distancing measures implemented in Kuwait, but have since resumed on a test basis. Our Utah operations were temporarily suspended from March through May 2020, but have since resumed. These suspensions have had a negative impact on our business and there can be no guaranty that we will not need to suspend operations again in the future as a result of the pandemic. We are closely monitoring the COVID-19 pandemic and the directives from federal and local authorities in the United States and in Kuwait affecting not only our workforce, but those of companies with whom we work.
Economic conditions in the current period of disruption and instability could adversely affect our ability to access the capital markets, in both the near and long term, and thus adversely affect our business and liquidity.
The current economic conditions related to the COVID-19 pandemic have had, and likely will continue to have for the foreseeable future a negative impact on the capital markets. Even if we are able to raise capital, it may not be at a price or on terms that are favorable to us. We cannot predict the occurrence of future disruptions or how long the current conditions may continue.
Our business plan includes operating internationally, which subjects us to a number of risks.
Our strategic plans include international operations, such as our projects in the Middle East. We intend to use our proprietary RPC technology system and develop, construct and potentially sell our RPC system in international locations. Risks inherent to international operations include the following:
| ● | inability to work successfully with third parties having local expertise to co-develop international projects; |
| ● | multiple, conflicting and changing laws and regulations, including export and import restrictions, tax laws and regulations, environmental regulations, labor laws and other government requirements, approvals, permits and licenses; |
| ● | difficulties in enforcing agreements in foreign legal systems; |
| ● | changes in general economic and political conditions in the countries in which we operate, including changes in government incentives relating to oil remediation; |
| ● | political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions; |
| ● | difficulties and costs in recruiting and retaining individuals skilled in international business operations; |
| ● | international business practices that may conflict with U.S. customs or legal requirements; |
| ● | financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable; |
| ● | fluctuations in currency exchange rates relative to the U.S. dollar; and |
| ● | inability to obtain, maintain or enforce intellectual property rights. |
Failure to effectively manage our expected growth could place strains on our managerial, operational and financial resources and could adversely affect our business and operating results.
Our expected growth could place a strain on our managerial, operational and financial resources. Further, if our subsidiaries’ businesses grow, then we will be required to manage multiple relationships. Any further growth by us or our subsidiaries, or any increase in the number of our strategic relationships, will increase the strain on our managerial, operational and financial resources. This strain may inhibit our ability to achieve the rapid execution necessary to implement our business plan and could have a material adverse effect on our financial condition, business prospects and operations and the value of an investment in our company.
14
We will need to achieve commercial acceptance of our RPCs and related products in order to generate revenues from those operations and sustain profitability.
Our goal at many of our sites is to produce asphaltic cement and/or other petroleum-based products from the hydrocarbons we recover and sell these products to customers; however, we may not be able to successfully commercialize our products related to those operations, and even if we do, we may not be able to do so on a timely basis. Superior competitive technologies may be introduced, or customer needs may change, which will diminish or extinguish the commercial uses for our applications. We cannot predict when significant commercial market acceptance for our RPCs and related products will develop, if at all, and we cannot reliably estimate the projected size of any such potential market. If the markets fail to accept those products, then we may not be able to generate revenues from the commercial application of our technologies related to those products. Our revenue growth and profitability will partially depend on our ability to manufacture and deploy additional RPCs and produce our products to the specifications required by each of our potential customers.
We have identified material weaknesses in our internal control over financial reporting. Failure to maintain effective internal controls could cause our investors to lose confidence in us and adversely affect the market price of our common stock. If our internal controls are not effective, we may not be able to accurately report our financial results or prevent fraud.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires that we maintain internal control over financial reporting that meets applicable standards. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction and a decrease in our stock price.
We have identified material weaknesses in our internal controls related to the segregation of duties and financial reporting process within our internal controls. Due to insufficient personnel in our accounting department, we were not able to achieve adequate segregation of duties, and, as a result, we did not have adequate review controls surrounding: (i) our technical accounting matters in our financial reporting process, and (ii) the work of specialists involved in the estimation process. We believe we may be able to substantially resolve our identified material weakness in our internal controls in the future as we continue to hire personnel to fulfill the duties related to the financial reporting process and growth in our business. There can be no assurances that weakness in our internal controls will not occur in the future.
If we identify new material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting (if and when required), we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition or divert financial and management resources from our core business, and would have a material adverse effect on our business, financial condition and results of operations.
A major portion of our business is dependent on the oil industry, which is subject to numerous worldwide variables.
Our prospective customers are concentrated in the oil industry. As a result, we will be subject to the success of the oil industry, which is subject to substantial volatility based on numerous worldwide factors. A decline in the oil industry may have a material adverse effect on our business, financial condition, results of operations and cash flows. The oil and gas industry is competitive in all its phases. Competition in the oil and gas industry is intense. We will compete with other participants in the search for oil sand properties and in the marketing of oil and other hydrocarbon products. Our customers could include competitors such as oil and gas companies that have substantially greater financial resources, staff and facilities than those of our customers and lessees. Competitive factors in the distribution and marketing of oil and other hydrocarbon products include price and methods and reliability of delivery.
Within the oil remediation market, demand for our services will be limited to a specific customer base and highly correlated to the oil industry. The oil industry’s demand for equipment is affected by a number of factors including the volatile nature of the oil industry’s business, increased use of alternative types of energy and technological developments in the oil extraction process. A significant reduction in the target market’s demand for oil would reduce the demand for the equipment, which would have a material adverse effect upon our business, financial condition, results of operations and cash flows.
15
Low oil prices may substantially impact our ability to generate revenues.
Low oil prices may negatively impact our ability to operate. The demand for our products and services depend, in part, on the price of oil and the margins oil producers receive on the sale of oil. Oil prices are volatile and can fluctuate widely based upon a number of factors beyond our control. Any decline in the prices of and demand for oil could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations are subject to unforeseen interruptions and hazards inherent in the oil industry, for which we may not be adequately insured and which could cause us to lose customers and substantial revenue.
Our operations are exposed to the risks inherent to our industry, such as equipment defects, vehicle accidents, fires, explosions, blowouts, pipe or pipeline failures, and various environmental hazards, such as oil spills and releases of, and exposure to, hazardous substances. For example, our operations are subject to risks associated with storage and handling of oil, including any mishandling or surface spillage. In addition, our operations are exposed to potential natural disasters, including blizzards, tornadoes, storms, floods, other adverse weather conditions and earthquakes. The occurrence of any of these events could result in substantial losses to us due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigations and penalties or other damage resulting in curtailment or suspension of our operations. The cost of managing such risks may be significant. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to purchase our product if they view our environmental or safety record as unacceptable, which could cause us to lose customers and revenues.
Our operations in the U.S. Gulf of Mexico region are particularly susceptible to interruption and damage from hurricanes. Any of these operating hazards could cause personal injuries, fatalities, oil spills, discharge of hazardous substances into the air and water or environmental damage, lost production and revenue, remediation and clean-up costs and liability for damages, all of which could adversely affect our business, financial condition and results of operations and may not be fully covered by our insurance.
Our insurance may not be adequate to cover all losses or liabilities we may suffer. Furthermore, we may be unable to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased and could escalate further. In addition, sub-limits have been imposed for certain risks. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we are not fully insured, it could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to secure additional insurance or bonding that might be required by new governmental regulations. This may cause us to restrict our operations, which might severely impact our financial position.
Additionally, we may not have coverage if we are unaware of the pollution event and unable to report the “occurrence” to our insurance company within the time frame required under our insurance policy. In addition, these policies do not provide coverage for all liabilities, and the insurance coverage may not be adequate to cover claims that may arise, or we may not be able to maintain adequate insurance at rates we consider reasonable. A loss not fully covered by insurance could have a material adverse effect on our financial position, results of operations and cash flows.
We require a variety of permits to operate our business. If we are not successful in obtaining and/or maintaining those permits it will adversely impact our operations.
Our business requires permits to operate. Our inability to obtain permits in a timely manner could result in substantial delays to our business. In addition, our customers may not receive permitting for our equipment’s specific use and we may be unable to adjust our equipment to meet our customer’s permitting needs. The issuance of permits is dependent on the applicable government agencies and is beyond our control and that of our customers. There can be no assurance that we and/or our customers will receive the permits necessary to operate, which could substantially and adversely affect our operations and financial condition.
16
We are required to pay permit and approval fees to operate in certain business segments and locations. If we are not able to pay those fees it would adversely impact our business.
We are required to pay various types of permit and approval fees to the applicable governmental and quasi-governmental agencies to operate our business. These fees are subject to change at the discretion of the various agencies. Our inability to pay these permit and approval fees could substantially and adversely affect our operations and financial condition.
We, and our customers and prospective customers, are subject to numerous governmental regulations, both domestically and internationally. In order to operate successfully we must be able comply with these regulations.
Current and future government laws, regulations and other legal requirements may increase the costs of doing business or restrict business operations. Laws, regulations and other legal requirements, such as those relating to the protection of the environment and natural resources, health, business and tax have an effect on our cost of operation or those of our customers. Such governmental regulation may result in delays, cause us to incur substantial compliance and other costs and prohibit or severely restrict our business or that of our customers, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
We currently depend, and are likely to continue to depend, on a limited number of customers for a significant portion of our revenues related to our operations.
We currently have a limited number of customers for our crude oil gathering, transportation and storage services and our RPC services. The failure to obtain additional customers or the loss of all or a portion of the revenues attributable to any current or future customer as a result of competition, creditworthiness, inability to negotiate extensions or replacement of contracts or otherwise could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If our customers do not enter into, extend or honor their contracts with us, our profitability could be adversely affected. Our ability to receive payment for production depends on the continued solvency and creditworthiness of our customers and prospective customers. If any of our customers’ creditworthiness suffers, we may bear an increased risk with respect to payment defaults. If customers refuse to accept our equipment or make payments for which they have a contractual obligation, our revenues could be adversely affected. In addition, if a substantial portion of our contracts are modified or terminated and we are unable to replace the contracts (or if new contracts are priced at lower levels), our results of operations will be adversely affected.
Our primary business is impacted by the oil industry and the manufacturing industry, which are subject to uncertain economic conditions.
The global economy is subject to fluctuation and it is unclear how stable the oil industry and the manufacturing industry will be in the future. As a result, there can be no assurance that the business will achieve anticipated cash flow levels. Further, recent world events evolving out of trade disputes, increased terrorist activities and political and military action, and the COVID-19 pandemic, among other events, have created an air of uncertainty concerning the stability of the global economy. Historically, such events have resulted in disturbances in financial markets, and it is impossible to determine the likelihood of future events. Any negative change in the general economic conditions in the United States and globally could adversely affect the financial condition and operating results of the business. We plan to expand our level of operations. Slower economic activity, concerns about inflation or deflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the general economy and recent international conflicts and terrorist and military activity have resulted in a downturn in worldwide economic conditions, especially in the United States. Political and social turmoil related to international conflicts and terrorist acts may place further pressure on economic conditions in the United States and worldwide. These political, social and economic conditions make it extremely difficult for us to accurately forecast and plan future business activities. If such conditions continue or worsen, then our business, financial condition and results of operations could be materially and adversely affected.
17
We will continue to be subject to competition in our business.
Our oil remediation equipment utilizes specific technology to extract oil from sand. Oil producers are continually investigating alternative oil production technologies with a view to reduce production costs. In addition, industries that compete with the oil industry, such as the electric power industry, also continue to innovate and create products that compete with the oil industry. There can be no assurance that superior alternative technologies will emerge, which could reduce the demand for and price of our product and services.
The market for our products and services is highly competitive and is becoming more so, which could hinder our ability to successfully market our products and services. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:
| ● | develop and expand their product offerings more rapidly; | |
| ● | adapt to new or emerging changes in customer requirements more quickly; | |
| ● | take advantage of acquisition and other opportunities more readily; and | |
| ● | devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can. |
Regarding crude oil gathering, storage and transportation, many of our competitors are large tank farm businesses and if one or more of them built storage tanks and/or facilities near our current facilities they could compete with us for business at our current location. As larger companies, they have greater resources than we do to compete for business in our area and may be able to price us out of business.
We carry insurance coverage against liabilities for personal injury, death and property damage, but there is no guarantee this coverage will be sufficient to cover us against all claims.
Although, we maintain insurance coverage against liability for personal injury, death and property damage. There can be no assurance that this insurance will be sufficient to cover any such liabilities. We may not be insured or fully insured against the losses or liabilities that could arise from a casualty in the business operations. In addition, there can be no assurance that particular risks that are currently insurable will continue to be insurable on an economical basis or that the current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may incur a significant liability.
We may be unable to adequately protect our proprietary rights.
Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property. To protect our proprietary rights, we will rely on a combination of patents, copyrights and trade secrets, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:
| ● | Our applications for patents relating to our business may not be granted and, if granted, may be challenged or invalidated; | |
| ● | Issued patents may not provide us with any competitive advantages; | |
| ● | Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; | |
| ● | Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or | |
| ● | Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products. |
18
We may become involved in lawsuits to protect or enforce our patents that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate patent litigation against third parties. In addition, we may become subject to interference or opposition proceedings conducted in patent and trademark offices to determine the priority and patentability of inventions. The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings, would be costly and divert our technical and management personnel from their normal responsibilities. An adverse determination of any litigation or defense proceedings could put our pending patent applications at risk of not being issued.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this type of litigation, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could have a material adverse effect on our business and our financial results.
Our operations rely on our ability to transport our equipment to different locations. Any impact on the cost, availability and reliability of transportation could adversely affect our business.
The availability and reliability of transportation and fluctuation in transportation costs could negatively impact our business. Transportation logistics may play an important role in the sale of our products and related services and in the oil industry generally. Delays and interruptions of transportation services because of accidents, failure to complete construction of infrastructure, infrastructure damage, lack of capacity, weather-related problems, governmental regulation, terrorism, strikes, lock-outs, third-party actions or other events could impair the operations of our customers and may also directly impair our ability to commence or complete production or services, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The lands on which we conduct our business operations must be properly zoned for our services. If they aren’t then it could impact our business.
The lands on which we conduct our business operates must comply with applicable zoning regulations. Any unknown or future violations could limit or require us to cease operations.
Data security breaches are increasing worldwide. If we are the victim of such a breach it will materially impact our business.
We will collect and retain certain personal information provided by our employees and investors. We intend to implement certain protocols designed to protect the confidentiality of this information and periodically review and improve our security measures; however, these protocols may not prevent unauthorized access to this information. Technology and safeguards in this area are consistently changing and there is no assurance that we will be able to maintain sufficient protocols to protect confidential information. Any breach of our data security measures and disbursement of this information may result in legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business and financial performance.
We may indemnify our directors and officers against liability to us and holders of our securities, and such indemnification could increase our operating costs.
Our bylaws allow us to indemnify our directors and officers against claims associated with carrying out the duties of their offices. Our bylaws also allow us to reimburse them for the costs of certain legal defenses. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to our directors, officers or control persons, we have been advised by the SEC that such indemnification is against public policy and is therefore unenforceable. If our officers and directors file a claim against us for indemnification, the associated expenses could also increase our operating costs.
19
We may be subject to liability if our equipment does not perform as expected.
We may be exposed to liability in the event our equipment does not perform as expected. We intend to enter into contracts with customers, which will grant certain rights with respect to the condition and use of our products. Certain contractual and legal claims could arise in the event the equipment does not perform as expected and in the event of personal injury, death or property damage as a result of the use of our equipment. There can be no assurance that particular risks are insured or, if insured, will continue to be insurable on an economical basis or that current levels of coverage will continue to be available. We may be liable for any defects in the equipment or its products and services and uninsured or underinsured personal injury, death or property damage claims.
Our RPCs depend on our ability to manufacture various pieces of equipment, many of which are quite large. Any disruption in our manufacturing ability will adversely affect our business and operations.
Our RPCs involve manufacturing and plant operation risks of delay that may be outside of our control. Production or services may be delayed or prevented by factors such as adverse weather, strikes, energy shortages, shortages or increased costs of materials, inflation, environmental conditions, legal matters and other unknown contingencies. Our RPCs also require certain manufacturing apparatus to manufacture the equipment. If the manufacturing apparatus were to suffer major damage or are destroyed by fire, abnormal wear, flooding, incorrect operation or otherwise, we may be unable to replace or repair such apparatus in a timely manner or at a reasonable cost, which would impact our ability to stay in production or service. Any significant downtime of the equipment manufacturing could impair our ability to produce for or serve customers and materially and adversely affect our results of operations. In addition, changes in the equipment plans and specifications, delays due to compliance with governmental requirements or impositions of fees or other delays could increase production costs beyond those budgeted for the business. If any cost overruns exceed the funds budgeted for operations, the business would be negatively impacted.
Any accident at our facilities could subject us to substantial liability.
The manufacturing and operation of our equipment and assets involves hazards and risks which could disrupt operations, decrease production and increase costs. The occurrence of a significant accident or other event that is not fully insured could adversely affect our business, financial condition, results of operations and cash flows.
If critical components become unavailable or our suppliers delay their production of our key components, our business will be negatively impacted.
Our ability to get key components to build or repair our equipment is crucial to our ability to manufacture our plants and produce our products. These components are supplied by certain third-party manufacturers, and we may be unable to acquire necessary amounts of key components at competitive prices.
If we are successful in our growth, outsourcing the production of certain parts and components would be one way to reduce manufacturing costs. We plan to select these particular manufacturers based on their ability to consistently produce these products according to our requirements in an effort to obtain the best quality product at the most cost-effective price. However, the loss of all or any one of these suppliers or delays in obtaining shipments would have an adverse effect on our operations until an alternative supplier could be found, if one may be located at all. If we get to that stage of growth, such loss of manufacturers could cause us to breach any contracts we have in place at that time and would likely cause us to lose sales.
Any shortage of skilled labor would have a detrimental impact on our ability to provide our products and services.
The manufacturing and operating of our facilities and equipment requires skilled laborers. In the event there is a shortage of labor, including skilled labor, it could have an adverse impact on our productivity and costs and our ability to expand production in the event there is an increase in demand for our product or services.
20
We rely on third party contractors for some of our operations. If we are unable to find quality contractors, it would severely impact our business.
We outsource certain aspects of our business to third party contractors. We are subject to the risks associated with such contractors’ ability to successfully provide the necessary services to meet the needs of our business. If the contractors are unable to adequately provide the contracted services, and we are unable to find alternative service providers in a timely manner, our ability to operate the business may be disrupted, which may adversely affect our business, financial condition, results of operations and cash flows.
Union activities could adversely impact our business.
While none of our employees are currently members of unions, we may become adversely effected by union activities. We are not subject to any collective bargaining or union agreement; however, it is possible that future employees may join or seek recognition to form a labor union or may be required to become a labor agreement signatory. If some or all of our employees become unionized, it could adversely affect productivity, increase labor costs and increase the risk of work stoppages. If a work stoppage were to occur, it could interfere with the business operations and have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we fail to make the Threshold Payment, or otherwise breach the terms of the MIPA entered into on August 1, 2022, the transaction consummated by the MIPA may be unwound.
Under the terms of the MIPA entered into on August 1, 2022, we agreed with the Sellers that, in the event of a breach of the terms of the MIPA, the Notes, or the Pledge Agreement, the sole and exclusive remedy of the parties will be to unwind the MIPA transaction (the “Unwinding”). In any such Unwinding, the Membership Interest will be transferred to Sellers and Sellers will assign and transfer to us, the number of shares of our common stock constituting the Purchaser Stock Consideration and any other amounts (the “Pre-Payment Amounts”) paid to Sellers by us above and beyond the monthly amounts required to be paid to Sellers under the Notes. If the MIPA transaction were to be unwound we would no longer own SFD and WCCC, which would substantially impact our operations and revenues.
If we do not file our Annual Report on Form 10-K (12/31/22) and our Quarterly Report on Form 10-Q (3/31/23) in the near future then we may be delisted from Nasdaq, causing our common stock to fall to The OTC Markets and likely cause the price of our common stock to decrease.
As a result of not timely filing our Annual Report on Form 10-K (12/31/22) and our Quarterly Report on Form 10-Q (3/31/23) we received notices from Nasdaq Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that if we do not file our Annual Report on Form 10-K (12/31/22) and our Quarterly Report on Form 10-Q (3/31/23) within the required timelines to cure this deficiency, then our common stock will be delisted from Nasdaq. In the event our common stock is delisted from Nasdaq the trading volume and price of our common stock will likely decrease.
Although our shares of Common Stock are listed on The Nasdaq Capital Market, our shares of Common Stock may be subject to potential delisting if we do not meet or continue to maintain the listing requirements of The Nasdaq Capital Market.
Our common stock is listed on Nasdaq; however, to keep our listing on Nasdaq, we are required to maintain: (i) a minimum bid price of $1.00 per share, (ii) a certain public float, (iii) a certain number of round lot shareholders and (iv) one of the following: a net income from continuing operations (in the latest fiscal year or two of the three last fiscal years) of at least $500,000, a market value of listed securities of at least $35 million or a stockholders’ equity of at least $2.5 million.
If our securities are ever delisted from Nasdaq, trading will most likely take place on the OTC Marketplace operated by OTC Markets Group Inc. An investor is likely to find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our Common Stock on an over-the-counter market, and many investors may not buy or sell our Common Stock due to difficulty in accessing over-the-counter markets, or due to policies preventing them from trading in securities not listed on a national exchange or other reasons, and our ability to issue additional securities for financing or other purposes, or otherwise to arrange for any financing we may need in the future, may also be materially and adversely affected if our Common Stock is not traded on a national securities exchange. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our Common Stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified executives and employees and to raise capital.
We may not be able to identify, negotiate, finance or close future acquisitions.
One component of our growth strategy focuses on acquiring additional technologies, companies and/or assets. We may not, however, be able to identify, audit, or acquire technologies, companies and/or assets on acceptable terms, if at all. Additionally, we may need to finance all or a portion of the purchase price for an acquisition by incurring indebtedness. There can be no assurance that we will be able to obtain financing on terms that are favorable, if at all, which will limit our ability to acquire additional companies or assets in the future. Failure to acquire additional companies or assets on acceptable terms, if at all, would have a material adverse effect on our ability to increase assets, revenues and net income and on the trading price of our common stock.
21
We may not be able to properly manage multiple businesses.
We may not be able to properly manage multiple businesses. Managing multiple businesses would be more complicated than managing one or two of business, even if the additional businesses were synergistic with our existing businesses, and would require that we hire and manage executives with experience and expertise in different fields. We can provide no assurance that we will be able to do so successfully. A failure to properly manage multiple businesses could materially adversely affect our company and the trading price of our stock.
We may not be able to successfully integrate new acquisitions.
Even if we are able to acquire additional technologies, companies and/or assets, we may not be able to successfully integrate those companies or assets. For example, we may need to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential requiring significant management time and attention. In addition, the successful integration of any companies we acquire will depend in large part on the retention of personnel critical to our combined business operations due to, for example, unique technical skills or management expertise. We may be unable to retain existing management, finance, engineering, sales, customer support, and operations personnel that are critical to the success of the integrated company, resulting in disruption of operations, loss of key information, expertise or know-how, unanticipated additional recruitment and training costs, and otherwise diminishing anticipated benefits of these acquisitions, including loss of revenue and profitability. Failure to successfully integrate acquired businesses could have a material adverse effect on our company and the trading price of our stock.
Our acquisitions of businesses may be extremely risky, and we could lose all of our investments.
We may invest in seemingly synergistic businesses that are in other risky industries. An investment in these companies may be extremely risky because, among other things, the companies we are likely to focus on: (1) typically have limited operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; (2) tend to be privately-owned and generally have little publicly available information and, as a result, we may not learn all of the material information we need to know regarding these businesses; (3) are more likely to depend on the management talents and efforts of a small group of people; and, as a result, the death, disability, resignation or termination of one or more of these people could have an adverse impact on the operations of any business that we may acquire; (4) may have less predictable operating results; (5) may from time to time be parties to litigation; (6) may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence; and (7) may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. Our failure to make acquisitions efficiently and profitably could have a material adverse effect on our business, results of operations, financial condition and the trading price of our stock.
Future acquisitions may fail to perform as expected.
Future acquisitions may fail to perform as expected. We may overestimate cash flow, underestimate costs, or fail to understand risks. This could materially adversely affect our company and the trading price of our Stock.
Competition may result in overpaying for acquisitions.
Other investors with significant capital may compete with us for attractive investment opportunities. These competitors may include publicly-traded companies, private equity firms, privately held buyers, individual investors, and other types of investors. Such competition may increase the price of acquisitions, or otherwise adversely affect the terms and conditions of acquisitions. This could materially adversely affect our company and the trading price of our stock.
We may have insufficient resources to cover our operating expenses and the expenses of raising money and consummating acquisitions.
We have limited cash to cover our operating expenses and to cover the expenses incurred in connection with money raising and a business combination. It is possible that we could incur substantial costs in connection with money raising or a business combination. If we do not have sufficient proceeds available to cover our expenses, we may be forced to obtain additional financing, either from our management or third parties. We may not be able to obtain additional financing on acceptable terms, if at all, and neither our management nor any third party is obligated to provide any financing. This could have a negative impact on our company and our stock price.
22
Although we do not believe that we are, or will be, an investment company covered by the Investment Company Act of 1940, if we are deemed to be an investment company, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to engage in strategic transactions.
A company that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment Company Act of 1940, as amended, (the “Investment Company Act”). Additionally, a company that is not and does hold itself out as being engaged primarily in the business of investing, reinvesting, owning, trading or holding certain types of securities may nevertheless be deemed an investment company under the Investment Company Act if more than 40% of such company’s assets are deemed to be “investment securities.”
We are not in the business of buying and selling securities of other companies. As our strategy had involved the Company investing in other companies, including Scepter Holdings and Odyssey Group International, it is possible that we could be deemed an investment company, although, given the nature and extent of our business operations, we do not believe that we are or will be subject us to the Investment Company Act. Our investments in Scepter Holdings and Odyssey Group International arose from loan agreements that were settled in the form of equity because cash was not available for the borrowers to pay the loans in cash, and we have recently sold, in a private transaction, all of our shares of Odyssey Group International. The Company has not traded or sold any securities of other companies that it has acquired. For those LLCs for which the Company serves as manager, it has been disclosed in the business plan of these LLCs that their primary business is manufacturing heavy machinery or to provide the Company with cash to specifically manufacture or purchase heavy machinery in exchange for a royalty from the production of the heavy machinery. These entities do not engage in activities such as investing, reinvesting, owning, holding or trading “investment securities,” and neither the units of ownership for these entities, nor rights to royalties, have any market and are not traded, and such interests are accounted for at cost.
In order not to be regulated as an investment company under the Investment Company Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading in securities and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Presently, our “investment securities,” which include our holdings in Scepter Holdings, as well as certain entities described in our corporate structure, comprise approximately 7% of our total assets, which is below such 40% threshold. As our business continues to develop and production increases, the percentage of our total assets comprised of investment securities is expected to decline substantially; however, in the event that the percentage of our holdings in investment securities increases, we risk exceeding such 40% threshold and being deemed an investment company. We do not plan to buy businesses or assets with a view to resale or profit from their resale. We do not plan to buy unrelated businesses or assets or to be a passive investor.
If we are nevertheless deemed to be an investment company under the Investment Company Act, we may be subject to certain restrictions that may make it more difficult for us to complete a business combination, including:
| ● | restrictions on the nature of our investments; and | |
| ● | restrictions on the issuance of securities. |
In addition, we may have imposed upon us certain burdensome requirements, including:
| ● | registration as an investment company; | |
| ● | adoption of a specific form of corporate structure; and | |
| ● | reporting, record keeping, voting, proxy, compliance policies and procedures and disclosure requirements and other rules and regulations. |
Compliance with these additional regulatory burdens would require additional expense for which we have not allotted.
23
Item 1B - Unresolved Staff Comments
Not applicable.
Item 2 - Properties
We own approximately 9 acres of land near Delhi, Louisiana where we operate a crude oil gathering, storage, and transportation facility.
We currently lease executive office space in Lehi, Utah, Las Vegas, Nevada, Houston, Texas, and Irvine, California. The Company also leases warehouses in Las Vegas, Nevada and Houston, Texas, and have paid to be on a land site in Vernal, UT and Houston, Texas. We believe these facilities are in good condition but that we may need to expand our leased space and warehouses as business increases.
Item 3 - Legal Proceedings
From time to time, we may become involved in various legal actions that arise in the normal course of business. We intend to defend vigorously against any future claims and litigation. We are not currently involved in any material disputes and do not have any material litigation matters pending.
Item 4 - Mine Safety Disclosures
Not applicable.
24
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our Common Stock is listed on the Nasdaq Capital Market under the symbol “VIVK.”
Holders
As of March 27, 2023, there were 18,064,838 shares of Common Stock outstanding held by approximately 559 holders of record (not including an indeterminate number of beneficial holders of stock held in street name).
Warrants
There is a warrant to purchase 80,000 shares of common stock issued and outstanding as of March 27, 2023.
Dividends
To date, we have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. The declaration and payment of dividends on the common stock is at the discretion of our Board of Directors and will depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our Board of Directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
On February 14, 2022, our 2021 Equity and Incentive Plan went effective. The plan was approved by our Board of Directors. The Plan’s number of authorized shares is 2,000,000. As of March 27, 2023, there were stock options granted to acquire 1,721,760 shares of common stock at a weighted exercise price of $1.76 per share under the plan. As of March 27, 2023, the Plan had 1,431,730 vested shares and 290,030 non-vested shares underlying the stock options. As of March 27, 2023, no options had been exercised under the Plan. We have not issued any other type of equity awards under the Plan. The stock options issued under the Plan are held by certain of our current and former executive officers.
Recent Issuance of Unregistered Securities
The following sets forth information regarding all unregistered securities sold by us in transactions that were exempt from the requirements of the Securities Act in the last fiscal year. Except where noted, all of the securities discussed in this Item 5 were all issued in reliance on the exemption under Section 4(a)(2) of the Securities Act.
2022
On July 19, 2022, the Company granted 16,667 shares of our common stock for a stock award, which successfully cliff vested in May 2022.
On August 1, 2022, the Company consummated the transactions under the previously disclosed Membership Interest Purchase Agreement dated June 15, 2022 (the “MIPA”), which included the issuance of an aggregate of 3,009,552 shares of Common Stock to Jorgan Development, LLC and JBAH Holdings, LLC. The issuances of the foregoing securities were exempt from registration pursuant to Section 4(a)(2) of the Securities Act promulgated thereunder.
As noted herein, in connection with the commencement of the trading of our Common Stock on Nasdaq Capital Market, we converted 66,667 shares of Series A Preferred Stock in to 833,333 shares of our common stock. This offering and sales were made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchasers contained in the securities purchase agreements signed by the purchasers, which indicated the purchasers were knowledgeable about our management and our operations, were sophisticated investors, and understood the purchase was part of a private placement.
25
As noted herein, in connection with the commencement of the trading of our Common Stock on Nasdaq Capital Market, approximately $1,144,992 in convertible notes payable were converted into 272,156 shares of our common stock. This offering and sales were made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchasers contained in the securities purchase agreements signed by the purchasers, which indicated the purchasers were knowledgeable about our management and our operations, were sophisticated investors, and understood the purchase was part of a private placement.
As noted herein, in connection with underwritten public offering of 1,600,000 shares of common stock, we issued the underwriter, EF Hutton, a 5-year warrants to purchase 80,000 shares of common stock at an exercise price equal $5.75. This offering and sales were made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchasers contained in the securities purchase agreements signed by the purchasers, which indicated the purchasers were knowledgeable about our management and our operations, were sophisticated investors, and understood the purchase was part of a private placement.
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on 10-K.
Overview
Vivakor, Inc. is a socially responsible operator, acquirer and developer of technologies and assets in the oil and gas industry, as well as, related environmental solutions. Currently, our efforts are primarily focused on operating crude oil gathering, storage and transportation facilities, as well as contaminated soil remediation services.
One of our facilities sells crude oil in amounts up to 60,000 barrels per month under agreements with a large energy company. A different facility owns a 120,000 barrel crude oil storage tank near Colorado City, Texas. The storage tank is presently connected to the Lotus pipeline system and we plan to further connect the tank to major pipeline systems.
Our soil remediation services specialize in the remediation of soil and the extraction of hydrocarbons, such as oil, from properties contaminated by or laden with heavy crude oil and other hydrocarbon-based substances. Our patented process allows us to successfully recover the hydrocarbons which we believe could then be used to produce asphaltic cement and/or other petroleum-based products.
Reclassifications
Certain reclassifications may have been made to prior years’ amounts to conform to the 2022 presentation.
COVID-19
On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most U.S. states and many countries have issued policies intended to stop or slow the further spread of the disease.
In March 2020 we temporarily suspended operations in Kuwait and Utah due to COVID-19 government restrictions. Utah and Kuwait have since resumed site preparations for operations. We have experienced supply chain disruptions in building our Remediation Processing Centers (“RPC”) and completing certain refurbishment on our precious metal extraction machines. These suspensions have had a negative impact on our business and there can be no guaranty that we will not need to suspend operations again in the future as a result of the pandemic.
COVID-19 and the U.S. response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have in the long-term, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business, or our operations.
26
Revenue
For the years ended December 31, 2022 and 2021 we realized revenues of $28,107,223 and $1,088,428, respectively, representing an increase of $27,018,795 or 2,482.37%. The increase in revenue is primarily attributed to our oil and natural gas liquid sales which have been realized through the operations from our newly acquired businesses in SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. For the year ended December 31, 2021, approximately 99% of our revenues were realized from precious metal sales from our business plan of buying and selling precious metal commodities on the open market during the COVID-19 pandemic while our remediation operations were shut down or delayed. These precious metals were acquired for immediate resale, with us acting as intermediary and never keeping an inventory of precious metals.
Cost of Revenue
For the year ended December 31, 2022, our cost of revenues consisted primarily of costs associated with selling oil and natural gas liquid through the operations from our newly acquired businesses in SFD and WCCC, which were acquired through our business combination which closed on August 1, 2022. For the year ended December 31, 2021, our cost of revenues consisted primarily of costs associated with selling our precious metals on the open market and precious metal commodity broker fees.
For the years ended December 31, 2022 and 2021 costs of revenue were $25,239,962 and $1,050,676, respectively, representing an increase of $24,189,286 or 2,302.26%. The increase in the cost of revenue is primarily attributed to the cost of goods sold for our oil and natural gas liquid products realized through the operations from our newly acquired businesses in SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022.
Gross Profit and Gross Margin
For the years ended December 31, 2022 and 2021 we realized gross profit of $2,867,261 and $37,752, respectively, representing an increase of $2,829,509 or 7,494.99%. For the year ended December 31, 2022, the gross profit increased in proportion to the revenue and costs of revenue related to the purchase and sale of our oil and natural gas liquid products. For the year ended December 31, 2021, the gross profit increased in proportion to the revenue and costs of revenue related to the purchase and sale of precious metals as described above.
Our gross margin will continue to be affected by a variety of factors that include the market prices of our oil products, the volume produced by our facilities, and our ability to raise capital to continue to fund our operations or other ancillary agreements outside of the oil gathering, transportation, and storage activities.
Operating Expenses
Our operating expenses consist primarily of marketing, general and administrative expenses, bad debt expense, impairment loss, and amortization and depreciation expense. Marketing expenses include marketing fees of company representatives for marketing the business and is products and services as well as investor customer service. General and administrative expenses include professional services, including audit, tax, and legal fees associated with the costs for services in finance, accounting, administrative activities and the formation and compliance of a public company. Bad debt expense includes the expense associated with assets that management analyses and estimates may be uncollectible. Impairment loss includes the expense associate with events or changes in circumstances that indicate the carrying amount of an asset may not be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized. Amortization and depreciation expense uses the useful life of the asset to calculate the amortization or depreciation expense in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and management’s judgment.
For the years ended December 31, 2022 and 2021, we realized operating expenses of $25,611,216 and $6,963,668, which represents an increase of $18,647,548, or 267.78%. Our operating expenses increased due to multiple substantial events and their associated expenses throughout 2022, including approximately $12,300,837 in impairment loss and bad debt expense, as discussed below.
27
For the years ended December 31, 2022 and 2021, we realized an impairment loss of $11,138,830 and none, which represents an increase of $11,138,830 or 100%. Our impairment loss directly related to multiple events throughout 2022, including disruptions at our Vernal, Utah plant due to recent, supply and personnel limitations, in which we realized an impairment loss of $447,124 on this license agreement with TBT Group and the possibilities of embedding self-powered sensors directly into the asphaltic cement we may generate from the Vernal, Utah RPC; After taking into consideration new information related to the costs of building our own test facility or using new partners to test our ammonia synthesis catalyst, we realized an impairment loss of $3,254,999 to our ammonia synthesis assets; The operations surrounding our precious metals extraction services were suspended until recently, although due to these suspended activities and a shift in 2022 of the Company’s focus to the oil and gas industry, we have realized an impairment loss $6,269,998 surrounding the extraction machinery, and we reserved further against our work-in-process precious metal concentrate in the amount of $1,166,709 as it has not been sold as anticipated in its concentrate form.
For the years ended December 31, 2022 and 2021, we realized bad debt expense of $1,162,007 and none, which represents an increase of $1,162,007 or 100%. The increase in bad debt expense is directly related to two note receivables. The first note receivable relates to the sale 3,309,578 shares of marketable securities in December 2021 in a private transaction for a purchase price of $860,491, reflecting the market price as of such time. Such purchase price was paid in the form of $10,000 cash delivered at signing and a note issued in favor of Vivakor in the amount of $850,491 with payments due quarterly over a five-year term. The purchaser made their initial payment in the first quarter of 2022 but has not made further payments. The second note receivable is a $333,744 note receivable with TMC Capital, LLC, an affiliate of MCW Energy Group Limited. The parties amended their agreement in December 2021 to have the note paid on or before October 1, 2022, but we have not received payment. As of December 31, 2022 we have reserved against these notes in the amount of $828,263 and $333,744.
For the years ended December 31, 2022 and 2021, we realized management and board of director compensation, and audit, tax, legal expenses of $6,268,684 and $1,409,267, which represents an increase of $4,859,417 or 344.82%. Throughout 2022 we recognized increased professional services and compensation expenses, which relate to our registration statement, its amendments, preparing for and completing an underwritten public offering of our common stock, including our preparations and completion of an uplist of our common stock to a senior stock exchange, and two substantial acquisitions of SFD and WCCC. For the years ended December 31, 2022 and 2021, professional services related to audit, tax, and legal, were $1,463,089 and $404,711 which represents an increase of $1,058,378 or 261.51%. For the years ended December 31, 2022 and 2021, the (accrued or paid) cash compensation of management and the board of directors was $1,562,456 and $214,556 which represents an increase of $1,347,500 or 628.23%, with management accruing approximately 85% of its salary, bonus, and signing bonus compensation (see Note 14). The increase in salary compensation expense was primarily attributed to new compensation agreements with management and the board members serving at that time after the Company’s successful underwritten public offering of net proceeds of $6.2 million and uplist to Nasdaq in February 2022. New compensation agreements were entered into as a result of previous executive management being significantly undercompensated prior to the underwritten public offering and uplist to Nasdaq (see Note 17). In order to retain management, in June 2022, executive salaries were increased, signing bonuses were granted, and stock options were issued to both executives at the time as authorized and granted by the board of directors for the two then executives (see Note 17). In October 2022 our previous CEO resigned, and we entered into an employment agreement with our current CEO, where the CEO salary increased to $1,000,000 annually, but is only payable in common stock of the Company (see Note 17). Further, the independent directors serving at that time increased their compensation, which included signing bonuses, and granted stock options to the independent board members that vested immediately (where previously there were no signing bonuses and stock options vested over one year), which increased board compensation expense approximately $250,000 in 2022. For the years ended December 31, 2022 and 2021, we realized stock option expense of $4,079,591 and $2,031,112, which represents an increase of $2,048,479, or 100.86% increase.
For the years ended December 31, 2022 and 2021, we realized amortization and depreciation expense of $2,953,629 and $1,462,492, which represents an increase of $1,491,137 or 101.96%. The increase in amortization and depreciation expense is primarily attributed to the amortization of our newly acquired contracts (see Note 13) and depreciation from our newly acquired property, plant and equipment held by SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022.
Loss from Operations
For the years ended December 31, 2022 and 2021, we realized a loss from operations of $22,743,955 and $6,925,916, which represents an increase of $15,818,039, or 228.39%. The increase in loss is attributed to the net effect of the increase in gross profit and increase in operating expenses discussed above.
28
Interest expense
For the years ended December 31, 2022 and 2021, we realized interest expense of $1,519,281 and $501,598, which represents an increase of $1,017,683, or 202.89%. The increase in interest expense is mainly attributable the $28,664,284 in notes payable issued as consideration for our newly acquired entities, SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. The notes accrue interest of prime plus 3% on the outstanding balance of the notes. For the year ended December 31, 2022, the Company accrued $1,126,429 in interest on these notes payable.
Unrealized loss on marketable securities
For the years ended December 31, 2022 and 2021, we reported an unrealized loss of $578,464 and $1,094,054 on marketable securities, which represents a decrease in the unrealized loss of $515,590, or 47.13%. Our marketable securities were considered to be traded on an active market and were accounted for at a fair value based on the quoted prices in the active markets resulting in aggregate unrealized losses as noted above.
Gain disposition of assets
For the years ended December 31, 2022 and 2021, we recorded a gain on the disposition of certain assets of $2,456 and $87,044, which represents a decrease of $84,588, or 97.18%. In 2022 the Company sold a vehicle, which resulted in a gain on the sale of $2,456. In August 2021 we converted $81,768 of our note receivable with Scepter Holdings, Inc. (“Scepter”, Ticker: BRZL, OTC Markets) into 26,376,882 shares of the borrower’s common stock pursuant to the terms of the note at $0.0031 per share. On the date of the conversion, the price per share on OTC Markets was $0.0062 per share, which resulted in a $87,044 gain on the disposition of the note receivable.
Provision for income tax
The Company recorded an income tax benefit of $4,436,691 and $1,050,207 for the years ended December 31, 2022 and 2021, respectively. The Company’s effective tax rate for 2022 and 2021 was 18.69% and 16.48%, which was the result of the benefit of book losses offset by an additional valuation allowance on the net operating losses.
Cash flows
The following table sets forth the primary sources and uses of cash and cash equivalents for the years ended December 31, 2022 and 2021 as presented below:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (4,143,297 | ) | $ | (2,901,696 | ) | ||
| Net cash used in investing activities | (2,332,754 | ) | (4,514,642 | ) | ||||
| Net cash provided by financing activities | 8,165,125 | 8,511,153 | ||||||
Liquidity and Capital Resources
We have historically suffered net losses and cumulative negative cash flows from operations and, as of December 31, 2022 and 2021, we had an accumulated deficit of approximately $55.2 million and $35.7 million. As of December 31, 2022 and 2021, we had an working capital deficit of approximately $3.77 million and $2.09 million, respectively.
As of December 31, 2022 and 2021, we had cash and cash equivalents of $3,182,793 and $1,493,719, with $81,607 and $199,952 attributed to variable interest entities, respectively.
To date we have financed our operations primarily through debt financing, private equity offerings and our working interest agreements, although on February 14, 2022, the Company closed an underwritten public offering of 1,600,000 shares of common stock, at a public offering price of $5.00 per share, for aggregate net proceeds of $6.2 million, after deducting underwriting discounts, commissions, and other offering expenses. The Company’s Common Stock began trading on the Nasdaq Capital Market under the symbol “VIVK”.
29
For the years ended December 31, 2022 and 2021, our net cash used in operating activities was mainly comprised of net effect of the consolidated net loss of $20,247,621 and $7,255,706, a $4,437,492 and $1,051,007 (decrease) related to our provision for income taxes and deferred tax liabilities, our depreciation and amortization of $2,953,629 and $1,462,492, an impairment loss of $11,138,830 and none, a bad debt expense of $1,162,007 and none, an decrease in accounts receivable of $2,613,278 and 6,890, changes in accounts payable of $3,408,157 (decrease) and $38,128 (increase), changes in prepaids of $59,900 and none, and changes inventory of $162,148, all of which are directly related to our 2022 acquisitions’ (SFD and WCCC’s) operations. For the years ended December 31, 2022 and 2021, we were also able to issue stock for services of $1,472,888 and $438,004, common stock options issued for services in relation to a consultant and the Board of Director of $1,472,888 and $1,585,000, and stock-based compensation employees of $2,606,703 and $446,112 in lieu of using cash. We also realized interest expense on loans and notes payable of $1,454,752 and $501,598 related to the $28,664,284 in notes payable issued as consideration for our newly acquired entities, SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. For the years ended December 31, 2022 and 2021 we also realized a $2,456 and $87,044 gain on the disposition of assets, including the sale of vehicle in 2022 and the conversion of a note receivable in 2021, and an unrealized loss of $578,464 and $1,094,054 on marketable securities as described above.
For the years ended December 31, 2022 and 2021, our net cash used in investing activities was mainly attributed to our purchase of equipment of $2,491,174 and $4,236,276 related to the manufacturing of our RPCs and a wash plant facilities (2022). The Company also paid $265,000 for an additional license technology for piezo electric and energy harvesting technologies for creating self-powered sensors for making smart roadways in 2021.
Our net cash provided by our financing activities was mainly attributed to the net effect of the following events:
For the year ended December 31, 2022 and 2021, and we received proceeds of $3,640,046 and $9,135,984related to the issuance of convertible bridge notes and other loans. For the year ended December 31, 2021, as included in the proceeds above, we obtained Paycheck Protection Program loans for $295,745 that may be forgiven under the CARES Act, if we can demonstrate that the proceeds from the loan were used for eligible expenses. We also received proceeds of $6,240,000 from our February 14, 2022 underwritten public offering of 1,600,000 shares of common stock. For the years ended December 31, 2022 and 2021 we paid down notes payable by $853,230 and $562,046 and made distributions to Viva Wealth Fund I, LLC unit holders of $861,691 and $55,050.
Capitalized interest on construction in process was none and $1,614,697 for the year ended December 31, 2022 and 2021. There are no further existing firm obligations; however, we anticipate further construction costs of approximately $1.7 million in connection with our construction in process of our RPC Series A & B; and construction for each Nanosponge costs approximately $200,000, and we intend to manufacture and add a Nanosponge to our current and future RPCs.
We have historically suffered net losses and cumulative negative cash flows from operations, and as of December 31, 2022, we had an accumulated deficit of approximately $55.2 million. As of December 31, 2022 and 2021, we had a working capital deficit of approximately $3.77 million and $2.09 million, respectively. As of December 31, 2022 we had cash of $3.1 million. In addition, we have obligations to pay approximately $17,500,000 (of which approximately $16,500,000 can be satisfied through the issuance of our common stock under the terms of the debt and $334,000 is related to PPP loans that are anticipated to be forgiven) of debt in cash within one year of the issuance of these financial statements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. In February 2022, the Company closed an underwritten public offering of 1,600,000 shares of common stock, at a public offering price of $5.00 per share, for aggregate net proceeds of $6.2 million, after deducting underwriting discounts, commissions, and other offering expenses. Prior to the offering, we financed our operations primarily through debt financing, private equity offerings, and our working interest agreements. We believe the liquid assets from the Company’s available for sale investments and funding provided from subsequent fundraising activities (see Note 24) of the Company will give it adequate working capital to finance our day-to-day operations for at least twelve months through May 2024. Our CEO has also committed to provide credit support through June 2024, as necessary, for an amount up to $8 million to provide the Company sufficient cash resources, if required, to execute its plans for the next twelve months. Based on the above, we believe these plans alleviate substantial doubt about the Company’s ability to continue as a going concern.
Our ability to continue to access capital could be affected adversely by various factors, including general market and other economic conditions, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us. If we cannot raise capital through public or private debt financings, equity offerings, or other means, our ability to grow our business may be negatively affected. In such case, we may need to suspend site and plant construction or further acquisitions until market conditions improve.
Contractual Obligations
Our contractual obligations as of December 31, 2022 for finance lease liabilities are for the sale and leaseback of certain land, property, plant, and equipment that were acquired in the closing of our business combination, which acquired SFD and WCCC on August 1, 2022, which leases end in 2025 and 2026. Finance lease obligations as of December 31, 2022 are as follows:
| 2023 | $ | 963,900 | ||
| 2024 | 963,900 | |||
| 2025 | 594,792 | |||
| 2026 | 471,756 | |||
| Total | $ | 2,994,383 |
30
Our contractual obligations as of December 31, 2022 for operating lease liabilities are for office and warehouse space, which leases end in 2024 and 2025, and a land lease which ends in 2042. Operating lease obligations as of December 31, 2022 are as follows:
| 2023 | $ | 471,991 | ||
| 2024 | 435,906 | |||
| 2025 | 162,545 | |||
| 2026 | 136,975 | |||
| 2027 | 153,089 | |||
| Thereafter | 2,865,620 | |||
| Total | $ | 4,226,126 |
Interest Rate and Market Risk
Interest Rate Risk
Interest rate risk is the potential for reduced net interest income and other rate-sensitive income resulting from adverse changes in the level of interest rates. We do not have variable interest rate-sensitive income agreements. We do have financing arrangements that were issued on August 1, 2022 as consideration for the business combination and acquisition of SFD and WCCC, in which the three year notes have variable interest rates based on the prime rate, which exposes us to further interest expense if the prime rate increases. We believe that the LIBOR is being phased out globally and do not have any financings with variable interest rates based on the LIBOR.
Market Risk — Equity Investments
Market risk is the potential for loss arising from adverse changes in the fair value of fixed-income securities, equity securities, other earning assets, and derivative financial instruments as a result of changes in interest rates or other factors. We own equity securities that are publicly traded. Because the fair value of these securities may fall below the cost at which we acquired them, we are exposed to the possibility of loss. Equity investments are approved, monitored, and evaluated by members of management.
Inflation
Prolonged periods of slow growth, significant inflationary pressures, volatility and disruption in financial markets, could lead to increased costs of doing business. Inflation generally will cause suppliers to increase their rates, and inflation may also increase employee salaries and benefits. In connection with such rate increases, we may or may not be able to increase our pricing to consumers. Inflation could cause both our investment and cost of revenue to increase, thereby lowering our return on investment and depressing our gross margins.
Off Balance Sheet Arrangements
None.
Critical Accounting Policies & Use of Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements included in this report, which have been prepared in accordance with GAAP. For further information on the critical accounting policies see Note 3 of the Notes to the Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Estimates by their nature are based on judgments and available information. Our estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis, and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. We believe our critical accounting estimates relate to the following: Recoverability of current and noncurrent assets, revenue recognition, stock-based compensation, income taxes, effective interest rates related to long-term debt, marketable securities, lease assets and liabilities, valuation of stock used to acquire assets, and derivatives.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
31
Item 8 - Financial Statements and Supplementary Data
The consolidated financial statements required by this item begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A - Controls and Procedures
Our management, with the participation of our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described below, as of December 31, 2022, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified include the following: We did not have enough personnel in our accounting and financial reporting functions. Due to insufficient personnel in our accounting department, we were not able to achieve adequate segregation of duties, and, as a result, we did not have adequate review controls surrounding: (i) our technical accounting matters in our financial reporting process, and (ii) the work of specialists involved in the estimation process. These control deficiencies, which are pervasive in nature, result in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis. Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Since our assessment as of December 31, 2022, we have hired additional external accounting staff, whom are consultants with expertise in research and technical guidance, and we are working to retain additional qualified valuation experts that report on their internal controls. We believe that these additions may provide for the remediation of these material weaknesses in 2023.
We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the fourth quarter ended December 31, 2022 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Since our assessment as of December 31, 2022, we have hired additional external accounting staff, whom are consultants with expertise in research and technical guidance. We believe that these additions may provide for the remediation of our material weaknesses in 2023.
Management’s report on internal control over financial reporting.
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2022 for the reasons discussed above.
32
Item 9B - Other Information
None.
Item 9C - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
33
PART III
Item 10 - Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
The following table sets forth information about our directors, executive officers and significant employees.
| Name | Age | Position(s) | ||
| James Ballengee | 57 | Chief Executive Officer (Principal Executive Officer) and Director | ||
| Tyler Nelson | 42 | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director | ||
| Dr. Daniel Hashim | 38 | Chief Scientific Officer | ||
| John Harris | 74 | Director | ||
| Albert Johnson | 48 | Director | ||
| David Natan | 69 | Director |
Executive Officers
James H. Ballengee joined Vivakor as Chief Executive Officer and Chairman of the Board in 2022. Prior to joining the Company, Mr. Ballengee had more than two decades of experience in midstream oil and gas senior management roles. Previously, he had been involved in two major private equity portfolio companies holding positions including Chief Commercial Officer, Chief Financial Officer, Chief Executive Officer, and Chairman of the Board. From 1997 through 2010, Mr. Ballengee served first as Chief Financial Officer, then Chief Executive Officer, then Chief Commercial Officer of Taylor Logistics, LLC, a Halifax Group-backed private equity portfolio company focused on crude oil marketing and logistics, which he led through a successful sale to Gibson Energy, Inc. (TSX: GEI). From 2010 to 2013, he was Chief Executive Officer and Chairman of the Board of Bridger Group, LLC, a private crude oil marketing firm. From 2013 to 2015, he was a board member and Chief Commercial Officer of Bridger, LLC, a Riverstone Holdings-backed private equity portfolio company focused on crude oil marketing and logistics, which he led through a successful sale to Ferrellgas Partners, LP (NYSE: FGP). Mr. Ballengee currently manages an exempt family office, which in turn holds and manages investments principally in the oil and gas, sports and entertainment, and real estate sectors. He has an undergraduate degree in accounting from Louisiana State University—Shreveport.
Tyler Nelson joined Vivakor on a part-time basis as Chief Financial Officer in 2014 and has served as full-time Chief Financial Officer since September 2020. Mr. Nelson joined the Board of Directors of Vivakor in January 2023. Mr. Nelson is a CPA who worked from 2006 to 2011 in Audit and Enterprise Risk Services at Deloitte LLP (USA) and later at Withum+Brown, PC. He worked with clients with assets of more than $100 billion and annual revenues of more than $15 billion, which are considered some of the most respected financial institutions in the world. In 2011, Mr. Nelson began working for LBL Professional Consulting, Inc. where he provided merger and acquisition, initial public offering, and interim chief financial officer services to clients. Mr. Nelson continues to sit on the Board of Directors and remains an officer of LBL Professional Consulting, Inc. Mr. Nelson earned a Master’s Degree in Accountancy from the University of Illinois- Urbana-Champaign, and a Bachelor’s Degree in Economics with a minor in Business Management from Brigham Young University.
Dr. Daniel Hashim joined Vivakor as Chief Scientific Officer in 2017. Dr. Hashim has extensive experience in the areas of nanoscience research, advanced materials synthesis, characterization, application, innovation and technological entrepreneurship. In addition to leading scientific efforts for Vivakor and its related companies, Dr. Hashim has served as the Founder, Chairman and CEO of CSS Nanotech, Inc. (“CSS”) since 2014. CSS is a nanomaterials research and development company that designs and commercializes useful structural nanomaterials that exhibit “safe-to-handle” nanofunctionality on a macro-scale, to include carbon filtration media, water purification, oil spill remediation, structural composite materials, electrode materials, petrochemical refining and thermal management systems. Mr. Hashim holds a Bachelor’s Degree in Materials Science Engineering from Rensselaer Polytechnic Institute, with a PhD from Rice University in the field of Materials Science and NanoEngineering.
34
Directors
James Ballengee - See “Executive Officers”
Tyler Nelson - See “Executive Officers”
John R. Harris, age 74, combines over 35 years of experience in Board of Directors, CEO and Senior Management positions in a variety of industries including technology services, telecommunications, healthcare, and business process outsourcing. He currently serves on the board of directors for the Hackett Group, Hifu Prostate Services, GenHemp, and Everservice. Since 2009 Mr. Harris has primarily been a private investor, advisor, and board member for both public and privately held companies. From 2006 to 2009 he was CEO of Etelecare Global solutions a leading provider of offshore teleservices to Fortune 1,000 companies. From 2003 to 2005 he served as the CEO of Seven Worldwide, a digital content management company where he was previously a member of the board of directors of the company. From 2001 to 2003, Mr. Harris consulted with a variety of venture-backed early-stage companies. Previously Mr. Harris spent 25 years with Electronic Data Systems in a variety of senior executive positions to include President of the 4 strategic business units serving the telecommunications and media industries world-wide. He was elected as a Corporate Vice-President and Officer of the company. During his tenure with EDS, he gained extensive international experience working and living in the Middle East, Europe and Asia. Mr. Harris has extensive public company board experience through prior services on the boards of Premier Global Services, Cap Rock Communications, Genuity, Ventiv Health, Startek, Sizmek, Mobivity and Applied Graphic Technologies and served in a variety of positions to include board member, committee chairman, lead director and chairman. Mr. Harris received his BBA and MBA from the University of West Georgia where he serves on the Board of Advisors to the Richards School of Business.
Albert Johnson, age 48, brings over 25 years of experience in operations and senior management in the midstream and downstream sectors of the oil and gas industry. Previously, Mr. Johnson had been involved in public and privately held companies holding various positions in senior management and serving as a member of boards of directors. From 2014 to 2015, he was Director of Business Development for Sunoco Logistics, LP., a publicly traded master limited partnership involved in the marketing, trading, transportation and terminalling of crude oil, products and NGLS. From July 2015 through May 2017, Mr. Johnson was the Vice President of Business Development for Navigator Energy Services, LLC., a private equity backed company involved in the gathering, transportation and terminalling of crude oil. From March 2018 to November 2022, Mr. Johnson served as Executive Vice President Business Development for ARX Energy, LLC. Since November 2022, Mr. Johnson has served as Chief Commercial Officer for ARX Energy, LLC., a privately held company involved in building a world class clean fuels facility in the Port of Brownsville, Texas. Mr. Johnson served on the Board of Directors for West Texas Gulf Pipe Line Company and on the Management Committee of SunVit Pipeline, LLC. He has an undergraduate degree in History from the University of Texas at Austin and an MBA finance concentration from Jones Graduate School of Business at Rice University.
David Natan, age 69, currently serves as President and Chief Executive Officer of Natan & Associates, LLC, a consulting firm offering chief financial officer services to public and private companies in a variety of industries, since 2007. In addition, Mr. Natan currently serves as Executive Vice President and Chief Financial Officer for Airborne Motorworks, Inc., a privately-held aerospace transportation company, since April 2020. From February 2010 to May 2020, Mr. Natan served as Chief Executive Officer of ForceField Energy, Inc. (OTCMKTS: FNRG), a company focused on the solar industry and LED lighting products. From February 2002 to November 2007, Mr. Natan served as Executive Vice President of Reporting and Chief Financial Officer of PharmaNet Development Group, Inc., a drug development services company, and, from June 1995 to February 2002, as Chief Financial Officer and Vice President of Global Technovations, Inc., a manufacturer and marketer of oil analysis instruments and speakers and speaker components. Prior to that, Mr. Natan served in various roles of increasing responsibility with Deloitte & Touche LLP, a global consulting firm. Mr. Natan currently serves as a member of the Board of Directors and Chair of the Audit Committee of Global Diversified Marketing Group, Inc. (OTCMKTS: GDMK), a manufacturer, marketer and distributor of food and snack products, since February 2021 and serves as a member of the Board of Directors and Chair of the Audit Committee of Sunshine Biopharma, Inc. (NASDAQ: SBFM), a pharmaceutical and nutritional supplement company, since February 2022. Previously, Mr. Natan served as Chairman of the Board of Directors of ForceField Energy, Inc., from April 2015 to May 2020, and as a member of the Board of Directors of Global Technovations, Inc., from December 1999 to December 2001. Mr. Natan holds a B.A. in Economics from Boston University.
Family Relationships
There are no family relationships between any of our directors and executive officers.
35
Corporate Governance Overview
Board Composition and Director Independence
Our Board of Directors consists of five members. The directors are elected at each annual meeting to hold office until the next annual meeting and until their successors are duly elected and qualified. The Company defines “independent” as that term is defined in the Nasdaq rules.
In making the determination of whether a member of the board is independent, our board considers, in addition to Nasdaq rules, among other things, and transactions and relationships between each director and his immediate family and the Company, including those reported under the caption “Related Party Transactions.” The purpose of this review is to determine whether any such relationships or transactions are material and, therefore, inconsistent with a determination that the directors are independent. On the basis of such review and its understanding of such relationships and transactions, our Board of Directors affirmatively determined that David Natan, Matthew Balk and Trent Staggs are qualified as independent and do not have any material relationships with us that might interfere with his exercise of independent judgment.
Board Committees
Our Board of Directors has established an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Each committee has its own charter, which is available on our website at www.vivakor.com. Each of the board committees has the composition and responsibilities described below.
Members will serve on these committees until their resignation or until otherwise determined by our Board of Directors.
Audit Committee
Our Audit Committee is currently comprised of David Natan, Albert Johnson and John Harris, each of whom qualify as an independent director under applicable Nasdaq and SEC rules, and “financially literate” under applicable Nasdaq rules. Our board has determined that David Natan, qualifies as an “audit committee financial expert”, as such term is defined in Item 407(d)(5) of Regulation S-K. David Natan serves as the chairman of the Audit Committee.
The Audit Committee oversees our accounting and financial reporting processes and oversee the audit of our consolidated financial statements and the effectiveness of our internal control over financial reporting. The responsibilities of this committee include, but are not limited to:
| ● | selecting and recommending to our Board of Directors the appointment of an independent registered public accounting firm and overseeing the engagement of such firm; | |
| ● | approving the fees to be paid to the independent registered public accounting firm; | |
| ● | helping to ensure the independence of the independent registered public accounting firm; | |
| ● | overseeing the integrity of our financial statements; | |
| ● | preparing an audit committee report as required by the SEC to be included in our annual proxy statement; | |
| ● | resolving any disagreements between management and the auditors regarding financial reporting; | |
| ● | reviewing with management and the independent auditors any correspondence with regulators and any published reports that raise material issues regarding the Company’s accounting policies; | |
| ● | reviewing and approving all related-party transactions; and | |
| ● | overseeing compliance with legal and regulatory requirements. |
36
The Audit Committee is authorized to retain independent legal and other advisors and conduct or authorize investigations into any matter within the scope of its duties.
Compensation Committee
Our Compensation Committee is currently comprised of David Natan, Albert Johnson, and John Harris, each of whom qualify as an independent director under applicable Nasdaq rules. John Harris serves as the chairman of the Compensation Committee.
Our Compensation Committee assists the board of directors in the discharge of its responsibilities relating to the compensation of the board of directors and our executive officers.
The responsibilities of this committee include, but are not limited to:
| ● | reviewing and approving on an annual basis the corporate goals and objectives with respect to compensation for our Chief Executive Officer; | |
| ● | reviewing, approving and recommending to our board of directors on an annual basis the evaluation process and compensation structure for our other executive officers; | |
| ● | determining the need for and the appropriateness of employment agreements and change in control agreements for each of our executive officers and any other officers recommended by the Chief Executive Officer or Board of Directors; | |
| ● | providing oversight of management’s decisions concerning the performance and compensation of other company officers, employees, consultants and advisors; | |
| ● | reviewing our incentive compensation and other equity-based plans and recommending changes in such plans to our Board of Directors as needed, and exercising all the authority of our Board of Directors with respect to the administration of such plans; | |
| ● | reviewing and recommending to our Board of Directors the compensation of independent directors, including incentive and equity-based compensation; and | |
| ● | selecting, retaining and terminating such compensation consultants, outside counsel or other advisors as it deems necessary or appropriate. |
The Compensation Committee may delegate any of its responsibilities to subcommittees as it deems appropriate. The Compensation Committee is authorized to retain independent legal and other advisors, and conduct or authorize investigations into any matter within the scope of its duties.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee is currently comprised of David Natan, Albert Johnson, and John Harris, each of whom qualify as an independent director under applicable Nasdaq rules. Albert Johnson serves as the chairman of the Nominating and Corporate Governance Committee.
The purpose of the Nominating and Corporate Governance Committee is to recommend to the Board of Directors nominees for election as directors and persons to be elected to fill any vacancies on the Board of Directors, develop and recommend a set of corporate governance principles and oversee the performance of the Board of Directors.
37
The responsibilities of this committee include, but are not limited to:
| ● | recommending to the Board of Directors nominees for election as directors at any meeting of stockholders and nominees to fill vacancies on the board; | |
| ● | considering candidates proposed by stockholders in accordance with the requirements in the Committee charter; | |
| ● | overseeing the administration of the Company’s code of business conduct and ethics; | |
| ● | reviewing with the entire Board of Directors, on an annual basis, the requisite skills and criteria for board candidates and the composition of the board as a whole; | |
| ● | the authority to retain search firms to assist in identifying board candidates, approve the terms of the search firm’s engagement, and cause the Company to pay the engaged search firm’s engagement fee; | |
| ● | recommending to the Board of Directors on an annual basis the directors to be appointed to each committee of the Board of Directors; | |
| ● | overseeing an annual self-evaluation of the Board of Directors and its committees to determine whether it and its committees are functioning effectively; and | |
| ● | developing and recommending to the board a set of corporate governance guidelines applicable to the Company. |
The Nominating and Corporate Governance Committee may delegate any of its responsibilities to subcommittees as it deems appropriate. The Nominating and Corporate Governance Committee is authorized to retain independent legal and other advisors and conduct or authorize investigations into any matter within the scope of its duties.
Board Leadership Structure
Currently, Mr. Ballengee is our principal executive officer and chairman of the board.
Risk Oversight
Our Board will oversee a company-wide approach to risk management. Our Board will determine the appropriate risk level for us generally, assess the specific risks faced by us and review the steps taken by management to manage those risks. While our Board will have ultimate oversight responsibility for the risk management process, its committees will oversee risk in certain specified areas.
Specifically, our compensation committee will be responsible for overseeing the management of risks relating to our executive compensation plans and arrangements, and the incentives created by the compensation awards it administers. Our audit committee will oversee management of enterprise risks and financial risks, as well as potential conflicts of interests. Our board of directors will be responsible for overseeing the management of risks associated with the independence of our Board.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics applicable to our principal executive, financial and accounting officers and all persons performing similar functions. A copy of that code is available on our corporate website at www.vivakor.com. We expect that any amendments to such code, or any waivers of its requirements, will be disclosed on our website.
38
Item 11 - Executive Compensation
Summary Compensation Table
The particulars of compensation paid to the following persons:
| (a) | all individuals serving as our principal executive officer during the year ended December 31, 2022; | |
| (b) | each of our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2022 who had total compensation exceeding $100,000 (if applicable); and | |
| (c) | up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at December 31, 2022 (if applicable), |
who we will collectively refer to as the named executive officers, for the years ended December 31, 2022 and 2021, are set out in the following summary compensation table:
Executive Officers and Directors
The Summary Compensation Table shows certain compensation information for services rendered in all capacities for the fiscal years ended December 31, 2022 and 2021. Other than as set forth herein, no executive officer’s salary and bonus exceeded $100,000 in any of the applicable years. The following information includes the dollar value of base salaries, bonus awards, the estimated fair value of stock options granted and certain other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||
| James Ballengee | 2022 | 178,082 | (2) | -0- | -0- | -0- | -0- | -0- | -0- | 178,082 | (2) | ||||||||||||||||||||||||
| CEO and Chairman(1) | |||||||||||||||||||||||||||||||||||
| Tyler Nelson | 2022 | 219,315 | (3) | 605,467 | -0- | 1,652,085 | (4) | -0- | -0- | 35,220 | (5) | 2,512,087 | |||||||||||||||||||||||
| CFO and Secretary | 2021 | 49,920 | -0- | -0- | -0- | -0- | -0- | 49,920 | |||||||||||||||||||||||||||
| Matthew Nicosia | 2022 | 138,904 | (7) | 125,000 | (8) | -0- | 1,053,224 | (9) | -0- | -0- | 11,044 | (5) | 1,328,172 | ||||||||||||||||||||||
| Former CEO and Former Chairman(6) | 2021 | 50,000 | -0- | -0- | -0- | -0- | -0- | -0- | 50,000 | ||||||||||||||||||||||||||
| (1) | Mr. Ballengee was hired as our Chief Executive Officer on October 28, 2022. |
| (2) | Total amount accrued as of December 31, 2022. Mr. Ballengee’s salary will be paid in shares of our common stock, priced based on the volume-weighted average price for the preceding five (5) NASDAQ trading days prior to the Effective Date or annual anniversary of his Employment Agreement, as applicable. The five (5) day volume-weighted average price of our common stock for the salary set forth in the table was $1.083. As a result, we are required to issue Mr. Ballengee 164,434 shares of our common stock as payment for his salary for 2022. |
| (3) | Of this total amount, $51,662 was paid in cash and the remaining $167,653 was accrued as of December 31, 2022. |
39
| (4) | Includes the aggregate grant date fair value of the stock option to acquire 917,825 shares of our common stock issued to Mr. Nelson under the Nelson Employment Agreement. Such stock options were priced using the Black-Scholes option pricing model to determine the fair value of the options on the date of grant, using the following assumptions: |
| June 9, 2022 | ||||
| Risk-free interest rate | 3.04% | |||
| Expected dividend yield | None | |||
| Expected life of warrants | 10 years | |||
| Expected volatility rate | 254% |
| (5) | Includes amounts for accrued employee benefits. All amounts accrued as of December 31, 2022. |
| (6) | Mr. Nicosia resigned as an executive officer, Chairman of the Board and as a Director, effective October 6, 2022. Such resignations were not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. |
| (7) | Of this total amount, $50,000 was paid in cash and the remaining $88,904 was accrued as of December 31, 2022. |
| (8) | Accrued as of December 31, 2022. |
| (9) | Includes the aggregate grant date fair value of the stock option to acquire 503,935 shares of our common stock issued to Mr. Nicosia under the Nicosia Employment Agreement. Stock options to acquire the remaining 451,158 shares of our common stock under the Nicosia Employment Agreement were forfeited when Mr. Nicosia resigned as our Chief Executive Officer and, as a result, have not be valued in the table. The 503,935 stock options were priced using guidance from ASC 718 and the Black-Scholes option pricing model to determine the fair value of the options on the date of grant, using the following assumptions: |
| June 9, 2022 | ||||
| Risk-free interest rate | 3.07% | |||
| Expected dividend yield | None | |||
| Expected life of warrants | 5 years | |||
| Expected volatility rate | 169% |
Employment Agreements
James Ballengee
On October 28, 2022, we entered into an executive employment agreement with James Ballengee (the “Ballengee Employment Agreement”) with respect to our appointment of Mr. Ballengee as Chief Executive Officer and Chairman of the Board of Directors. Pursuant to the Ballengee Employment Agreement, Mr. Ballengee will receive annual compensation of $1,000,000 payable in shares of our common stock, priced at the volume weighted average price (VWAP) for the five trading days preceding the date of the Ballengee Employment Agreement and each anniversary thereof (the “CEO Compensation”). The CEO Compensation is subject to satisfaction of Nasdaq rules, the provisions of our equity incentive plan and other applicable requirements and shall be accrued if such issuance is due prior to satisfaction of such requirements. Additionally, Mr. Ballengee shall be eligible for a discretionary performance bonus. The Ballengee Employment Agreement may be terminated by either party for any or no reason, by providing a five days’ notice of termination.
Pursuant to the Ballengee Employment Agreement, Mr. Ballengee was granted the right to nominate two additional directors for appointment to the Board in his sole discretion, as well as a third additional director upon issuance of the Note Payment Shares (defined below), subject to such directors passing a background check. Pursuant to the Ballengee Employment Agreement, Mr. Ballengee nominated John Harris and Albert Johnson as Board of Director appointees and both were appointed in January 2023.
40
Tyler Nelson
On June 9, 2022, we entered into an Executive Employment Agreement with Tyler Nelson (the “Nelson Employment Agreement”) to serve as our Chief Financial Officer. The agreement provides for an annual salary of $350,000 (the “Nelson Base Salary”). The Nelson Base Salary is payable in equal installments and will be paid every two weeks. The Nelson Base Salary will increase by $100,000 upon the Company earning a total of at least $2,000,000 in Adjusted EBITDA during any calendar year, and the Nelson Base Salary will continue to increase in $100,000 increments for each additional $1,000,000 increase in EBITDA over $2,000,000 during the term of the Nelson Employment Agreement up to $650,000 at which time the Nelson Base Salary will continue to increase in $13,500 increments for each additional $1,000,000 increase in Adjusted EBITDA over $4,000,000. Any increase to the Nelson Base Salary will be effective the first pay period of the Company after the Company reaches a particular EBITDA amount is achieved that triggers the increase. For example purposes only and not by way of limitation: (i) if on October 31, 2023 the Company reaches $3,000,000 in EBITDA earned during the 2023 calendar year, the Nelson Base Salary would increase to $550,000 commencing the Company’s first pay period after October 31, 2023. Under the Nelson Employment Agreement Mr. Nelson will also receive a $100,000 cash bonus in recognition of the fact Mr. Nelson was undercompensated for his past services to the Company and as an inducement for him to continue providing services as our Chief Financial Officer.
The Nelson Employment Agreement has an initial term of two years and automatically extends for successive one-year periods unless terminated in writing by the Company or Mr. Nelson at least three months prior to the end of the applicable term. It is anticipated that Mr. Nelson will receive a bonus for 2022, with such bonus to be determined by our Compensation Committee and Board of Directors taking into account the general business performance of the Company, including any completed financings and/or acquisition. For 2023 forward it is anticipated that our Compensation Committee and Board of Directors will approve an annual executive incentive bonus plan, which shall be updated annually by the Compensation Committee of the Company’s Board of Directors, and possibly a growth metrics or acquisition transaction bonus plan. Once established, Mr. Nelson will be eligible to participate in such plans during the term of the Nelson Employment Agreement.
Under the Nelson Employment Agreement, Mr. Nelson was granted a stock option to acquire 917,825 shares of our common stock (the “Stock Option”) under our 2022 Equity Incentive Plan (each an “Equity Award”). Any Equity Awards granted to Mr. Nelson will be documented by issuing him a grant document (i.e. a stock option agreement). The Stock Option will vest over two years with 360,145 of the shares vesting immediately, 219,312 of the shares vesting three (3) months after issuance, and the remaining 338,368 of the shares vesting in equal quarterly installments over the remaining seven (7) quarters (48,338 for 6 quarters and 48,340 for the last quarter), with an exercise price equal to 100% of the fair market value on the date grant, and which expires ten (10) years after the date of grant. In the event Mr. Nelson is terminated without Cause (as defined in the Nelson Employment Agreement) or resigns for Good Reason (as defined in Nelson Employment Agreement), one hundred percent (100%) of the then unvested shares subject to each Option Agreement will fully vest and become fully exercisable. The Option Agreement will allow Mr. Nelson to exercise the vested options provided by the Option Agreement for a period of three (3) years following any termination of Mr. Nelson’s employment.
Upon termination Mr. Nelson’s employment by Mr. Nelson for good reason, by the Company without cause, or by the Company because of disability, the Company will pay or provide Mr. Nelson (i) any unpaid base salary and any accrued benefits through the date of termination; (ii) amounts payable under any Company bonus plans in which Mr. Nelson is eligible to participate as of the date of the termination of his employment on a pro-rated basis; (iii) for a period of 12 months, Mr. Nelson’s then current monthly base salary; (iv) outplacement services for Mr. Nelson for a period of 12 months with an outplacement firm selected by Mr. Nelson; (v) at Mr. Nelson’s election to continue health insurance coverage under COBRA, Mr. Nelson’s monthly premium until (a) the close of the severance period, as defined therein, (b) the expiration of Mr. Nelson’s continuation of coverage under COBRA, or (c) the date when Mr. Nelson becomes eligible for substantially equivalent health insurance coverage in connection with new employment, and (vi) 100% of any unvested stock options will fully vest and become exercisable. Mr. Nelson will have three (3) after termination to exercise any vested stock options. Upon the termination of Mr. Nelson’s employment because of death, Mr. Nelson’s estate will be entitled to receive (i) Mr. Nelson’s then current base salary through the end of the month in which his death occurs, (ii) all accrued and unpaid compensation (including any accrued and unused vacation time) and earned but unpaid bonus payments. Upon the termination Mr. Nelson’s employment by the Company for cause or by Mr. Nelson without good reason, the Company will pay Mr. Nelson (i) a pro rata amount of Mr. Nelson’s then current base salary through the date his employment is terminated and (ii) all unpaid bonuses and accrued and unpaid compensations (including any accrued and unused vacation).
41
Stock Incentive Plan
Equity Incentive Plan
Our Board of directors approved a new equity incentive plan in February 2022, which authorizes the issuance of up to 2,000,000 shares of common stock through the grant of stock options (including incentive stock options qualifying under section 422 of the Code and nonstatutory stock options), restricted stock awards, stock appreciation rights, restricted stock units, performance awards, other stock-based awards or any combination of the foregoing.
Outstanding Equity Awards at December 31, 2022
The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers on December 31, 2022:
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||||||||||
| James Ballengee | -0- | -0- | -0- | N/A | N/A | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
| Tyler Nelson | 627,795 | 290,030 | -0- | 1.80 | June 8, 2032 | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
| Matthew Nicosia(1) | 503,935 | -0- | -0- | 1.98 | June 8, 2027 | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
| (1) | Mr. Nicosia resigned as an executive officer, Chairman of the Board and as a Director, effective October 6, 2022. Such resignations were not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices. Includes stock option to acquire 503,935 shares of our common stock issued to Mr. Nicosia under the Nicosia Employment Agreement. Stock options to acquire the remaining 451,158 shares of our common stock under the Nicosia Employment Agreement were forfeited when Mr. Nicosia resigned as our Chief Executive Officer and, as a result, are not reflected in the table. |
Aggregated Option Exercises
There were no options exercised by any officer or director of our company during our twelve-month period ended December 31, 2022.
Employee Pension, Profit Sharing or other Retirement Plan
We do not have a defined benefit, pension plan, profit sharing or other retirement plan, although we may adopt one or more of such plans in the future.
42
Director Compensation
The table below shows the compensation paid to our directors during the year ended December 31, 2022. The following current Board of Directors members were appointed after January 1, 2023, and, as a result, are not reflected in the below table: Tyler Nelson, John Harris and Albert Johnson.
| Name | Fees ($) | Stock Awards ($) | Option Awards ($) | Non-Equity ($) | Nonqualified ($) | All
Other ($) | Total ($) | |||||||||||||||||||||
| James Ballengee | - | - | - | - | ||||||||||||||||||||||||
| David Natan | 1,923 | - | - | - | - | 1,923 | ||||||||||||||||||||||
| Matthew Balk(1) | 32,500 | - | 93,000 | - | - | - | 125,500 | |||||||||||||||||||||
| Trent Staggs(2) | 42,500 | - | 93,000 | - | - | - | 135,500 | |||||||||||||||||||||
| Al Ferrara(3) | 38,333 | - | 93,000 | - | - | - | 131,333 | |||||||||||||||||||||
| Matthew Nicosia(4) | - | - | - | - | - | - | ||||||||||||||||||||||
| Joseph Spence(5) | 6,000 | - | - | - | - | 6,000 | ||||||||||||||||||||||
| (1) | Matthew Balk resigned from the Board of Directors on January 16, 2023. |
| (2) | Trent Staggs resigned from the Board of Directors on January 4, 2023. |
| (3) | Al Ferrara resigned from the Board of Directors on November 28, 2022. |
| (4) | Matthew Nicosia resigned from the Board of Directors on October 6, 2022. |
| (5) | Joseph Spence resigned from the Board of Directors on July 1, 2022. |
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
The following table sets forth certain information regarding our voting shares beneficially owned as of May 5, 2023 by (i) each stockholder known to be the beneficial owner of 5% or more of the outstanding shares of the particular class of voting stock, (ii) each executive officer, (iii) each director, and (iv) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options, warrants and/or other convertible securities. Unless otherwise indicated, voting and investment power relating to the shares shown in the tables for each beneficial owner is exercised solely by the beneficial owner.
For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons, any shares that such person or persons has the right to acquire within 60 days of May 5, 2023 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person.
The percentage of beneficial ownership of our common stock is based on an aggregate of 18,064,838 shares outstanding.
Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders. Unless otherwise indicated, the address for each director and executive officer listed is: c/o Vivakor, Inc., 4101 North Thanksgiving Way, Lehi, Utah 84043.
43
| Name and Address of Beneficial Owner | Shares of Common Stock Beneficially Owned | Percentage of Common Stock Beneficially Owned | ||||||
| James H. Ballengee, Chief Executive Officer and Director(1) | 3,009,552 | 16.66 | % | |||||
| Tyler Nelson, Chief Financial Officer(2) | - | * | ||||||
| Daniel Hashim, Chief Scientific Officer(3) | 166,667 | * | ||||||
| David Natan, Director | - | * | ||||||
| John R. Harris, Director | - | * | ||||||
| Albert Johnson, Director | - | * | ||||||
| All Officers and Directors as a group (six persons) | 3,176,219 | 17.58 | % | |||||
| 5% Beneficial Stockholders | ||||||||
| Matthew Nicosia(4) | 4,189,405 | 23.19 | % | |||||
| Everett Monroe(5) | - | - | ||||||
| Daniel O. Ritt Trust(6) | - | - | ||||||
| Peter D’Arruda(7) | - | - | ||||||
| Name and Address of Beneficial Owner | Value of Class B Units of VV RII Beneficially Owned | Percentage of VV RII Class B Units Beneficially Owned | ||||||
| James H. Ballengee, Chief Executive Officer and Director(1) | - | - | ||||||
| Tyler Nelson, Chief Financial Officer(2) | - | |||||||
| Daniel Hashim, Chief Scientific Officer(3) | - | - | ||||||
| David Natan, Director | - | - | ||||||
| John R. Harris, Director | - | - | ||||||
| Albert Johnson, Director | - | - | ||||||
| All Officers and Directors as a group (six persons) | ||||||||
| - | ||||||||
| 5% Beneficial Stockholders | - | |||||||
| Matthew Nicosia(4) | - | - | ||||||
| Everett Monroe(5) | $ | 90,000 | 7.88 | % | ||||
| Daniel O. Ritt Trust(6) | $ | 65,000 | 5.69 | % | ||||
| Peter D’Arruda(7) | $ | 60,000 | 5.25 | % | ||||
| * | Less than 1% |
| (1) | James H. Ballengee’s address is 5151 Beltline Road, Suite 715 Dallas, Texas 75234. Includes 2,979,456 shares of common stock held in the name of Jorgan Development, LLC and 30,096 shares of common stock held in the name of JBAH Holdings, LLC. James Ballengee, in his capacity as sole manager, has sole voting and investment power over both Jorgan Development, LLC and JBAH Holdings, LLC. |
| (2) | Does not include options to purchase 917,825 shares of common stock |
| (3) | The 166,667 shares of common stock beneficially owned by Dr. Hashim are directly held by CSS Nanotech Ltd. Dr. Hashim is the Chief Executive Officer of CSS Nanotech Ltd. |
| (4) | The shares of common stock beneficially owned by Matthew Nicosia includes 4,189,405 shares of common stock held by AKMN Irrevocable Trust and 262 shares of common stock held by Nicosia Family Trust. Matthew Nicosia is the trustee of the AKMN Irrevocable Trust, of which Jonathan Nicosia, Matthew Nicosia’s son, a minor, is the beneficiary. Does not include options to purchase 503,935 shares of common stock. |
| (5) | Everett Monroe’s address is 5813 114th Street, Lubbock TX 79424. |
| (6) | Daniel O. Ritt Trust’s address is 168 Dover Pkwy, Stewart Manor, NY 11530. |
| (7) | Peter D’Arruda’s address is 124 Poppleford Place, Cary, NC 27518. |
44
Item 13 - Certain Relationships and Related Transactions and Director Independence
Related Party Transactions
The following is a description of each transaction from January 1, 2022 to December 31, 2022, and any material, publicly disclosed transaction through the date of this filing and each currently proposed transaction in which:
| ● | we have been or are to be a participant; |
| ● | the amount involved exceeded the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years; and |
| ● | any of our directors, executive officers or holders of more than 5% of our outstanding capital stock, or any immediate family member of, or person sharing the household with, any of these individuals or entities, had or will have a direct or indirect material interest. |
Our current policy with regard to related party transactions is for the Board as a whole to approve any material transactions involving our directors, executive officers or holders of more than 5% of our outstanding capital stock.
On October 28, 2022, we entered into an executive employment agreement with James Ballengee (the “Ballengee Employment Agreement”) with respect to our appointment of Mr. Ballengee as Chief Executive Officer and Chairman of the Board of Directors. Pursuant to the Ballengee Employment Agreement, Mr. Ballengee will receive annual compensation of $1,000,000 payable in shares of our common stock, priced at the volume weighted average price (VWAP) for the five trading days preceding the date of the Ballengee Employment Agreement and each anniversary thereof (the “CEO Compensation”). The CEO Compensation is subject to satisfaction of Nasdaq rules, the provisions of our equity incentive plan and other applicable requirements and shall be accrued if such issuance is due prior to satisfaction of such requirements. Additionally, Mr. Ballengee shall be eligible for a discretionary performance bonus. The Ballengee Employment Agreement may be terminated by either party for any or no reason, by providing a five days’ notice of termination. As of December 31, 2022, we have accrued salary owing to Mr. Ballengee of $178,082. Mr. Ballengee’s salary will be paid in shares of our common stock, priced based on the volume-weighted average price for the preceding five (5) NASDAQ trading days prior to the Effective Date or annual anniversary of his Employment Agreement, as applicable. The five (5) day volume-weighted average price of our common stock for the salary in 2022 was $1.083. As a result, we are required to issue Mr. Ballengee 164,434 shares of our common stock as payment for his salary for 2022. At the time we entered into the Employment Agreement with Mr. Ballengee he was the beneficial holder of approximately 16.66% of our outstanding common stock.
On October 24, 2022, the Board of Directors resolved to increase their compensation to (i) $50,000 per year in cash effective August 1, 2022, in equal quarterly payments, with the first such payment, in the amount of $12,500 due November 1, 2022 and, thereafter, $12,500 every February 1, May 1, August 1 and November 1, and (ii) 100,000 stock options priced at $2.50 per share, vesting immediately. In addition, the Board of Directors approved a one-time payment of $10,000 to each Mr. Trent Staggs and Mr. Al Ferrara for serving as the Chairperson of the Compensation Committee and Chairperson of the Audit Committee of the Board of Directors, respectively, payable on November 1, 2022. Al Ferrara resigned from the Audit Committee and Board of Directors on November 28, 2022. Trent Staggs resigned from the Compensation Committee and the Board of Directors on January 4, 2023. Matthew Balk resigned from the Board of Directors on January 16, 2023.
In June 2022, we entered into employment agreements with our former Chief Executive Officer, and our Chief Financial Officer, which provided for annual base salaries of $375,000 and $350,000, respectively, and provided for incremental increases in their salaries upon our achievement of specific performance metrics. These executives are currently accruing substantial portions of the base salaries. The employment agreements provided for the grant of stock options to the Chief Executive Officer and Chief Financial Officer to purchase up to 955,093 and 917,825 shares of our common stock, respectively, at an exercise price equal to 110% and 100% of the fair market value of our common stock on the date of grant. The stock options vest after two years of continuous employment, subject to acceleration if terminated without cause or resignations for good reason. The agreements also provided that it was anticipated that the executives receive bonuses for 2022 which would be determined by our Compensation Committee and Board of Directors after taking into account the general business performance of the company, including any completed financings and or acquisitions. On September 30, 2022, our Board of Directors received notice from Matthew Nicosia, our former Chief Executive Officer and Chairman of the Board of Directors of his resignation from such positions. Such resignations are not the result of any disagreement with us on any matter relating to our operations, policies or practices. Mr. Nicosia vested in 503,935 of these stock options before his resignation without good reason with the remainder of his stock options were cancelled. As of December 31, 2022, we owed our Chief Financial Officer. $700,532 in accrued compensation and benefits. As of December 31, 2022, we owed Mr. Nicosia. $402,805 in accrued compensation and benefits.
45
Viva Wealth Fund I, LLC (VWFI), which is managed by Wealth Space LLC, has continued its private offering of up to $25,000,000 in convertible notes for the manufacture of one or more RPC machines. As of December 31, 2022, VWFI has raised $11,750,000. As of December 31, 2022, VWFI has paid $2,266,964 to Dzign Pro Enterprises, LLC (Dzign Pro) for engineering services related to our RPCs, site planning, and infrastructure, which entity shares a common executive with VWFI. As of December 31, 2022, VWFI also entered into a master revolving note payable to Dzign Pro in the amount of $300,000, which accrues 5% interest per annum, has a maturity date of July 14, 2024, where no payments are made prior to the maturity date unless at the option of the fund. VWFI also entered into a master revolving note payable to Van Tran Family LP, which is an affiliate of WealthSpace, LLC, the VWFI Fund Manager, in the amount of $599,500, which accrues 6% interest per annum, has a maturity date of October 11, 2023, where no payments are made prior to the maturity date unless at the option of the fund.
On June 15, 2022, we entered into a Membership Interest Purchase Agreement (the “MIPA”), with Jorgan Development, LLC, (“Jorgan”) and JBAH Holdings, LLC, (“JBAH” and, together with Jorgan, the “Sellers”), as the equity holders of Silver Fuels Delhi, LLC (“SFD”) and White Claw Colorado City, LLC (“WCCC”) whereby, at closing, which occurred on August 1, 2022, we acquired all of the issued and outstanding membership interests in each of SFD and WCCC (the “Membership Interests”), making SFD and WCCC our wholly-owned subsidiaries. The purchase price for the Membership Interests was approximately $32.9 million paid for by us with a combination of shares of our common stock, amount equal to 19.99% of the number of issued and outstanding shares of our common stock immediately prior to issuance, and secured three-year promissory notes issued by us in favor of the Sellers (the “Notes”). The principal amount of the Notes, together with any and all accrued and unpaid interest thereon, will be paid to the Sellers on a monthly basis in an amount equal to the Monthly Free Cash Flow beginning on August 20, 2022, and continuing thereafter on the twentieth (20th) calendar day of each calendar month thereafter, as set forth in the MIPA. At the time of the closing of these transactions Jorgan, JBAH, and our newly hired CEO, James Ballengee were not considered related parties. As James Ballengee is now our Chief Executive Officer and is the beneficiary of Jorgan and JBAH, and the Sellers now own approximately 16.66% of our outstanding common shares, certain transactions, as noted below, related to Jorgan, JBAH, and James Ballengee are now considered related party transactions.
The consideration for the membership interests included the Notes in the amount of $286,643 to JBAH and $28,377,641 to Jorgan, which accrue interest of prime plus 3% on the outstanding balance of the notes. Under the MIPA, we have committed to make a payment to Jorgan and JBAH on or before February 1, 2024 in the amounts of $16,306,754 to Jorgan and $164,715 to JBAH, whether in cash or unrestricted common stock. In the event of a breach of the terms of the Notes, the sole and exclusive remedy of the holder of the notes will be to unwind the MIPA transaction. The principal amount of the Notes, together with any and all accrued and unpaid interest thereon, will be paid to on a monthly basis in an amount equal to the Monthly Free Cash Flow continuing thereafter on the twentieth (20th) calendar day of each calendar month thereafter. Monthly Free Cash Flow means cash proceeds received by SFD and WCCC from its operations minus any capital expenditures (including, but not limited to, maintenance capital expenditures and expenditures for personal protective equipment, additions to the land/current facilities and pipeline connections) and any payments on the lease obligations of SFD and WCCC. Subsequent to September 30, 2022, we entered into an agreement amending the Notes, whereby, as soon as is practicable, following and subject to the approval of our shareholders, and provided there are no applicable prohibitions under the rules of The Nasdaq Capital Market or other restrictions, we will issue 7,042,254 restricted shares of our common stock as a payment of $10,000,000 toward the principal of the Notes on a pro rata basis (the “Note Payment”), reflecting a conversion price of $1.42 per share. 6,971,831 shares will be issued to Jorgan and $9,900,000 of principal owed to Jorgan will be cancelled and 70,423 shares will be issued to JBAH and $100,000 of principal owed to JBAH will be cancelled. Once a registration statement registering the shares for the Note Payment is declared effective by the SEC, the Note Payment will count against the threshold payment amount, as defined in the notes and the MIPA. As of December 31, 2022 we have accrued interest of approximately $247,914 and made cash payments of $1,565,090.
46
In the business combination of acquiring WCCC we also acquired WCCC’s Oil Storage Agreement with White Claw Crude, LLC (“WC Crude”), who shares a beneficiary, James Ballengee, with Jorgan and JBAH. Under this agreement, WC Crude has the right, subject to the payment of service and maintenance fees, to store volumes of crude oil and other liquid hydrocarbons at a certain crude oil terminal operated by WCCC. WC Crude is required to pay $150,000 per month even if the storage space is not used. The agreement expires on December 31, 2031. Since acquiring this contract on August 1, 2022 we have received tank storage revenue of approximately $750,000.
In the business combination of acquiring SFD, we acquired an amended Crude Petroleum Supply Agreement with WC Crude (the “Supply Agreement”), under which WC Crude supplies volumes of Crude Petroleum to SFD, which provides for the delivery to SFD a minimum of 1,000 sourced barrels per day, and includes a guarantee that when SFD resells these barrels, if SFD does not make at least a $5.00 per barrel margin on the oil purchased from WC Crude, then WC Crude will pay to SFD the difference between the sales price and $5.00 per barrel. In the event that SFD makes more than $5.00 per barrel, SFD will pay WC Crude a profit-sharing payment in the amount equal to 10% of the excess price over $5.00 per barrel, which amount will be multiplied by the number of barrels associated with the sale. The Supply Agreement expires on December 31, 2031. Since acquiring this contract on August 1, 2022 we have made crude oil purchases from WC Crude of $25,239,962. In addition, SFD entered into a sales agreement on April 1, 2022 with WC Crude to sell a natural gas liquid product to WC Crude. SFD sells the NGL stream at cost to WC Crude. We produced and sold natural gas liquids to WC Crude in the amount of $5,890,910 as of December 31, 2022.
In the business combination of acquiring SFD and WCCC we also entered into a Shared Services Agreement with Endeavor Crude, LLC (“Endeavor”), who shares a beneficiary, James Ballengee, with Jorgan and JBAH. Under this agreement, we have the right, but not the obligation to use Endeavor for consulting services. Since entering into this contract on August 1, 2022, we have paid Endeavor $37,993.
In September 2020, we entered into a consulting contract with LBL Professional Consulting, Inc. (“LBL”), of which our Chief Financial Officer is also an officer, which remains in effect. For twelve months ended December 31, 2022, LBL invoiced the Company for $340,484. On December 17, 2020 the Company granted non-statutory stock options to LBL to purchase 333,334 shares of common stock, which was cancelled on September 1, 2022 by the parties. Our Chief Financial Officer is not the beneficiary of the Company and is not permitted to participate in any discussion, including LBL’s board meetings, regarding any Company stock that LBL may own at any time.
We have an existing note payable issued to Triple T, which is owned by Dr. Khalid Bin Jabor Al Thani, the 51% majority-owner of Vivakor Middle East LLC The note is interest free, has no fixed maturity date and will be repaid from revenues generated by Vivakor Middle East LLC. As of December 31, 2022 the balance owed was $342,830.
On January 20, 2021, we entered into a worldwide, exclusive license agreement with TBT Group, Inc. (of which an independent Vivakor Board member at the time was a 7% shareholder of TBT Group, Inc.) to license piezo electric and energy harvesting technologies for creating self-powered sensors for making smart roadways. We paid $25,000 and 16,667 shares of restricted common stock upon signing and $225,000 as of April 5, 2022. When the licensor delivers to us data showing that the sensor performs based on mutually defined specifications and all designs for the sensor are completed, we shall pay an additional $250,000 and 16,667 shares of restricted common stock. Upon the delivery of a mutually agreed working prototype, we will pay licensor $250,000 and 16,667 shares of restricted common stock. Upon commercialization of the product, we will pay licensor $250,000 and 33,333 shares of restricted common stock. TBT shall have the option, at its sole discretion, to convert the license to a non-exclusive license if we fail to pay $500,000 to TBT for sensor inventory per year, which will commence after the second anniversary of product commercialization. We shall share in the development costs of the sensor technology to the time of commercialization. From May 2021 through March 3, 2022, the parties amended the license agreement to extend the terms of the first milestone to March 4, 2022, of which we paid $15,000 as consideration for the extensions and $225,000 to be paid on March 4, 2022.
Policy on Future Related-Party Transactions
All future transactions between us and our officers, directors, principal stockholders and their affiliates will be approved by the audit committee, or a similar committee consisting of entirely independent directors, according to the terms of our Code of Business Conduct and Ethics and our Related-Party Transaction Policies and Procedures.
47
Item 14 - Principal Accounting Fees and Services
The aggregate fees billed for the two most recently completed fiscal periods ended December 31, 2022 and December 31, 2021 for professional services rendered by our independent registered public accounting firm auditors for the audit of our annual consolidated financial statements, quarterly reviews of our interim consolidated financial statements and services normally provided by independent accountants in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Audit Fees | $ | 383,535 | $ | 172,000 | ||||
| Audit Related Fees | 158,108 | 56,288 | ||||||
| Tax Fees | 33,149 | 10,500 | ||||||
| Total | $ | 574,792 | $ | 238,788 | ||||
In the above table, Audit Fees are fees billed by our company’s external auditor for services provided in auditing our company’s annual financial statements for the subject year. “Tax fees” are fees billed for professional services rendered for tax compliance, tax advice and tax planning. The audit fees include review of our interim financial statements and year-end audit.
48
PART IV
Item 15 - Exhibits and Financial Statement Schedules
The following documents are filed as part of this Annual Report on Form 10-K:
| a) | Financial Statements: |
Our financial statements and the Report of Independent Registered Public Accounting Firm are included herein on page F-2.
| b) | Financial Statement Schedules: |
The financial statement schedules are omitted as they are either not applicable or the information required is presented in the financial statements and notes thereto on page F-1.
| c) | Exhibits: |
49
EXHIBIT INDEX
50
| * | Management contract or compensatory plan or arrangement. |
| ** | These exhibits are being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. |
51
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 hereunto duly authorized.
| Vivakor, Inc. | ||
| Date: May 24, 2023 | By: | /s/ James Ballengee |
| James Ballengee | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Signature | Title | Date | ||
| /s/ James Ballengee | Chief Executive Officer and Director | May 24, 2023 | ||
| James Ballengee | (Principal Executive Officer) | |||
| /s/ Tyler Nelson | Chief Financial Officer and Director | May 24, 2023 | ||
| Tyler Nelson | (Principal
Accounting Officer and Principal Financial Officer) |
|||
| /s/ David Natan | Director | May 24, 2023 | ||
| David Natan | ||||
| /s/ John Harris | Director | May 24, 2023 | ||
| John Harris | ||||
| /s/ Albert Johnson | Director | May 24, 2023 | ||
| Albert Johnson | ||||
52
VIVAKOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Vivakor, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vivakor, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year ended December 31, 2022, 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, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
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 audit. 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 audit 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 audit 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 audit 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 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 audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2022.
May 24, 2023
F-2
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Vivakor, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Vivakor, Inc. (the Company) as of December 31, 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on the entity’s consolidated financial statements based on our audit. 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 audit 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 audit 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 entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Macias Gini & O’Connell LLP
Irvine, CA 92618
We have served as the Company’s auditor since 2021, which ended in 2022
April 15, 2022
F-3
VIVAKOR, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Cash and cash equivalents attributed to variable interest entity | ||||||||
| Accounts receivable, less allowances of | ||||||||
| Prepaid expenses | ||||||||
| Marketable securities | ||||||||
| Inventories | ||||||||
| Precious metal concentrate | ||||||||
| Other assets | ||||||||
| Total current assets | ||||||||
| Other investments | ||||||||
| Notes receivable, less allowances of $ | ||||||||
| Property and equipment, net | ||||||||
| Rights of use assets- operating leases | ||||||||
| License agreements, net | ||||||||
| Intellectual property, net | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liabilities, current | ||||||||
| Finance lease liabilities, current | ||||||||
| Loans and notes payable, current | ||||||||
| Loans and notes payable, current attributed to variable interest entity | ||||||||
| Long-term debt (working interest royalty programs), current | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, long term | ||||||||
| Finance lease liabilities, long term | ||||||||
| Loans and notes payable, long term | ||||||||
| Long-term debt (working interest royalty programs) | ||||||||
| Deferred income tax liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Convertible preferred stock, $ par value; shares authorized;(1) | ||||||||
| Series A- and issued and outstanding, respectively(1) | ||||||||
| Common stock, $ par value; shares authorized; and were issued and outstanding as December 31, 2022 and 2021, respectively(1) | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Vivakor, Inc. stockholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| (1) |
See accompanying notes to consolidated financial statements
F-4
VIVAKOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Product revenue - third parties | $ | $ | ||||||
| Product revenue - related parties | ||||||||
| Total revenues | ||||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Bad debt expense | ||||||||
| Impairment loss | ||||||||
| Amortization and depreciation | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Unrealized loss on marketable securities | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain on disposition of asset | ||||||||
| Other income | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ||||
| Loss before provision for income taxes | ( | ) | ( | ) | ||||
| Benefit for income taxes | ||||||||
| Consolidated net loss | ( | ) | ( | ) | ||||
| Less: Net loss attributable to noncontrolling interests | ( | ) | ( | ) | ||||
| Net loss attributable to Vivakor, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Dividend on preferred stock | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| Basic and diluted net loss per share(1) | $ | ( | ) | $ | ( | ) | ||
| Basic weighted average common shares outstanding(1) | ||||||||
| (1) |
See accompanying notes to consolidated financial statements
F-5
VIVAKOR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Series
A Preferred Stock | Common Stock | Additional Paid-in | Treasury | Accumulated | Non-controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Interest | Equity | ||||||||||||||||||||||||||||
| December 31, 2020(1) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Common Stock issued for services(1) | - | |||||||||||||||||||||||||||||||||||
| Common Stock issued for a reduction of liabilities(1) | - | |||||||||||||||||||||||||||||||||||
| Common Stock issued for the purchase of a license(1) | ||||||||||||||||||||||||||||||||||||
| Conversion of temporary equity Series B, B-1, and C-1 Preferred Stock to Common Stock(1) | - | |||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of noncontrolling interest for a reduction of debt | - | - | ||||||||||||||||||||||||||||||||||
| Dividend paid in Series B-1 Preferred Stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| December 31, 2021(1) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Common Stock issued for stock awards | - | ( | ) | |||||||||||||||||||||||||||||||||
| Common Stock issued for a reduction of liabilities | - | |||||||||||||||||||||||||||||||||||
| Conversion of Series A Preferred Stock to Common Stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Common Stock issued for cash | ||||||||||||||||||||||||||||||||||||
| Common stock issued for fractional shares from reverse stock split | ||||||||||||||||||||||||||||||||||||
| Common stock issued as part consideration for the purchase of Silver Fuels Delhi, LLC and White Claw Colorado City, LLC | ||||||||||||||||||||||||||||||||||||
| Stock options issued for services | - | - | ||||||||||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Distributions by noncontrolling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of noncontrolling interest for a reduction of debt | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| (1) |
See accompanying notes to consolidated financial statements
F-6
VIVAKOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Consolidated net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment loss | ||||||||
| Bad debt expense | ||||||||
| Forgiveness of notes payable | ( | ) | ( | ) | ||||
| Common stock options issued for services | ||||||||
| Common stock issued for services | ||||||||
| Stock-based compensation | ||||||||
| Unrealized loss- marketable securities | ||||||||
| Gain on disposal of asset | ( | ) | ( | ) | ||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Inventory | ||||||||
| Other assets | ( | ) | ||||||
| Right of use assets- finance leases | ||||||||
| Right of use assets- operating leases | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ||||||
| Financing lease liabilities | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Interest on notes receivable | ( | ) | ( | ) | ||||
| Interest on notes payable | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
| Proceeds from notes receivable | ||||||||
| Payment on costs of patents | ( | ) | ||||||
| Acquisition of assets | ||||||||
| Purchase of a technology license | ( | ) | ||||||
| Proceeds from disposal of equipment | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Payment of long-term debt | ( | ) | ||||||
| Proceeds from loans and notes payable | ||||||||
| Proceeds from sale of common stock | ||||||||
| Payment of notes payable | ( | ) | ( | ) | ||||
| Distributions to noncontrolling interest | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL CASHFLOW INFORMATION: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| Noncash transactions: | ||||||||
| Conversion of Series A, B, B-1, and C-1 Preferred Stock to Common Stock | $ | $ | ||||||
| Common stock issued for a reduction in liabilities | $ | $ | ||||||
| Conversion of note receivable to equity investment | ||||||||
| Noncontrolling interest issued for a reduction in liabilities | $ | $ | ||||||
| Preferred stock Series C-1 issued for a reduction in liabilities | $ | $ | ||||||
| Common stock issued for the purchase of a license | $ | $ | ||||||
| Capitalized interest on construction in process | $ | $ | ||||||
| Dividend paid in Series B-1 Preferred Stock | $ | $ | ||||||
| Common stock and note payable issued in the acquisition of Silver Fuels Delhi, LLC and White Claw Colorado City, LLC | $ | $ | ||||||
| Sale of marketable securities for note receivable | $ | |||||||
| Accounts payable on purchase of equipment | $ | |||||||
See accompanying notes to consolidated financial statements
F-7
VIVAKOR, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Vivakor, Inc. (collectively “we”, “us,” “our,” “Vivakor” or the “Company”) is a socially responsible operator, acquirer and developer of technologies and assets in the oil and gas industry, as well as, related environmental solutions. Currently, our efforts are primarily focused on operating crude oil gathering, storage and transportation facilities, as well as contaminated soil remediation services. The Company was originally organized on November 1, 2006 as a limited liability company in the State of Nevada as Genecular Holdings, LLC. The Company’s name was changed to NGI Holdings, LLC on November 3, 2006. On April 30, 2008, the Company was converted to a C-corporation and changed its name to Vivakor, Inc. pursuant to Articles of Conversion filed with the Nevada Secretary of State.
On
February 14, 2022, we effected a
COVID-19
On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most U.S. states and many countries have issued policies intended to stop or slow the further spread of the disease.
COVID-19 and the U.S. response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the COVID-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business, or our operations. In March 2020 we temporarily suspended operations in Kuwait and Utah due to COVID-19 government restrictions. Utah and Kuwait have since resumed site preparations for operations. We have experienced supply chain disruptions in building our Remediation Processing Centers (“RPC”) and completing certain refurbishment on our precious metal extraction machines. These suspensions have had a negative impact on our business and there can be no guaranty that we will not need to suspend operations again in the future as a result of the pandemic.
Note 2. Liquidity
We
have historically suffered net losses and cumulative negative cash flows from operations, and as of December 31, 2022, we had an
accumulated deficit of approximately $55.2 million. As of December 31, 2022 and 2021, we
had a working capital deficit of approximately $
The Company has prepared the consolidated financial statements on a going concern basis. If the Company encounters unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures to conserve liquidity. Management cannot provide any assurance that the Company will raise additional capital if needed.
F-8
Note 3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) “FASB Accounting Standard Codification™” (the “Codification”) which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States.
All figures are in U.S. dollars unless indicated otherwise.
Principles of Consolidation
The consolidated financial statements include the accounts of Vivakor, Inc., its wholly owned and majority-owned active subsidiaries, or joint ventures (collectively, the “Company”). Intercompany balances and transactions between consolidated entities are eliminated. Inactive entities have no value, assets or liabilities. Vivakor has the following wholly and majority-owned subsidiaries: Silver Fuels Delhi, LLC (since August 1, 2022), White Claw Colorado City, LLC (since August 1, 2022), Vivaventures Remediation Corporation, a Texas corporation, Vivaventures Management Company, Inc., Vivaventures Energy Group, Inc. (99%), Vivaventures Oil Sands, Inc., Vivasphere, Inc., and Vivakor Middle East, LLC (49%, consolidated). Vivakor manages and consolidates RPC Design and Manufacturing LLC, which includes a noncontrolling interest investment from Vivaopportunity Fund, LLC, which is also managed by Vivaventures Management Company, Inc. Vivakor has common officers with and consolidates Viva Wealth Fund I, LLC.
The
Company follows ASC 810-10-15 guidance with respect to accounting for Variable Interest Entities (“VIE”). A VIE is an entity
that does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties,
or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or
other interest that will absorb portions of a VIE’s expected losses or receive portions of the entity’s expected residual
returns. Variable interests are contractual, ownership, or other pecuniary interests that change with changes in the fair value of the
entity’s net assets. A party is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest,
or combination of variable interests, that provides the party with a controlling financial interest. A party is deemed to have a controlling
financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities
of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses
from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing
reconsideration of whether a reporting entity is the primary beneficiary of a VIE due to changes in facts and circumstances. For the
years ended December 31, 2022 and 2021 the following entities are considered to be a VIE and are consolidated in our consolidated
financial statements: Viva Wealth Fund I, LLC and RPC Design and Manufacturing, LLC. For the years ended December 31, 2022 and 2021
the following entities were considered to be a VIE, but were not consolidated in our consolidated financial statements due to a lack
of the power criterion or the losses/benefits criterion: Vivaventures UTS I, LLC, Vivaventures Royalty II, LLC, Vivaopportunity Fund,
LLC, and International Metals Exchange, LLC. For the years ended December 31, 2022 and 2021 the unaudited financial information
for the unconsolidated VIEs is as follows: Vivaventures UTSI, LLC held assets of $
F-9
RPC
Design and Manufacturing, LLC: The Company established RPC Design and Manufacturing, LLC (“RDM”) in December 2018
with a business purpose of manufacturing custom machinery and selling or leasing the manufactured equipment in long term contracts with
financing or leasing activities to the Company. We own 100% of the voting rights in RDM. We, as the sole general partner of RDM, have
the full, exclusive and complete right, power and discretion to operate, manage and control the affairs of RDM and take certain actions
necessary to maintain RDM in good standing without the consent of the limited partners. RDM has entered into a license agreement with
the Company indicating that while RDM builds custom machinery incorporating the Company’s hydrocarbon extraction technology, RDM
will pay the Company a license fee of $500,000 per Remediation Processing Center manufactured. RDM has been retained by VWFI to assist
in being the plant manager and will manage and direct the manufacturing of the RPCs. RDM’s license fee is waived for RPC manufacturing
for VWFI. Creditors of RDM have no recourse to the general credit of the Company. For the years ended December 31, 2022 and 2021,
investors in RDM have a noncontrolling interest of $
Viva
Wealth Fund I, LLC: The Company assisted in designing and organizing Viva Wealth Fund I, LLC (“VWFI”) in
November 2020, as a special purpose entity, for the purpose of manufacturing, leasing and selling custom equipment solely to
the Company. Wealth Space, LLC, an unaffiliated entity, is the sole manager. The Company has been retained by the manager, who may
assist in the administrative operations. VWFI has also retained the Company to act as its sole plant manager, and we will manage and
direct all of the manufacturing, leasing and selling of custom equipment in behalf of VWFI to the Company. In November 2020,
VWFI commenced a $25,000,000 private placement offering to sell convertible promissory notes, which convert to VWFI LLC units, to
accredited investors to raise funds to manufacture equipment that will expand the Company’s second RPC, amended to manufacture
one separate double capacity RPC. As of December 31, 2022 and 2021, the cash and cash equivalents of this VIE are restricted
solely for the use of proceeds of the VWFI offering (to manufacture RPCs) and cannot be used to settle the obligations of the
reporting entity. As of December 31, 2022 and 2021, the Company has cash attributed to variable interest entities of $
F-10
Business Combinations
We apply the provisions of ASC 805, Business Combinations (ASC 805), in accounting for our acquisitions. ASC 805 requires that we evaluate whether a transaction pertains to an acquisition of assets, or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return to investors. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the business acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the business acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of a business acquisition’s measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
In addition, uncertain tax positions and tax related valuation allowances assumed in a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the business acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when acquired to be cash equivalents.
As of December 31, 2022, the Company had a $750,000 3-month certificate of deposit with B1bank. As of December 31, 2021, the
Company did not have any cash equivalents. The Company places its cash with high credit quality financial institutions. The Company’s
accounts at these institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31,
2022 and 2021, the Company had bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such
financial institutions, the Company annually evaluates the rating of the financial institutions in which it holds deposits. As of December 31,
2022 and 2021, the Company has cash attributed to variable interest entities of $
Accounts Receivable
Accounts
receivable are carried at original invoice amount less an estimated allowance for doubtful accounts, if deemed necessary by management,
and based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts, if any,
by identifying troubled accounts and by using historical experience applied to an aging of accounts. An allowance for doubtful accounts
was considered necessary by management as of December 31, 2021 in the amount of $
Investments
Investments in marketable securities consist of equity securities recorded at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. We analyze our marketable securities in accordance with Accounting Standard Codification 321 (“ASC 321”). Valuations for marketable securities are based on quoted prices for identical assets in active markets.
The
Company had an investment of $800,000 or 800,000,000 shares of common stock, or a diluted 17% equity holding in Scepter Holdings, Inc.
(ticker: BRZL, OTC Markets) and does not have significant influence, and as the stock is traded on an active market, the Company has
classified the investment as trading securities for the years ended December 31, 2022 and 2021 with the change in unrealized gains
and losses on the investment included in the statement of operations (see Note 7). The Company’s prior Chief Executive Officer,
who resigned as of October 6, 2022, had an immediate family member who sat on the board of directors of Scepter Holdings, Inc.
The Company’s common shares have a market value of approximately $
F-11
As
of December 31, 2022 and 2021, the Company owns 1,000 Class A LLC Units in each of the following entities, which are not consolidated:
Vivaopportunity Fund LLC, Vivaventures UTSI, LLC, Vivaventures Royalty II, LLC, and International Metals Exchange, LLC. In aggregate
these units amount to $
Convertible Instruments
The Company reviews the terms of convertible debt and preferred stock for indications requiring bifurcation, and separate accounting for the embedded conversion feature. Generally, embedded conversion features where the ability to physical or net-share settle the conversion option is not within the control of the Company or the number of shares is variable are bifurcated and accounted for as derivative financial instruments. (See Derivative Financial Instruments below). Bifurcation of the embedded derivative instrument requires the allocation of the proceeds first to the fair value of the embedded derivative instrument with the residual allocated to the host instrument. The resulting discount to the debt instrument or the redemption value of convertible preferred securities is accreted through periodic charges to interest expense over the term of the agreements or to dividends over the period to the earliest conversion date using the effective interest rate method, respectively.
Derivative Financial Instruments
The Company does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However, certain other financial instruments, such as warrants to purchase the Company’s common stock and the embedded conversion features of debt and preferred instruments that are not considered indexed to the Company’s common stock are classified as liabilities when either (a) the holder possesses rights to net-cash settlement, (b) physical or net share settlement is not within the control of the Company, or (c) based on its anti-dilutive provisions. In such instances, net-cash settlement is assumed for financial accounting and reporting. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. Fair value for embedded conversion features and option-based derivative financial instruments is determined using the Monte Carlo Simulation or the Black-Scholes Option Pricing Model, respectively.
Other convertible instruments that are not derivative financial instruments are accounted for by recording the intrinsic value of the embedded conversion feature as a discount from the initial value of the instrument and accreting it back to face value over the period to the earliest conversion date using the effective interest rate method.
Leases
The Company follows Accounting Standards Codification 842, Leases (“ASC 842”). We determine if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances.
We
are the lessee in a lease contract when we obtain the right to control the asset. Lease right-of-use (“ROU”) assets represent
our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising
from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the
commencement date. Leases with a lease term of 12 months or less at inception are not recorded on our consolidated balance sheet and
are expensed on a straight-line basis over the lease term in our consolidated statement of operations. We determine the lease term by
assuming the exercise of renewal options that are reasonably certain. As most of our leases do not provide an implicit interest rate,
we use our local incremental borrowing rate based on the information available at the commencement date in determining the present value
of future payments. According to ASC 842, the Company has measured the lease liabilities acquired on August 1, 2022 by measuring the present value of the remaining lease payments, as if the lease were acquired on acquisition date. The right-of-use assets were measured at the same amount as the lease liabilities as adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. Finance ROU assets are included in property, plant, equipment, net (see Note 11). As of December 31, 2022 and
2021, we recorded operating right-of-use assets of $
F-12
Long Lived Assets
The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the fair value of the related asset.
On March 11, 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most U.S. states and many countries have issued policies intended to stop or slow the further spread of the disease. The Company’s Kuwait operations were suspended to comply with the social distancing measures implemented in Kuwait, but in 2022 has allowed for the Company to obtain site personnel visas to recommence operations for site refurbishments. The Company’s Utah operations were temporarily suspended from March through May 2020, but have since resumed in full in its manufacturing of its RPCs, and infrastructure preparations. Currently the operations at the Company’s Vernal plant are limited due to recent, supply and personnel limitations. The Company is not currently producing product toward our off-take agreement due to these recent developments. The Company continues to assess the impact of these limitations, including the impact on our ancillary agreements. Ancillary to our Vernal, Utah operations, the Company have an exclusive license agreement with TBT Group, Inc., under which we are exploring the possibilities of embedding self-powered sensors directly into the asphaltic cement we may generate from the Vernal, Utah RPC utilizing TBT Group’s piezo electric and energy harvesting technologies. For the year ended December 31, 2022 we realized an impairment loss of $447,124 on this license agreement with TBT Group due to the current disruptions at the Vernal, Utah facility.
As of December 31, 2022 we continued to pursue a test facility or third party reactor for our nano catalyst technology that facilitates chemical manufacturing, with a focus on the production of ammonia. The Company received recent quotes for testing or building our own test facilities with new partners for this venture with estimates of cost being over $4 million. The Company does not anticipate pursing this cost of testing at this time. After taking into consideration this new information, we noted that the newly requested capital expenditure to test and scale the business triggered an impairment loss of assets related to our ammonia synthesis assets of $3,254,999.
We have previously extracted and sold precious metals using our extraction machinery and held extracted precious metals from those operations of the machinery for monetization. The operations surrounding our precious metals extraction services were temporarily suspended until recently, although due to these suspended activities and a shift in 2022 of the Company’s focus to the oil and gas industry, we have realized an impairment loss of $1,166,709 surrounding our precious metal concentrate and an impairment loss of $6,269,998 surrounding the extraction machinery.
No impairment charges were incurred during the year ended December 31, 2021.
There can be no assurance that market conditions will not change or demand for the Company’s services will continue, which could result in impairment of long-lived assets in the future.
Property and equipment, net
Property and equipment are stated at cost or fair value when acquired. Depreciation is computed by the straight-line method and is charged to the statement of operations over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the term of the related lease. Impairment losses are recognized for long-lived assets, including definite-lived intangibles, used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are not sufficient to recover the assets’ carrying amount. Impairment losses are measured by comparing the fair value of the assets to their carrying amount.
Interest on long-term debt for the development or manufacturing of Company assets is capitalized to the asset until the asset enters production or use, and thereafter all interest is charged to expense as incurred. Maintenance and repairs are charged to expense as incurred. Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the term of the related lease.
F-13
The carrying amount and accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal and any resulting gain or loss is included in results of operations. The estimated useful lives of property and equipment are as follows:
| Computers, software, and office equipment | ||
| Machinery and equipment | ||
| Vehicles | ||
| Furniture and fixtures | ||
| crude oil gathering, storage, and transportation facilities | ||
| Remediation Processing Centers (heavy extraction and remediation equipment) (“RPC”) | ||
| Leasehold improvements |
Equipment that is currently being manufactured is considered construction in process and is not depreciated until the equipment is placed into service.
Intangible Assets and Goodwill:
We
account for intangible assets and goodwill in accordance with ASC 350 “Intangibles-Goodwill and Other” (“ASC
350”). Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible
assets acquired. Intangible asset amounts represent the acquisition date fair values of identifiable intangible assets acquired. The
fair values of the intangible assets were determined by using the income approach, discounting projected future cash flows based on management’s
expectations of the current and future operating environment. The rates used to discount projected future cash flows reflected a weighted
average cost of capital based on our industry, capital structure and risk premiums including those reflected in the current market capitalization.
Definite-lived intangible assets are amortized over their useful lives, which have historically ranged from
We
assess our intangible assets in accordance with ASC 360 “Property, Plant, and Equipment” (“ASC 360”).
Impairment testing is required when events occur that indicate an asset group may not be recoverable (“triggering events”).
As detailed in ASC 360-10-35-21, the following are examples of such events or changes in circumstances (sometimes referred to as impairment
indicators or triggers): (a) A significant decrease in the market price of a long-lived asset (asset group) (b) A significant adverse
change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition. (c) A significant
adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including
an adverse action or assessment by a regulator (d) An accumulation of costs significantly in excess of the amount originally expected
for the acquisition or construction of a long-lived asset (asset group) (e) A current-period operating or cash flow loss combined with
a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of
a long-lived asset (asset group) (f) A current expectation that, more likely than not, a long-lived asset (asset group) will be sold
or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to
a level of likelihood that is more than 50 percent. We have evaluated our intangible assets and found that certain losses and a delay
in our business plan may have constituted a triggering event for our intangible assets. We performed an analysis and assessed an impairment
loss in the following areas: Currently the operations at the Company’s Vernal plant are limited due to recent, temporary supply
and personnel limitations. The Company is not currently producing product toward our off-take agreement due to these recent developments.
Ancillary to our Vernal, Utah operations, the Company has an exclusive license agreement with TBT Group, Inc., under which we are exploring
the possibilities of embedding self-powered sensors directly into the asphaltic cement we may generate from the Vernal, Utah RPC utilizing
TBT Group’s piezo electric and energy harvesting technologies. For the year ended December 31, 2022 we realized an impairment
loss of $
F-14
The Company performs its annual goodwill impairment test in the fourth quarter each year, and more frequently if facts and circumstances indicate such assets may be impaired, including significant declines in actual or future projected cash flows and significant deterioration of market conditions.
The Company’s goodwill impairment assessment includes a qualitative assessment to determine whether it is more likely than not that the fair value of the goodwill is below its carrying value, each year, and more often if there are significant changes in business conditions that could result in impairment. When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches: 1) market value, using the Company’s stock price plus outstanding debt; 2) discounted cash flow analysis; and 3) multiple of earnings before interest, taxes, depreciation and amortization based upon relevant industry data.
The
estimated fair value of the reporting unit is then compared to its carrying amount, including goodwill. If the estimated fair value exceeds
the carrying amount, goodwill is not considered impaired. If the carrying amount, including goodwill, exceeds its estimated fair value,
any excess of the carrying value of goodwill of the reporting unit over its fair value is recorded as an impairment.
Asset Retirement Obligations
Under
ASC 410-20, Asset Retirement and Environmental Obligations – Asset Retirement Obligations, which relates to accounting requirements
for costs associated with legal obligations to retire tangible, long-lived assets, the Company records an Asset Retirement Obligation
(“ARO”) at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset.
In each subsequent period, liability is accreted over time towards the ultimate obligation amount and the capitalized costs are depreciated
over the useful life of the related asset. The Company did not identify any significant or material cost after review; thus,
Share-Based Compensation
Share-based compensation is accounted for based on the requirements of ASC 718, “Compensation-Stock Compensation’ (“ASC 718”) which requires recognition in the financial statements of the cost of employee, consultant, or director services received in exchange for an award of equity instruments over the period the employee, consultant, or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee, consultant, or director services received in exchange for an award based on the grant-date fair value of the award.
Income tax
Deferred income taxes are provided on the asset and liability method whereby deferred income tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Our annual effective tax rate is based on our income and the tax laws in the various jurisdictions in which we operate. Judgment is required in determining our annual tax expense and in evaluating our tax positions. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the position becomes uncertain based upon one of the following conditions: (1) the tax position is not “more likely than not” to be sustained; (2) the tax position is “more likely than not” to be sustained, but for a lesser amount; or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without considerations of the possibility of offset or aggregation with other tax positions taken. We adjust these reserves, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. See Note 22 for further information on income tax.
F-15
Revenue Recognition
We follow Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”).
The revenue standard contains a five-step approach that entities will apply to determine the measurement of revenue and timing of when it is recognized, including (i) identifying the contract(s) with a customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to separate performance obligations, and (v) recognizing revenue when (or as) each performance obligation is satisfied. The standard requires a number of disclosures intended to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue, and the related cash flows. The disclosures include qualitative and quantitative information about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized from the costs to obtain or fulfill a contract.
Due to the business combination
in which we acquired Silver Fuels Delhi, LLC and White Claw Colorado City, LLC, for the year ended December 31, 2022, our sales
consist of storage services and the sale of crude oil or like products. For the year ended December 31, 2022, disaggregated revenue by customer type was as follows: $
We recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. After completion of our performance obligation, we have an unconditional right to consideration as outlined in our contracts. Due to the nature of our product we do not accept returns. Our receivables will generally be collected in less than three months, in accordance with the underlying payment terms.
For the year ended December 31, 2021, approximately 99% of our sales consisted of the sale of precious metals with a commitment to deliver precious metals to the customer, and revenue is recognized on the settlement date, which is defined as the date on which: (1) the quantity, price, and specific items being purchased have been established, (2) metals have been shipped to the customer, and (3) payment has been received or is covered by the customer’s established credit limit with the Company.
In order to ensure the revenue recognition in the proper period, we review material sales contracts for proper cut-off based upon the business practices and legal requirements of each country.
Related Party Revenues
We sell sale of crude oil or like products and provide storage services
to related parties under long-term contracts. We acquired these contracts in our August 1, 2022 acquisition of Silver Fuels Delhi, LLC
and White Claw Colorado City, LLC. These contracts were entered into in the normal course of our business. Our revenue from related parties
for 2022 was $
Major Customers and Concentration of Credit Risk
The
Company has two major customers, which account for approximately
Contingent liabilities
From time to time the Company may work with success based professional service providers, including securities counsel for private offerings, which may require contingent payments to be made based on the future offering fundraising and financial performance of the offering. In the event that an offering does not perform or is never consummated, the Company may still be required to pay a portion of the success fees for the services provided in preparing the offering. The fair value of the contingent payments would be estimated using the present value of management’s projections of the financial results. Failure to correctly project the financial results of the offering or settlement of legal fees related to the offering could materially impact our results of operations and financial position.
Advertising Expense
Advertising costs are expensed as incurred. The Company did not incur advertising expense for the years ended December 31, 2022 and 2021.
F-16
Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act, or the JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt-out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, we comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non- emerging growth companies.
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and changes in tax laws or rates, as well as clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 became effective for the Company beginning January 1, 2021.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06 Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which improves Convertible Instruments and Contracts in an Entity’s Own Equity and is expected to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas.
In May 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-04 Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), provides a “principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense.” These amendments are effective for fiscal years beginning after December 15, 2021. The Company has adopted this pronouncement and it has not materially impacted our consolidated financial statements.
The FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, in October 2021. The guidance improves the accounting for acquired revenue contracts with customers in a business combination by requiring contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. This guidance will be effective for fiscal years beginning after December 15, 2022, including interim periods within that year, with early adoption permitted. The Company has early adopted this pronouncement and it has not materially impacted our consolidated financial statements.
Basic
net income (loss) per share is calculated by subtracting any preferred interest distributions from net income (loss), all divided by
the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted
net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common share equivalents
outstanding for the period determined using the treasury stock method if their effect is dilutive. Potential dilutive instruments as
of December 31, 2022 and 2021 include the following: convertible notes payable convertible into approximately and
shares of common stock, stock options granted to employees of and shares of common stock, stock options granted to
Board members or consultants of and shares of common stock. The Company also has a warrant outstanding to purchase
F-17
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe our critical accounting estimates relate to the following: Recoverability of current and noncurrent assets, revenue recognition, stock-based compensation, income taxes, effective interest rates related to long-term debt, marketable securities, cost basis investments, lease assets and liabilities, valuation of stock used to acquire assets, derivatives, and fair values of the intangible assets and goodwill related to business combinations.
While our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions.
Fair Value of Financial Instruments
The Company follows Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that requires the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results but did expand certain disclosures.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1: Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (“FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying amounts reported in the consolidated balance sheets for marketable securities are classified as Level 1 assets due to observable quoted prices for identical assets in active markets. The carrying amounts reported in the consolidated balance sheets for cash, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their estimated fair market values based on the short-term maturity of these instruments. The recorded values of notes payable approximate their current fair values because of their nature, rates, and respective maturity dates or durations.
Note 4. Business Combination
On
June 15, 2022, we entered into a Membership Interest Purchase Agreement (the “MIPA”), with Jorgan Development, LLC
(“Jorgan”) and JBAH Holdings, LLC (“JBAH” and, together with Jorgan, the “Sellers”), as the
equity holders of Silver Fuels Delhi, LLC (“SFD”) and White Claw Colorado City, LLC (“WCCC”) whereby, at
closing, which occurred on August 1, 2022, the Company acquired 100% of the issued and outstanding membership interests in each
of SFD and WCCC (the “Membership Interests”), making SFD and WCCC wholly owned subsidiaries of the Company. The purchase
price for the Membership Interests was approximately $32.9 million, after post-closing adjustments, paid for by the Company with
a combination of shares of the issuance of of
the Company’s common stock and secured three-year promissory notes made by the Company in favor of the Sellers in an aggregate
amount of $
F-18
For the acquisition of Silver Fuels Delhi, LLC and White Claw Colorado City, LLC, the following table summarizes the acquisition date fair value of consideration paid, identifiable assets acquired and liabilities assumed:
| Common stock | $ | |||
| Note payable to seller | ||||
| Fair value of total consideration paid | $ | |||
| Net assets acquired and liabilities assumed | ||||
| Assets acquired in business combination | ||||
| Current assets | $ | |||
| Finance lease right-of-use assets (property, plant and equipment) | ||||
| Property, plant and equipment, net | ||||
| Other assets | ||||
| Contract-based intangible assets | ||||
| Total assets acquired | $ | |||
| Liabilities assumed in business combination | ||||
| Current liabilities | $ | ( | ) | |
| Long term liabilities | ( | ) | ||
| Total liabilities acquired | $ | ( | ) | |
| Total net assets acquired | $ | |||
| Goodwill | $ |
The value of goodwill represents SFD and WCCC’s ability to generate profitable operations going forward. Management engaged a valuation expert who performed a valuation study to calculate the fair value of the acquired assets and goodwill. The acquired contracts are amortized over their 9 year, 5 month life of the contracts.
Business combination related costs were expensed as incurred and consisted of various advisory, legal, accounting, valuation and other professional fees of $174,592 for the year ended December 31, 2022. These costs are included in general and administrative expense in our consolidated statement of operations.
Since
the date of acquisition on August 1, 2022 through December 31, 2022 $
| (Unaudited) | ||||||||
| Years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Total net sales | $ | $ | ||||||
| Loss from operations | ||||||||
| Net loss (attributable to Vivakor, Inc.) | $ | $ | ||||||
| Basic and diluted loss per share | ( | ) | ( | ) | ||||
| Weighted average shares outstanding | ||||||||
F-19
Note 5. Accounts receivable
Accounts
receivable primarily relates to sales to trade accounts receivable of customers for crude oil. Differences between the amounts due from
customers less an estimated allowance for doubtful accounts, if deemed necessary by management, and based on a review of all outstanding
amounts on a monthly basis. Management determines the allowance for doubtful accounts, if any, by identifying troubled accounts and by
using historical experience applied to an aging of accounts. As of December 31, 2022 and 2021 an allowance for doubtful accounts
of
Note 6. Prepaid Expenses and Other Assets
As
of December 31, 2022 and 2021, we other assets of $
As of December 31, 2022, our prepaid expenses
of $
Note 7. Marketable Securities
Investments in marketable securities consist of equity securities recorded at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. We analyze our marketable securities in accordance with Accounting Standard Codification 321 (“ASC 321”). Valuations for marketable securities are based on quoted prices for identical assets in active markets. Where marketable securities were found not be part of an actively traded market, we made a measurement alternative election and estimate the fair value at cost of the investment minus impairment.
In
December 2021 we sold shares of common stock of Odyssey Group International, Inc. (“Odyssey”) ticker: ODYY,
OTC Markets in a private transaction for a purchase price of $
The
Company owns shares of common stock of Scepter Holdings, Inc. (“Scepter”), ticker: BRZL, OTC Markets., for a
diluted 17% equity holding in the company. In August 2021 we converted $
As
of December 31, 2022 and 2021, marketable securities were $
F-20
Note 8. Inventories
As
of December 31, 2022, inventories consist of crude oil. The crude oil is related to our oil gathering facility in Delhi, Louisiana. As of December 31, 2022 an impairment loss of $
Note 9. Precious Metal Concentrate
Precious metal concentrate includes metal concentrates located at the Company’s facilities. Concentrates consist of gold, silver, platinum, palladium, and rhodium. Precious metal concentrate was acquired from our funding agreements for extraction operations with Vivaventures Precious Metals LLC from 2013 through 2016. Our precious metal concentrate requires further refining to be sold as a finished product and is valued at the lower of cost or market (net realizable value).
As
of December 31, 2021, the Company carried a refining reserve of $
Note 10. Notes Receivable
Notes receivable are carried at the receivable amount less an estimated reserve for troubled accounts. Management determines the reserve for troubled accounts by analyzing notes receivable for non-performance, including the payment history of the notes receivable.
Notes receivable consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| PLC International Investments, Inc.(a) | ||||||||
| TMC Capital, LLC(b) | ||||||||
| Total Notes Receivable | $ | $ | ||||||
| (a) |
| (b) |
F-21
Note 11. Property and Equipment
The following table sets forth the components of the Company’s property and equipment at December 31, 2022 and 2021:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Depreciation/Amortization | Net Book Value | Gross Carrying Amount | Accumulated Depreciation | Net Book Value | |||||||||||||||||||
| Office furniture | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Vehicles | ||||||||||||||||||||||||
| Equipment | ||||||||||||||||||||||||
| Property | ||||||||||||||||||||||||
| Finance lease- Right of use assets | ||||||||||||||||||||||||
| Precious metal extraction machine- 1 ton | ||||||||||||||||||||||||
| Precious metal extraction machine- 10 ton | ||||||||||||||||||||||||
| Construction in process: | ||||||||||||||||||||||||
| Bioreactors | ||||||||||||||||||||||||
| Wash Plant Facilities | ||||||||||||||||||||||||
| Nanosponge/Cavitation device | ||||||||||||||||||||||||
| Remediation Processing Unit 1 | ||||||||||||||||||||||||
| Remediation Processing Unit 2 | ||||||||||||||||||||||||
| Remediation Processing Unit System A | ||||||||||||||||||||||||
| Remediation Processing Unit System B | ||||||||||||||||||||||||
| Total fixed assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
For
the year ended December 31, 2021 the Company paid $
The operations surrounding our precious metals extraction services were temporarily suspended until recently, although due to these suspended activities and a shift in 2022 of the Company’s focus to the oil and gas industry, we have realized an impairment loss of $6,269,998 surrounding the extraction machinery for the year ended December 31, 2022.
As of December 31, 2022 we continued to pursue a test facility or third party reactor for our nano catalyst technology that facilitates chemical manufacturing, with a focus on the production of ammonia, which includes our bioreactor equipment. The Company received recent quotes for testing or building our own test facilities with new partners for this venture. After taking into consideration this new information, we noted that the newly requested capital expenditure to test and scale the business triggered an impairment loss of assets related to our ammonia synthesis assets, including our bioreactors. The impairment loss related to our bioreactors was $1,440,000 for the year ended December 31, 2022.
F-22
Note 12. License Agreements
On
August 17, 2017, the Company purchased rights to an exclusive license for the applications and implementations involving the Nanosponge
Technology and to use and develop the Nanosponge as we see fit at our sole discretion. The Nanosponge contribution in the Company’s
processes is to facilitate a cracking process whereby remediated or extracted oil may be further refined from a crude product to a diesel
fuel. The license was valued at $
On
January 20, 2021, the Company entered into a worldwide, exclusive license agreement with TBT Group, Inc. (of which an
independent Vivakor Board member is a 7% shareholder) to license piezo electric and energy harvesting technologies for creating
self-powered sensors for making smart roadways. The Company paid $25,000 and 16,667 shares of restricted common stock upon signing.
On March 4, 2022, the Company paid licensor an additional $225,000. When the licensor delivers to the Company data
showing that the sensor performs based on mutually defined specifications and all designs for the sensor are completed, Company
shall pay an additional $250,000 and 16,667 shares of restricted common stock. Upon the delivery of a mutually agreed working
prototype, Company will pay licensor $250,000 and 16,667 shares of restricted common stock. Upon commercialization of the product,
the Company will pay licensor $250,000 and 33,333 shares of restricted common stock. TBT shall have the option, at its sole
discretion, to convert the license to a non-exclusive license if the Company fails to pay $500,000 to TBT for sensor inventory per
year, which will commence after the second anniversary of product commercialization. The Company shall share in the development
costs of the sensor technology to the time of commercialization.
The Company amended the agreement multiple times in 2021 to extend the terms of the first milestone payment of $
F-23
Note 13. Intellectual Property, Net and Goodwill
The following table sets forth the components of the Company’s intellectual property at December 31, 2022 and 2021:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||
| Extraction Technology patents | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Extraction Technology | ||||||||||||||||||||||||
| Acquired crude oil contracts | ||||||||||||||||||||||||
| Ammonia synthesis patents | ||||||||||||||||||||||||
| Total Intellectual property | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The changes in the carrying amount of goodwill are as follows:
| Goodwill | ||||
| January 1, 2021 | $ | |||
| Acquisition | ||||
| December 31, 2022 | $ | |||
There is no goodwill as of December 31, 2021.
On
August 1, 2022, the Company closed a Membership Interest Purchase Agreement, (the “MIPA”), with Jorgan Development,
LLC, and JBAH Holdings, LLC, as the equity holders of Silver Fuels Delhi, LLC, a Louisiana limited liability company (“SFD”)
and White Claw Colorado City, LLC, a Texas limited liability company (“WCCC”) whereby, the Company acquired all of the issued
and outstanding membership interests in each of SFD and WCCC making SFD and WCCC wholly owned subsidiaries of the Company. The purchase
price for the Membership Interests is approximately $
In the business combination of acquiring WCCC we also acquired WCCC’s Oil Storage Agreement with White Claw Crude, LLC (“WC Crude”), of which our CEO is a beneficiary. Under this agreement, WC Crude has the right, subject to the payment of service and maintenance fees, to store volumes of crude oil and other liquid hydrocarbons at a certain crude oil terminal operated by WCCC. WC Crude is required to pay $150,000 per month even if the storage space is not used. The agreement expires on December 31, 2031.
In the business combination of acquiring SFD, we acquired an amended Crude Petroleum Supply Agreement with WC Crude (the “Supply Agreement”), under which WC Crude supplies volumes of Crude Petroleum to SFD, which provides for the delivery to SFD a minimum of 1,000 sourced barrels per day, and includes a guarantee that when SFD resells these barrels, if SFD does not make at least a $5.00 per barrel margin on the oil purchased from WC Crude, then WC Crude will pay to SFD the difference between the sales price and $5.00 per barrel. In the event that SFD makes more than $5.00 per barrel, SFD will pay WC Crude a profit-sharing payment in the amount equal to 10% of the excess price over $5.00 per barrel, which amount will be multiplied by the number of barrels associated with the sale. The Supply Agreement expires on December 31, 2031.
F-24
Management
hired a valuation expert who performed a valuation study to calculate the fair value of the acquired assets, assumed liabilities and goodwill. Based on the valuation
study, the fair values of goodwill and the acquired contracts (described above) were $
The
Company entered into a Contribution Agreement dated January 5, 2015, where proprietary information and intellectual property related
to certain petroleum extraction technology (also known as hydrocarbon extraction technology) suitable to extract petroleum (or hydrocarbons)
from tar sands and other sand-based ore bodies, and all related concepts and conceptualizations thereof (the “Extraction Technology”)
was contributed to VivaVentures Energy Group, Inc., a 99% majority-owned subsidiary of Vivakor, and was assessed a fair market value
of $
In
2019, the Company began the process of patenting the Extraction Technology and all of its developments and additions since the acquisition,
and we have filed a series of patents and capitalized the costs of these patents. As of December 31, 2022 and 2021, the capitalized
costs of these patents are $
The
Company entered into an asset purchase agreement dated September 5, 2017, where two patents (US patent number 7282167- Method
and apparatus for forming nano-particles and US patent number 9272920- System and
method for ammonia synthesis) were purchased and attributed a fair market value of $
The
patents were being amortized over their useful life of
F-25
Note 14. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Office access deposits | ||||||||
| Accrued compensation | ||||||||
| Unearned revenue | ||||||||
| Accrued interest (various notes and loans payable | ||||||||
| Accrued interest (working interest royalty programs) | ||||||||
| Accrued tax penalties and interest | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
As
of December 31, 2022, our accounts payable are primarily made up of trade
payable for the purchase of for crude oil. Trade accounts payables in the amount of $
As
of December 31, 2021 the Company accrued $
In March 2023, the Compensation Committee reviewed the Company’s
2022 results, including, but not limited to, the progress of the Company’s historic business and certain acquisitions completed
by the Company, and approved discretionary bonuses, which have been accrued as of December 31, 2022, for the Chief Financial Officer,
and an acquisition consultant, in the amounts of $
Note 15. Stock Payable
In
2019, the Company had an outstanding payable of $
F-26
Note 16. Loans and Notes Payable
Loans and notes payable and their maturities consist of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Various promissory notes and convertible notes(a) | $ | $ | ||||||
| Novus Capital Group LLC Note(b) | ||||||||
| Triple T Notes(c) | ||||||||
| National Buick GMC(d) | ||||||||
| Various Convertible Bridge Notes(e) | ||||||||
| Blue Ridge Bank(f) | ||||||||
| Small Business Administration(g) | ||||||||
| JP Morgan Chase Bank(h) | ||||||||
| Jorgan Development, LLC(i) | ||||||||
| Various variable interest promissory notes(j) | ||||||||
| Total Notes Payable | $ | $ | ||||||
| Loans and notes payable, current | $ | $ | ||||||
| Loans and notes payable, current attributed to variable interest entity | ||||||||
| Loans and notes payable, long term | $ | $ | ||||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
| (a) |
| (b) |
| (c) |
F-27
| (d) |
| (e) |
Throughout
2021 and 2020 the Company entered into convertible promissory notes with an aggregate principal of $
On October 13, 2020, the Company entered into a convertible promissory note in an amount of $280,500 having an interest rate of 12% per annum. The note bears a 10% Original Issue Discount. The loan shall mature in 1 year and may be convertible at the lower of $12.00 or 80% of the lowest median daily traded price over ten trading days prior to conversion, but in the event of a Qualified Uplist the note may be converted at a 30% discount to market. The Company also issued 3,333 restricted shares with no registration rights in conjunction with this note, which was recorded as a debt discount in the amount of $44,000, which is amortized to interest expense over the term of the agreements using the effective interest method. On March 28, 2021 the parties amended this agreement to state that in no event shall the conversion price be lower than $3.00 per share. In October 2021 the parties agreed to extend the maturity of this loan to April 13, 2022 in exchange for an increase in principal owed of $30,000. This note was converted to common stock as of April 13, 2022.
On February 4, 2021, the Company entered into a convertible promissory note in an amount of $277,778 having an interest rate of 12% per annum. The note bears a 10% Original Issue Discount. The loan shall mature in 1 year and may be convertible at the lower of $12.00 or 80% of the lowest median daily traded price over ten trading days prior to conversion, but in the event of a Qualified Uplist the note may be converted at a 30% discount to market. The Company also issued 3,333 restricted shares with no registration rights in conjunction with this note, which was recorded as a debt discount in the amount of $36,000, which is amortized to interest expense over the term of the agreements using the effective interest method. On March 28, 2021 the parties amended this agreement to state that in no event shall the conversion price be lower than $3.00 per share. In February 2022 the parties agreed to extend the maturity of this loan to August 8, 2022 in exchange for an increase in principal owed of $25,000. This note was converted to common stock as of April 13, 2022.
| (f) |
F-28
| (g) |
| (h) |
| (i) |
| (j) |
F-29
Note 17. Commitments and Contingencies
Finance Leases
In the business combination where we acquired Silver Fuels Delhi, LLC (SFD) and White Claw Colorado City, LLC (WCCC), we acquired certain finance leases contracts and liabilities as described below:
On
March 17, 2020, the SFD entered into two sale and leaseback transactions with Maxus Capital Group, LLC (“Maxus”).
The first transaction involved the Company assigning twelve storage tanks and other equipment for consideration of $
We
are required to make minimum cash reserve payments of at least $
On
December 28, 2021, the WCCC entered into a sale and leaseback transaction with Maxus, where WCCC assigned the crude oil, natural
gas liquids, condensate, and liquid hydrocarbon receipt, throughput, processing, gathering, and delivery terminal, commonly known as
the China Grove Station (the “China Grove Station”), located in Colorado City, Texas to Maxus for consideration of approximately $
F-30
The following table reconciles the undiscounted cash flows for the finance leases as of December 31, 2022 to the finance lease liability recorded on the balance sheet:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Total undiscounted lease payments | ||||
| Less: Imputed interest | ||||
| Present value of lease payments | ||||
| Add: carrying value of lease obligation at end of lease term | ||||
| Total finance lease obligations | $ | |||
| Finance lease liabilities, current | $ | |||
| Finance lease liabilities, long-term | $ | |||
| Weighted-average discount rate | % | |||
| Weighted-average remaining lease term (months) |
The discount rate is the Company’s incremental borrowing rate, or the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Based on an assessment of the Company’s borrowings at the time the finance leases were entered into, the incremental borrowing rate was determined to be 18.00%.
Operating Leases
Commencing
on September 15, 2019, the Company entered into a five-year lease with Jamboree Center 1 & 2 LLC covering approximately 6,961
square feet of office space in Irvine, CA. Under the terms of the lease agreement, we are required to make the following monthly lease
payments: Year 1 $
On
February 1, 2022, the Company entered into a lease agreement for approximately 2,533 square feet of office and manufacturing space
located in Las Vegas, Nevada. Commencing on March 1, 2022, the Company entered into a three-year lease with Speedway Commerce Center,
LLC. Under the terms of the lease agreement, we are required to make the following monthly lease payments: Year 1 $
On
March 28, 2022, the Company entered into a lease agreement for approximately 1,469 square feet of office space located in Lehi,
Utah. Commencing on April 1, 2022, the Company entered into a three-year lease with Victory Holdings, LLC. Under the terms of the
lease agreement, we are required to make the following monthly lease payments: Year 1 is comprised of April to May 2022 $
On
April 1, 2022, the Company entered into a lease agreement for approximately 2,000 square feet of office and warehouse space located
in Houston, Texas. Commencing on April 1, 2022, the Company entered into a month-to-month lease with JVS Holdings, Inc. The lease
may be terminated at any time or for any reason with a 30-day written notice to terminate. The lease requires a monthly lease payment
of $
On December 16, 2022, our subsidiary, VivaVentures Remediation Corp. entered into a Land Lease Agreement (the “Land Lease”) with W&P Development Corporation, under which we agreed to lease approximately 3.5 acres of land in Houston, Texas. The Land Lease is for an initial term of 126 months and may be extended for an additional 120 months at our discretion. Our monthly rent is $0 for the first three months and then at month 4 it is approximately $7,000 (based on a 50% reduction) and increases to approximately $13,000 in month 7 and then increases annually up to approximately $16,000 per month by the end of the initial term. We plan to place one or more of our RPC machines on the property, as well as store certain equipment.
The
right-of-use asset for operating leases as of December 31, 2022 and 2021 was $
F-31
The following table reconciles the undiscounted cash flows for the leases as of December 31, 2022 to the operating lease liability recorded on the balance sheet:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Less: Imputed interest | ||||
| Present value of lease payments | $ | |||
| Operating lease liabilities, current | $ | |||
| Operating lease liabilities, long-term | $ | |||
| Weighted-average remaining lease term | ||||
| Weighted-average discount rate | % |
The discount rate is the Company’s incremental borrowing rate, or the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Based on an assessment of the Company’s borrowings at the time the operating leases were entered into, the incremental borrowing rate was determined to be 9.93%.
Employment Agreements
On September 30, 2022, the Board of Directors of the Company received notice from Matthew Nicosia, the Company’s former Chief Executive Officer and Chairman of the Board of Directors of his resignation from such positions. Such resignations are not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices and the resignation is considered to be without good reason. On October 28, 2022 we entered into an executive employment agreement with a new Chief Executive Officer, James Ballengee, which provides for annual compensation of $1,000,000 payable in shares of our common stock issued in four equal quarterly installments, priced at the volume weighted average price (VWAP) for the five trading days preceding the date of the Employment Agreement and each anniversary thereof (the “CEO Compensation”). For the first twelve months of Mr. Ballengee’s employment, we will issue him a total of 923,672 shares of our common stock, issuable 230,918 per quarter. The CEO Compensation shall be subject to satisfaction of Nasdaq rules, the provisions of the Company’s equity incentive plan and other applicable requirements and shall be accrued if such issuance is due prior to satisfaction of such requirements. Additionally, Mr. Ballengee shall be eligible for a discretionary performance bonus. The Employment Agreement may be terminated by either party for any or no reason, by providing a five days’ notice of termination. In June 2022, the Company entered into employment agreements with its previous Chief Executive Officer and its current Chief Financial Officer, which provided for annual base salaries of $375,000 and $350,000, respectively, and provided for incremental increases in their salaries upon the Company’s achievement of specific performance metrics. The Company is currently accruing substantial portions of executive base salaries (see Note 14). The employment agreements provided for the grant of stock options to the previous Chief Executive Officer and the current Chief Financial Officer to purchase up to 955,093 and 917,825 shares of the Company’s common stock, respectively, at an exercise price equal to 110% and 100% of the fair market value of the Company’s common stock on the date of grant. The previous Chief Executive Officer vested in of these stock options before his resignation without good reason with the remainder of his stock options cancelled. The total stock options for the former Chief Executive Officer vest over two years of continuous employment, subject to acceleration if terminated without cause or resignations for good reason. The Chief Financial Officer’s agreement also provides that it is anticipated that the executive will receive bonuses for 2022 which will be determined by the Company’s Compensation Committee and Board of Directors after taking into account the general business performance of the Company, including any completed financings and/or acquisitions.
F-32
Note 18. Long-term Debt
To assist in funding the manufacture of the Company’s Remediation Processing Centers, between 2015 and 2017, the Company entered into two agreements which include terms for the purchase of participation rights for the sale of future revenue of the funded RPCs, and which also require working interest budget payments by the Company.
The
Company accounts for the terms under these contracts for the sale of future revenue under Accounting Standards Codification 470 (“ASC
470”). Accordingly, these contracts include the receipt of cash from an investor where the Company agrees to pay the investor for
a defined period a specified percentage or amount of the revenue or a measure of income (for example, gross revenue) according to their
contractual right, in which the Company will record the cash as debt and apply the effective interest method to calculate and accrue
interest on the contracts. The terms of these agreements grant the holder a prorated 25% participation in the gross revenue of the assets
as defined in the agreements for 20 years after operations commence for a purchase price of approximately $2,200,000. The Company made
its first payment of $
In accordance with ASC 470, the Company records the proceeds from these contracts as debt because the Company has significant continuing involvement in the generation of the cash flows due to the investor (for example, active involvement in the generation of the operating revenues of the business segment), which constitutes the presence of a factor that independently creates a rebuttable presumption that debt classification is appropriate. The Company has determined its effective interest rates to be between approximately 11% and 34% based on each contract’s future revenue streams expected to be paid to the investor as of December 31, 2022. These rates represent the discount rate that equates estimated cash flows with the initial proceeds received from the investor and is used to compute the amount of interest expense to be recognized each period. During the development and manufacturing of the assets the effective interest has been capitalized to the assets. As the assets enter operations or service of their intended use, the effective interest on these contracts will be recognized as interest expense (see Note 11).
In
2016 and 2017, additional consideration to investors to enter into these agreements was granted, and the Company issued to these investors
shares of Series B-1 Preferred Stock with a relative fair value of $7.50 per share or based on conversion terms and price of
the Company’s Common Stock at the time of issuance. The Company also issued
Some holders of these participation rights also have the option to relinquish ownership and all remaining benefits of their LLC units in exchange for Common Stock in the Company. Depending on the contract, these options to convert to common stock range from between 1 and 5.5 years. The exercise period ranges from between 1 year to 5.5 years with a step-up discount to market for each year the option is not exercised with a range of between a 5% to a 25% discount to market. As of December 31, 2022 and 2021 none of these options have been exercised to convert to Common Stock. Accordingly, under Accounting Standards Codification 815 (“ASC 815”) the Company valued these options at fair value using a Monte Carlo Simulation by a third-party valuation expert, which found the fair value of the options to be nominal. Long-term debt related to these participation rights is recorded in “Long-term debt” on the consolidated balance sheet.
The accounting for the terms under these contracts that call for working interest budget payments by the Company are recorded in current liabilities on the consolidated balance sheet and paid down through pass-through expenses or cash according to the contract. Accordingly, the Company records any unpaid balance of budget payments received in “Long-term debt, current” as these liabilities are generally paid within 12 months after proceeds are received.
F-33
Long-term debt consists of the following:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Principal | $ | $ | ||||||
| Accrued interest | ||||||||
| Debt discount | ( | ) | ( | ) | ||||
| Total long-term debt | $ | $ | ||||||
| Long term debt, current | $ | $ | ||||||
| Long term debt | $ | $ | ||||||
The following table sets forth the estimated payment schedule of long-term debt as of December 31, 2022:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
Note 19. Stockholders’ Equity
Series A, Series B, Series B-1, Series C and Series C-1 Preferred Stock
The Preferred Stock authorized by the Company may be issued from time to time in one or more series. The Company is authorized to issue shares of preferred stock. The Company is authorized to issue shares of Series A Preferred Stock, shares of Series B Preferred Stock, shares of Series B-1 Preferred Stock, shares of Series C Preferred Stock, and shares of Series C-1 Preferred Stock. The Board of Directors is authorized to fix or alter the number of shares constituting any series of Preferred Stock and the designation thereof. In 2021, the Board of Directors authorized, and a majority vote acceptance was received of each voting class of preferred stock, including Series B Preferred Stock, Series B-1 Preferred Stock, and Series C-1 Preferred Stock, that each class’s designations be amended that upon the Company’s public offering in conjunction with an uplist to a senior stock exchange that these classes of preferred stock will convert their preferred shares to common shares on a one for one basis.
The
Company has no issued and outstanding shares of Series A Preferred as of December 31, 2022. All of the outstanding shares of Series
A Preferred Stock (66,667 shares) were converted to common stock upon the close of the Company’s public offering of the Company’s
common stock on February 14, 2022. The conversion price is subject to adjustment under certain customary circumstances, including
as a result of stock splits and combinations, dividends and distributions, and certain issuances of common stock. Holders of shares of
Series A Preferred Stock will have the right to 25 votes for each share of Common Stock into which such shares of Series A Preferred
Stock can then be converted (with a current conversion ratio of 10 shares of Common Stock for each outstanding share of Series A Preferred
Stock) and the right to a liquidation preference in any distribution of net assets made to the shareowners prior to and in preference
to the holders of Common Stock and any other Preferred Stock holder in the liquidation, dissolution or winding up of our Company. As
of December 31, 2022 and 2021 the liquidation preference was
F-34
The
Company has no issued outstanding shares of Series B Preferred Stock as of December 31, 2022 and 2021, respectively. Shares of Series
B Preferred Stock are convertible one year after issuance, at any time at the option of the holder, into shares of Common Stock (with
a conversion price at the lesser of the issuance price ($6.00) or a 10% discount to market on the conversion date). Automatic 1-for-1
conversion of all outstanding shares of Series B Preferred Stock into shares of Common Stock occurred on May 1, 2021. No other shares
have been issued since the conversion of all of the outstanding shares of this class of stock. The conversion price is subject to adjustment
under certain customary circumstances, including as a result of stock splits and combinations, dividends and distributions, and certain
issuances of common stock. The Company has the right, but not the obligation, to redeem shares of Series B Preferred Stock one year after
issuance. Holders of Series B Preferred Stock will have the right to one vote for each share of Common Stock into which such Series B
Preferred Stock is then convertible, and a right to a liquidation preference in any distribution of net assets made to the shareowners
prior to and in preference to the holders of Common Stock and any Preferred Stockholder, except holders of Series A Preferred Stock,
in the liquidation, dissolution or winding up of our Company. Dividends are
The Company has no issued and outstanding shares of Series B-1 Preferred Stock as of December 31, 2022 and 2021, respectively. Shares of Series B-1 Preferred Stock are convertible one year after issuance, at any time at the option of the holder, into shares of Common Stock (with a conversion price at the lesser of the issuance price ($7.50) or a 10% discount to market on the conversion date). Automatic 1-for-1 conversion of all outstanding shares of Series B-1 Preferred Stock into shares of Common Stock occurred on May 1, 2021. No other shares have been issued since the conversion of all of the outstanding shares of this class of stock. The conversion price is subject to adjustment under certain customary circumstances, including as a result of stock splits and combinations, dividends and distributions, and certain issuances of common stock. The Company has the right, but not the obligation, to redeem shares of Series B-1 Preferred Stock one year after issuance. Holders of Series B-1 Preferred Stock have no voting or dividend rights, and a right to a liquidation preference in any distribution of net assets made to the shareowners prior to and in preference to the holders of Common Stock and any Preferred Stockholder, except holders of Series A and Series B Preferred Stock, in the liquidation, dissolution or winding up of our Company.
The
Company has not issued any Series C Preferred Stock as of December 31, 2022 and 2021, respectively. Shares of Series C Preferred
Stock are convertible one year after issuance, at any time at the option of the holder, into shares of Common Stock (with a conversion
price at the lesser of the issuance price ($10.50) or a 10% discount to the market price on the conversion date). Automatic conversion
of shares of Series C Preferred Stock into shares of Common Stock may occur due to certain qualified public offerings entered into or
by written consent of a majority of the holders of Series C Preferred Stock or upon the four-year anniversary date of the issuance of
such shares. The conversion price is subject to adjustment under certain customary circumstances, including as a result of stock splits
and combinations, dividends and distributions, and certain issuances of common stock. The Company has the right, but not the obligation,
to redeem shares of Series C Preferred Stock one year after issuance. Holders of Series C Preferred Stock will have the right to one
vote for each share of Common Stock into which such Series C Preferred Stock is then convertible, and a right to a liquidation preference
in any distribution of net assets made to the shareowners prior to and in preference to the holders of Common Stock and any Preferred
Stockholder, except holders of Series B and B-1 Preferred Stock, in the liquidation, dissolution or winding up of our Company. Dividends
are
The Company has no issued and outstanding shares of Series C-1 Preferred Stock as of December 31, 2022 and 2021, respectively. Shares of Series C-1 Preferred Stock are convertible one year after issuance, at any time at the option of the holder, into shares of Common Stock (with a conversion price at the lesser of the issuance price ($12.00) or a 10% discount to the market price on the conversion date). Automatic conversion of all outstanding shares of Series C-1 Preferred Stock into shares of Common Stock occurred on May 4, 2021 by written consent of a majority of the holders of Series C-1 Preferred Stock. No other shares have been issued since the conversion of all of the outstanding shares of this class of stock. The conversion price is subject to adjustment under certain customary circumstances, including as a result of stock splits and combinations, dividends and distributions, and certain issuances of common stock. The Company has the right, but not the obligation, to redeem shares of Series C-1 Preferred Stock one year after issuance. Holders of Series C-1 Preferred Stock have no voting or dividend rights, and a right to a liquidation preference in any distribution of net assets made to the shareowners prior to and in preference to the holders of Common Stock and any Preferred Stockholder, except holders of Series A, Series B, Series B-1, and Series C Preferred Stock, in the liquidation, dissolution or winding up of our Company.
F-35
On February 14, 2022, we effected a 1-for-30 reverse split of our authorized and outstanding shares via the filing of a certificate of change with the Nevada Secretary of State, which was filed simultaneously with the close of the underwritten public offering of our common stock and the commencement of the trading of our common stock on the Nasdaq Capital Market, LLC. As a result of the reverse stock split, all authorized and outstanding common stock, preferred stock, and per share amounts have been adjusted to reflect the reverse stock split for all periods presented.
For the year ended December 31, 2022, all of the outstanding shares of Series A Preferred Stock ( shares) were converted to common stock upon the close of the Company’s public offering of the Company’s common stock on February 14, 2022, and converted into shares of Common Stock.
For
the year ended December 31, 2021, $
For
the year ended December 31, 2021, the Company issued Series C-1 Preferred Stock or $
For
the year ended December 31, 2021, the Company issued shares of Series B-1 Preferred Stock as a $
Common Stock
The Company is authorized to issue shares of common stock. As of December 31, 2022 and 2021, there were and shares of our common stock issued and outstanding, respectively. Treasury stock is carried at cost.
On February 14, 2022, we closed an underwritten public offering for 1,600,000 shares of common stock, at a public offering price of $5.00 per share, for aggregate net proceeds of $6.2 million, after deducting underwriting discounts, commissions, and other offering expenses of approximately $1.8 million. We effected a 1-for-30 reverse split of our authorized and outstanding shares of common stock (the “Reverse Stock Split”) via the filing of a certificate of change with the Nevada Secretary of State, which was filed simultaneously with the close of the underwritten public offering of our common stock and the commencement of the trading of our common stock on the Nasdaq Capital Market, LLC. As a result of the Reverse Stock Split, all authorized and outstanding common stock, preferred stock, and per share amounts have been adjusted to reflect the Reverse Stock Split for all periods presented.
On
August 1, 2022, we closed a Membership Interest Purchase Agreement, (the “MIPA”), with Jorgan Development, LLC, (“Jorgan”)
and JBAH Holdings, LLC, (“JBAH”), as the equity holders of Silver Fuels Delhi, LLC (“SFD”) and White Claw Colorado
City, LLC (“WCCC”), whereby, the Company acquired all of the issued and outstanding membership interests in each of SFD and
WCCC, making SFD and WCCC wholly owned subsidiaries of the Company. The purchase price for the Membership Interests is approximately
$
For
the year ended December 31, 2021, $
F-36
For
the years ended December 31, 2022 and 2021, the Company issued and common shares for a $
For
the years ended December 31, 2021, the Company issued shares of Common Stock for $
For
the year ended December 31, 2021, the Company issued shares for a $
Noncontrolling Interest
For
the years ended December 31, 2022 and 2021, the Company converted $
Note 20. Temporary Equity
Shares of Series B, B-1, C and C-1 convertible preferred stock hold conversion features providing that, at the holder’s election, the holder may convert the preferred stock into common stock. Upon conversion, the Company may be required to deliver a variable number of equity shares that is determined by using a formula based on the market price of the Company’s Common Stock. After four years from the date of issuance, Series C preferred shareholders are forced to automatically convert to Common Stock. On May 1, 2021, all outstanding shares of Series B and B-1 converted at 1-for-1 to Common Stock. On May 4, 2021, all outstanding shares of Series C-1 converted at 1-for-1 to Common Stock. For each respective series, the holder may convert their preferred shares to common shares at the original issue price as defined, which ranges from between $6.00 per share to $12.00 per share, at the lesser of the original issue price or 90% of the market price on the conversion date. There is no contractual cap on the number of common shares that the Company could be required to deliver on preferred shareholders’ conversions to Common Stock.
Accordingly, under ASC 815-40-25-10 the Company may be forced to settle these conversion features in cash, specifically since it is unknown as to what date the shareholders’ may convert their preferred stock to common stock and if there will be sufficient authorized and unissued common shares on that date. As of December 31, 2020 the Company did have sufficient authorized and unissued common shares to satisfy all preferred shareholders interest if it were converted to Common Stock, although if the stock price were to drop below $0.60 per share and the Company may be forced to settle such conversions in cash, which may consider them redeemable. Accordingly, Series B, B-1, C and C-1 preferred stock has been classified in temporary equity until later converted into common shares in 2021.
The following table shows all changes to temporary equity during for the years ended December 31, 2021.
| Convertible Preferred Stock | ||||||||||||||||||||||||
| Series B | Series B-1 | Series C-1 | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
| December 31, 2020 | $ | $ | $ | |||||||||||||||||||||
| Series C-1 Issue for a reduction in stock payables | - | - | ||||||||||||||||||||||
| Dividend paid in Series B-1 Preferred Stock | - | |||||||||||||||||||||||
| Conversion of Series B and B-1 Preferred Stock to Common Stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| December 31, 2021 | $ | $ | $ | |||||||||||||||||||||
F-37
On February 14, 2022, our 2021 Equity and Incentive Plan (the Plan) went effective. The plan was approved by our Board of Directors.
The following is a summary of the material features of the Plan, which is qualified in its entirety by reference to the actual text of the Plan.
Eligibility. The Plan provides for the grant of equity awards to the officers, employees, directors, consultants and other key persons of the Company and our subsidiaries selected from time to time by our Compensation Committee of the Board. The Compensation Committee will determine in its sole and absolute discretion the specific individuals eligible to participate in the Plan. As of April 14, 2023, we had approximately ten employees and five directors. The Company also employs consultants to supplement its operational activities.
Awards. Awards under the Plan may take the form of stock options, stock appreciation rights (“SARs”), restricted stock awards, unrestricted stock awards, restricted stock units (“RSUs”), and other share-based awards, or any combination of the foregoing (each, an “award” and collectively, “awards”).
Shares Available. Subject to the adjustment provisions discussed below under “Adjustments,” the total number of shares that may be issued under the Plan is .
Plan Administration. Our Compensation Committee of the Board will administer the Plan at the time we add additional independent directors. Until then the Board will administer the Plan. The Board and the Compensation Committee are to as the “Administrator.” The Administrator will be authorized to grant awards under the Plan, to interpret the provisions of the Plan and to prescribe, amend and rescind rules relating to the Plan or any award thereunder. It is anticipated that the Administrator (either generally or with respect to specific transactions) will be constituted so as to comply, as necessary or desirable, with the requirements of Section 162(m) of the Internal Revenue Code (the “Code”) and Rule 16b-3 promulgated under the Exchange Act.
Stock Options. The Plan permits the granting of “incentive stock options” meeting the requirements of Section 422 of the Code, and “nonqualified stock options” that do not meet such requirements. The term of each option is determined by the Compensation Committee and shall not exceed ten years after the date of grant. Options may also be subject to restrictions on exercise, such as exercise in periodic installments, as determined by the Administrator. In general, the per share exercise price for options must be at least equal to 100% of the fair market value of the underlying shares on the date of the grant, unless the option is intended to be compliant with the requirements of Section 409A of the Code. All 2,000,000 shares authorized for issuance under the Plan shall be available for issuance in respect of incentive stock options.
Stock Appreciation Rights. The Plan permits the granting of SARs. The Administrator will determine any vesting schedules and the terms and conditions of each grant. Upon the exercise of a SAR, the recipient is entitled to receive from the Company an amount in cash or shares with a fair market value equal to the appreciation in the value of the shares subject to the SAR over a specified reference price. The reference price per share of any SAR will not be less than 100% of the fair market value per share of Company Common Stock on the date of the grant of the SAR, unless the SAR is intended to be compliant with the requirements of Section 409A of the Code.
Restricted Stock Awards. The Administrator may award restricted stock under the Plan. Restricted stock gives a participant the right to receive stock subject to a risk of forfeiture based upon certain conditions. The forfeiture restrictions on the shares may be based upon performance standards, length of service and/or other criteria as the Compensation Committee may determine. Until all restrictions are satisfied, lapsed or waived, we will maintain custody over the restricted stock, but the participant will be able to vote the shares and will be entitled to all distributions paid with respect to the shares (but see below, under the heading “No Current Dividends on Unvested Awards” with respect to the treatment of dividends while the shares remain unvested). During the period in which shares are restricted, the restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered. Upon termination of employment, the participant will forfeit the restricted stock to the extent the applicable vesting requirements have not by then been met.
Unrestricted Stock Awards. The Administrator may award unrestricted stock under the Plan. Unrestricted stock may be granted in respect of past services or other valid consideration, or in lieu of cash compensation due to such grantee.
F-38
Restricted Stock Units. The Plan provides that the Administrator may grant restricted stock units (“RSUs”), which represent the right to receive shares following the satisfaction of specified conditions. The Administrator will determine any vesting schedules and the other terms of each grant of RSUs. A participant will not have the rights of a stockholder with respect to the shares subject to an RSU award prior to the actual issuance of those shares.
Performance Awards. The Plan provides that the Administrator may grant awards that are contingent upon the achievement of specified performance criteria (“Performance Awards”). Such awards may be payable in cash, shares or other property. The Administrator will determine the terms of Performance Awards, including the performance criteria, length of the applicable performance period, and the time and form of payment.
Other Share-Based Awards. The Plan provides that the Administrator may grant other awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares. All the terms of such other share-based awards will be determined by the Administrator.
No Payment of Dividends Until Awards Vest. Dividends or dividend equivalents payable with respect to Plan awards will be subject to the same vesting terms as the related award.
Adjustments. In the event of any corporate transaction or event such as a stock dividend, extraordinary dividend or similar distribution (whether in the form of cash, shares, other securities, or other property), reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company’s capital stock, the Plan provides that the Administrator will make equitable adjustments to (i) the maximum number of shares reserved for issuance under the Plan, (ii) the number and kind of shares or other securities subject to any then outstanding awards under the Plan, (iii) the repurchase price, if any, per phare subject to each outstanding award, and (iv) the exercise price for each Share subject to any then outstanding Stock Options under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Stock Options) as to which such Stock Options remain exercisable.
Transferability of Awards. Restricted Stock awards, Stock Options, SARs and, prior to exercise, the shares issuable upon exercise of such Stock Option shall not be transferred other than by will, or by the laws of descent and distribution. The Administrator, however, may allow for the assignment or transfer of an award (other than incentive stock options and restricted stock awards) to a participant’s spouse, children and/or trusts, partnerships, or limited liability companies established for the benefit of the participant’s spouse and/or children, subject in each case to certain conditions on assignment or transfer.
Termination and Amendment. The Board may, at any time, amend or discontinue the Plan and the Compensation Committee may, at any time, amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding award without the consent of the holder of the Award. The Compensation Committee may exercise its discretion to reduce the exercise price of outstanding Stock Options or effect repricing through cancellation of outstanding Stock Options and by granting such holders new awards in replacement of the cancelled Stock Options. To the extent determined by the Compensation Committee to be required either by the Code to ensure that Incentive Stock Options granted under the Plan are qualified under Section 422 of the Code or otherwise, Plan amendments shall be subject to approval by the Company stockholders entitled to vote at a meeting of stockholders. The Board has the right to amend the Plan and/or the terms of any outstanding Stock Options to the extent reasonably necessary to comply with the requirements of the exemption pursuant to Rule 12h-1 of the Exchange Act.
Treatment of Awards Upon a Sale Event. In the case of and subject to the consummation of a Sale Event (as the term is defined in the Plan), the Plan and all outstanding Stock Options and SARs issued thereunder shall become one hundred percent (100%) vested upon the effective time of any such Sale Event, all unvested Restricted Stock and unvested Restricted Stock Unit Awards issued thereunder shall become one hundred percent (100%) vested, with an equitable or proportionate adjustment as to the number and kind of shares subject to such awards as such parties shall agree, and such Restricted Stock shall be repurchased from the holder thereof at the then fair market value of such shares. In the event of the termination of the Plan, each holder of Stock Options shall be permitted, within a period of time prior to the consummation of the Sale Event as specified by the Administrator, to exercise all such Stock Options or SARs which are then exercisable or will become exercisable as of the effective time of the Sale Event.
F-39
Treatment of Termination of Service Relationship. Any portion of a Stock Option or SAR that is not vested and exercisable on the date of termination of an optionee’s service relationship, a grantee’s right in all Restricted Stock Units that have not vested upon the grantee’s cessation of service relationship with the Company and any subsidiary for any reason, shall immediately expire and be null and void, unless otherwise be provided by the Administrator. Once any portion of the Stock Option becomes vested and exercisable, the optionee’s right to exercise such portion of the Stock Option or SAR in the event of a termination of the optionee’s service relationship shall continue until the earliest of: (i) the date which is: (A) 12 months following the date on which the optionee’s Service Relationship terminates due to death or Disability (or such longer period of time as determined by the Committee and set forth in the applicable Award Agreement), or (B) three months following the date on which the optionee’s Service Relationship terminates if the termination is due to any reason other than death or Disability (or such longer period of time as determined by the Committee and set forth in the applicable Award Agreement), or (ii) the expiration date set forth in the award agreement; provided that notwithstanding the foregoing, an award agreement may provide that if the optionee’s rervice Relationship is terminated for cause, the Stock Option shall terminate immediately and be null and void upon the date of the optionee’s termination and shall not thereafter be exercisable.
Tax Withholding. The Company and its subsidiaries may deduct amounts from participants to satisfy withholding tax requirements arising in connection with Plan awards. The Company’s obligation to deliver stock certificates (or evidence of book entry) to any grantee is subject to and conditioned on any such tax withholding obligations being satisfied by the grantee.
Options
Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
The Company has granted stock-based compensation to employees, including a share stock award, which was issued in 2018 and vested in May 2022, 166,667 in employee stock options that were issued in 2020 to cliff vest at the end of five years, but were cancelled on September 1, 2022 by the parties in conjunction with the issuance of employee stock options granted in June 2022 that were to vest over a period of two years, for which of these options were cancelled with the resignation without cause in October 2022 of our prior Chief Executive Officer. For the years ended December 31, 2022 and 2021, stock-based compensation was $ and $. In 2020, the Company also granted non-statutory stock options, including stock options to the Board of Directors, which vested over 1 year, and a stock option to a consultant, which was to vest over 4 years, but was cancelled on September 1, 2022 by the parties which concluded that it was not probable that certain performance targets would be met, as agreed upon by both parties. On October 24, 2022, the Board of Directors resolved to increase their compensation including the issuance of stock options per independent board member, exercisable at $ per share, vesting immediately. Non-statutory stock-based compensation was $ and $ for the years ended December 31, 2022 and 2021. In 2022, the Company closed on its underwritten public offering in which the Company granted the underwriter, EF Hutton, division of Benchmark Investments, LLC (“EF Hutton”), a 45-day option to purchase up to an additional 240,000 shares of Common Stock at the public offering price per share, less the underwriting discounts and commissions, to cover over-allotments, if any. These options were not exercised and expired.
There were no other options granted during the years ended December 31, 2022 and 2021, respectively.
The assumptions used in the Black-Scholes option pricing model to determine the fair value of the options on the date of issuance are as follows:
| Schedule of option activity | December 31,
2021 through December 31, 2022 | |
| Risk-free interest rate | – % | |
| Expected dividend yield | ||
| Expected life of warrants | - years | |
| Expected volatility rate | - % |
F-40
The following table summarizes all stock option activity of the Company for the years ended December 31, 2022 and 2021:
| Schedule of warrant assumptions | Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
|||||||||
| Outstanding, December 31, 2020 | $ | |||||||||||
| Granted | - | - | - | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Outstanding, December 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( | ) | - | |||||||||
| Forfeited | ( | ) | - | |||||||||
| Outstanding, December 31, 2022 | $ | |||||||||||
| Exercisable, December 31, 2021 | $ | |||||||||||
| Exercisable, December 31, 2022 | $ | |||||||||||
As of December 31, 2022 and 2021, the aggregate intrinsic value of the Company’s outstanding options was approximately none. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Warrants
As
of December 31, 2022 and 2021, the Company had
Management uses the Black-Scholes option pricing model to determine the fair value of warrants on the date of issuance.
The assumptions used in the Black-Scholes option pricing model to determine the fair value of the warrants on the date of issuance are as follows:
| Risk-free interest rate | ||
| Expected dividend yield | ||
| Expected life of warrants | years | |
| Expected volatility rate |
F-41
Note 22. Income Tax
Benefit for income taxes is as follows:
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Current: | ||||||||
| State | $ | $ | ||||||
| Total current | ||||||||
| Deferred: | ||||||||
| Federal | ( | ) | ( | ) | ||||
| State | ( | ) | ( | ) | ||||
| Total Deferred | ( | ) | ( | ) | ||||
| Net provision | $ | ( | ) | $ | ( | ) | ||
The differences between the expected income tax benefit based on the statutory Federal United States income tax rates and the Company’s effective tax rates are summarized below:
| Schedule reconciliation of income tax | ||||||||
| December 31, 2022 | ||||||||
| Tax Computed At The Federal Statutory Rate | $ | ( | ) | % | ||||
| State Tax, Net Of Fed Tax Benefit | ( | ) | % | |||||
| Nondeductible Expenses | - | % | ||||||
| Flowthrough Entity not Subject to Tax | - | % | ||||||
| Foreign Corporation - Minority Interest | - | % | ||||||
| Other | - | % | ||||||
| Valuation Allowance | - | % | ||||||
| Benefit for income taxes | $ | ( | ) | % | ||||
| December 31, 2021 | ||||||||
| Tax Computed At The Federal Statutory Rate | $ | ( | ) | % | ||||
| State Tax, Net Of Federal Tax Benefit | ( | ) | % | |||||
| Nondeductible Expenses | - | % | ||||||
| Flowthrough Entity not Subject to Tax | - | % | ||||||
| Foreign Corporation - Minority Interest | - | % | ||||||
| Valuation Allowance | - | % | ||||||
| Benefit for income taxes | $ | ( | ) | % | ||||
F-42
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| December 31, 2022 | ||||
| Reserves | $ | |||
| Fixed Assets | ( | ) | ||
| Leases | ( | ) | ||
| Intangibles | ( | ) | ||
| Net Operating Losses | ||||
| Impairment Losses | ||||
| Stock Options | ( | ) | ||
| Accruals | ||||
| Other | ( | ) | ||
| Net Deferred Asset | ||||
| Less: Valuation Allowance | ( | ) | ||
| Total deferred tax liability: | $ | |||
| December 31, 2021 | ||||
| Reserves | $ | |||
| Fixed Assets | ( | ) | ||
| Leases | ||||
| Intangibles | ( | ) | ||
| Net Operating Losses | ||||
| Impairment Losses | ||||
| Stock Options | ||||
| Accruals | ( | ) | ||
| Other | ( | ) | ||
| Net Deferred Liability | ( | ) | ||
| Less: Valuation Allowance | ( | ) | ||
| Total deferred tax liability: | $ | ( | ) | |
In determining the possible future realization of deferred tax assets, the Company has considered future taxable income from the following sources: (a) reversal of taxable temporary differences; and (b) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into years in which net operating losses might otherwise expire.
F-43
Deferred tax assets are recognized subject to management’s judgment that realization is more likely than not. A valuation allowance is recognized for a deferred tax asset if, based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized. In making such judgments, significant weight is given to evidence that can be objectively verified. Based on our review of the deferred tax assets the Company has concluded that a valuation allowance is necessary on the net operating loss balance, as realization of this asset does not meet the more likely than not threshold.
As of December 31, 2022 and 2021, the Company
had estimated net operating losses for federal and state purposes of $
We recognize a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. We recognize potential interest and penalties related to unrecognized tax benefits in the general and administrative expense in the statement of operations of the Company.
The Company is in the process of filing back income
tax returns from 2010 through the current year and subject to IRS examination for these years. The Company has booked a reserve for potential
penalties associated with non-filing of certain foreign information reports related to its subsidiary in the Middle East. Penalties and
interest have been reported in the general and administrative section of the statement of operations. The reserve balance at December 31,
2022 and 2021 was $
Note 23. Related Party Transactions
On October 24, 2022, the Board of Directors resolved to increase their compensation to (i) $50,000 per year in cash effective August 1, 2022, in equal quarterly payments, with the first such payment, in the amount of $12,500 due November 1, 2022 and, thereafter, $12,500 every February 1, May 1, August 1 and November 1, and (ii) 100,000 stock options priced at $2.50 per share, vesting immediately. In addition, the Board of Directors approved a one-time payment of $10,000 to each Mr. Trent Staggs and Mr. Al Ferrara for serving as the Chairperson of the Compensation Committee and Chairperson of the Audit Committee of the Board of Directors, respectively, payable on November 1, 2022. Al Ferrara resigned from the Audit Committee and Board of Directors on November 28, 2022. Trent Staggs resigned from the Compensation Committee and the Board of Directors on January 4, 2023. Matthew Balk resigned from the Board of Directors on January 16, 2023.
F-44
Viva
Wealth Fund I, LLC (VWFI), which is managed by Wealth Space LLC, has continued its private offering of up to $
On June 15, 2022, we entered into a Membership Interest Purchase Agreement (the “MIPA”), with Jorgan Development, LLC, (“Jorgan”) and JBAH Holdings, LLC, (“JBAH” and, together with Jorgan, the “Sellers”), as the equity holders of Silver Fuels Delhi, LLC (“SFD”) and White Claw Colorado City, LLC (“WCCC”) whereby, at closing, which occurred on August 1, 2022, we acquired all of the issued and outstanding membership interests in each of SFD and WCCC (the “Membership Interests”), making SFD and WCCC our wholly-owned subsidiaries. The purchase price for the Membership Interests was approximately $32.9 million paid for by us with a combination of shares of our common stock, amount equal to 19.99% of the number of issued and outstanding shares of our common stock immediately prior to issuance, and secured three-year promissory notes issued by us in favor of the Sellers (the “Notes”). The principal amount of the Notes, together with any and all accrued and unpaid interest thereon, will be paid to the Sellers on a monthly basis in an amount equal to the Monthly Free Cash Flow beginning on August 20, 2022, and continuing thereafter on the twentieth (20th) calendar day of each calendar month thereafter, as set forth in the MIPA. At the time of the closing of these transactions Jorgan, JBAH, and our newly hired CEO, James Ballengee were not considered related parties. As James Ballengee is now our Chief Executive Officer and is the beneficiary of Jorgan and JBAH, and the Sellers now own approximately 16.66% of our outstanding common shares, certain transactions, as noted below, related to Jorgan, JBAH, and James Ballengee are now considered related party transactions.
The
consideration for the membership interests included the Notes in the amount of $
F-45
In the business combination of acquiring WCCC we also acquired WCCC’s Oil Storage Agreement with White Claw Crude, LLC (“WC Crude”), who shares a beneficiary, James Ballengee, with Jorgan and JBAH. Under this agreement, WC Crude has the right, subject to the payment of service and maintenance fees, to store volumes of crude oil and other liquid hydrocarbons at a certain crude oil terminal operated by WCCC. WC Crude is required to pay $150,000 per month even if the storage space is not used. The agreement expires on December 31, 2031. Since acquiring this contract on August 1, 2022 we have received tank storage revenue of approximately $750,000.
In
the business combination of acquiring SFD, we acquired an amended Crude Petroleum Supply Agreement with WC Crude (the “Supply Agreement”),
under which WC Crude supplies volumes of Crude Petroleum to SFD, which provides for the delivery to SFD a minimum of 1,000 sourced barrels
per day, and includes a guarantee that when SFD resells these barrels, if SFD does not make at least a $5.00 per barrel margin on the
oil purchased from WC Crude, then WC Crude will pay to SFD the difference between the sales price and $5.00 per barrel. In the event
that SFD makes more than $5.00 per barrel, SFD will pay WC Crude a profit-sharing payment in the amount equal to 10% of the excess price
over $5.00 per barrel, which amount will be multiplied by the number of barrels associated with the sale. The Supply Agreement expires
on December 31, 2031. Since acquiring this contract on August 1, 2022 we have made crude oil purchases from WC Crude of $
In the business combination of acquiring SFD and WCCC we also entered into a Shared Services Agreement with Endeavor Crude, LLC (“Endeavor”), who shares a beneficiary, James Ballengee, with Jorgan and JBAH. Under this agreement, we have the right, but not the obligation to use Endeavor for consulting services. Since entering into this contract on August 1, 2022, we have paid Endeavor $37,993.
In September 2020, we entered into a consulting contract with LBL Professional Consulting, Inc. (“LBL”), of which our Chief Financial Officer is also an officer, which remains in effect. For the twelve months ended December 31, 2022, LBL invoiced the Company for $340,484. On December 17, 2020 the Company granted non-statutory stock options to LBL to purchase 333,334 shares of common stock, which was cancelled on September 1, 2022 by the parties. Our Chief Financial Officer is not the beneficiary of the Company and is not permitted to participate in any discussion, including LBL’s board meetings, regarding any Company stock that LBL may own at any time.
We
have an existing note payable issued to Triple T, which is owned by Dr. Khalid Bin Jabor Al Thani, the 51% majority-owner of Vivakor
Middle East LLC The note is interest free, has no fixed maturity date and will be repaid from revenues generated by Vivakor Middle East
LLC. As of December 31, 2022 the balance owed was $
On January 20, 2021, we entered into a worldwide, exclusive license agreement with TBT Group, Inc. (of which an independent Vivakor Board member at the time was a 7% shareholder of TBT Group, Inc.) to license piezo electric and energy harvesting technologies for creating self-powered sensors for making smart roadways. We paid $25,000 and 16,667 shares of restricted common stock upon signing and $225,000 as of April 5, 2022. When the licensor delivers to us data showing that the sensor performs based on mutually defined specifications and all designs for the sensor are completed, we shall pay an additional $250,000 and 16,667 shares of restricted common stock. Upon the delivery of a mutually agreed working prototype, we will pay licensor $250,000 and 16,667 shares of restricted common stock. Upon commercialization of the product, we will pay licensor $250,000 and 33,333 shares of restricted common stock. TBT shall have the option, at its sole discretion, to convert the license to a non-exclusive license if we fail to pay $500,000 to TBT for sensor inventory per year, which will commence after the second anniversary of product commercialization. We shall share in the development costs of the sensor technology to the time of commercialization. From May 2021 through March 3, 2022, the parties amended the license agreement to extend the terms of the first milestone to March 4, 2022, of which we paid $15,000 as consideration for the extensions and $225,000 to be paid on March 4, 2022.
Note 24. Subsequent Events
The
Company has evaluated subsequent events through the date the financial statements were available to issue. Subsequent to
December 31, 2022,
F-46