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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.
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.
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.
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.
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.
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.
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:
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Proprietary patented technology; |
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Environmental advantages; and |
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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.
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:
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the number of barrels of oil gathered, stored, and transported pursuant to our existing long-term
contracts; |
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Construction of wash plant facilities for oil transportation trucks to gather, store and transport reclaimed oil from these facilities; |
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Acquisition of additional gathering, storage, and transportation assets or companies; and |
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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:
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Expansion into new and complementary markets; |
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Operating our Remediation Project in Kuwait; |
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Increase of revenue via new service and product offerings; |
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Strategic acquisitions and licenses targeting complementary
technologies; and |
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Redeployment of the metallic separation technologies. |
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.
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.
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:
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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; |
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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; |
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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; |
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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 |
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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. |
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.
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.
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:
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inability to work successfully
with third parties having local expertise to co-develop international projects; |
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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; |
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difficulties in enforcing
agreements in foreign legal systems; |
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changes
in general economic and political conditions in the countries in which we operate, including changes in government incentives
relating to oil remediation; |
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political
and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business
restrictions; |
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difficulties and costs
in recruiting and retaining individuals skilled in international business operations; |
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international business
practices that may conflict with U.S. customs or legal requirements; |
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financial risks, such as
longer sales and payment cycles and greater difficulty collecting accounts receivable; |
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fluctuations in currency
exchange rates relative to the U.S. dollar; and |
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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.
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.
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.
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.
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:
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develop and expand their product offerings more rapidly; |
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adapt to new or emerging changes in customer requirements
more quickly; |
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take advantage of acquisition and other opportunities
more readily; and |
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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:
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Our
applications for patents relating to our business may not be granted and, if granted, may be challenged or invalidated; |
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Issued
patents may not provide us with any competitive advantages; |
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Our
efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; |
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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 |
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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. |
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.
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.
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.
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.
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:
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restrictions on the nature of our investments; and |
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restrictions on the issuance of securities. |
In
addition, we may have imposed upon us certain burdensome requirements, including:
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registration
as an investment company; |
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adoption
of a specific form of corporate structure; and |
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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.
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.
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 1-for-30
reverse split of our 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 effective at the commencement of trading of our
Common Stock. No fractional shares of the Company’s common stock were 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. All issued and
outstanding common stock, preferred stock, and per share amounts in the consolidated financial statements and footnotes included
herein have been retroactively adjusted to reflect this reverse stock split for all periods presented.
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 $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.
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.
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 $1,622,424 and $3,753,296 (where the primary asset represents
a receivable from the Company), and liabilities of $52,368 and $12,608. Vivaventures Royalty II, LLC held assets of $3,670,583 and $2,648,810
(where the primary asset represents a receivable from the Company), and liabilities of $1,720 and $300. Vivaopportunity Fund LLC held
assets of $2,199,781 and $2,119,961 (where the primary asset represents a noncontrolling interest in units of a consolidated entity of
the Company) and $10,815 and no liabilities. International Metals Exchange, LLC held assets of $29,443 and $30,461 and liabilities of
$1,800 and $1,900.
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 $227,104 and $629,694, respectively. As of December 31, 2022 and 2021, the cash
and cash equivalents of this VIE are not restricted and can be used to settle the obligations of the reporting entity. As of December 31,
2022 and 2021 this VIE has an outstanding note payable to the reporting entity in the amount of $1,288,279 and $354,566, which is eliminated
upon consolidation. We have the primary risk (expense) exposure in financing and operating the assets and are responsible for 100% of
the operation, maintenance and any unfunded capital expenditures, which ultimately could be 100% of a custom machine, and the decisions
related to those expenditures including budgeting, financing and dispatch of power. Based on all these facts, it was determined that
we are the primary beneficiary of RDM. Therefore, RDM has been consolidated by the Company. Any intercompany revenue and expense associated
with RDM and its license agreement with the Company has been eliminated in consolidation.
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 $81,607
and $199,952.
As of December 31, 2022, VWFI has reached $6,250,000 in funding and has released the funding for construction of RPC Series A.
VWFI has continued fundraising for RPC Series B. In the event that VWFI does not raise at least $8,250,000 for Series B by the
offering termination date (which date was extended until March 31, 2023), then the convertible notes and/or units
would convert into Vivakor common stock where the minimum conversion price will be the greater of $13.50 or a 10% discount to market
per share or in the event of a public offering, 200% of the per share price of the Company common stock sold in the underwritten
offering, which was closed on February 14, 2022 at $5.00 per share. As of March 27, 2023, VWFI has raised approximately
$7,480,000 for RPC Series B. VWFI unit holders may also sell their units to the Company for their principal investment amount on the
3rd, 4th, and 5th anniversary of the offering termination date. The Company also has the option to
purchase any LLC units where the members did not exercise their conversion option under the same terms and pricing for cash or
common stock. VWFI has entered into a license agreement with the Company indicating that VWFI will pay the Company a license fee of
$1,000,000 per series of equipment manufactured with the Company’s proprietary technology. All of the operations of VWFI
relate to private placement offering to fund and manufacture proprietary equipment for the Company, as intended in VWFI’s
design and organization by the Company, so that the Company controls VWFI in its business purpose, use of proceeds, and selling and
leasing of its equipment solely to the Company. Creditors of VWFI have no recourse to the general credit of the Company. We have the
primary risk (expense) exposure in financing and operating the assets and are responsible for 100% of the operation, and any
unfunded capital expenditures, and the expense to the unit holders in conversion to common stock if series of equipment cannot be
fully funded, which ultimately could be 100% of any custom machine. We are responsible for the decisions related to the expenditures
of VWFI proceeds including budgeting, financing and dispatch of power surrounding the series of equipment. Based on all these facts,
it was determined that we are the primary beneficiary of VWFI. Therefore, VWFI has been consolidated by the Company.
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 $81,607 and $199,952. The Company has $2,666 in Qatar
National Bank, located in Doha Qatar.
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 $33,000.
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 826,376,882 common shares have a market value of approximately $1,322,203 as of April 18, 2023 based on the quoted
market price.
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 $4,000 as of December 31, 2022 and 2021. These Class A Units give the Company’s management control of
the entities but lack the necessary economics criterion, where the Company lacks the obligation to absorb losses of these entities, as
well as the right to receive benefits from the LLCs.
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 $1,880,056 and $663,291, operating lease obligations of $1,929,474 and $721,878, and
finance lease obligations of $3,262,860 and none.
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.
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:
Schedule of useful lives for property plant and equipment | |
|
Computers, software, and office equipment | |
1-5 years |
Machinery and equipment | |
3-5 years |
Vehicles | |
5 years |
Furniture and fixtures | |
5-10 years |
crude oil gathering, storage, and transportation facilities | |
10 years |
Remediation Processing Centers (heavy extraction and remediation equipment) (“RPC”) | |
20 years |
Leasehold improvements | |
Lesser of the lease term or estimated useful life |
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 10 to 20 years. The carrying
amounts of our definite-lived intangible assets are evaluated for recoverability whenever events or changes in circumstances indicate
that the entity may be unable to recover the asset’s carrying amount.
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 $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. 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 it’s patents) of $3,254,999.
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. No goodwill impairment
loss was incurred during the year ended December 31, 2022.
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, no ARO obligation
is recorded for the year ended December 31, 2022.
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.
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: $21,409,300 in crude oil sales and $5,890,910 in product related to natural gas liquids sales.
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 $6,649,073.
Major
Customers and Concentration of Credit Risk
The
Company has two major customers, which account for approximately 100% of the balance of accounts receivable as of December 31, 2022
and 99% of the Company’s revenues for the year ended December 31, 2022. Additionally, the Company operates in the crude oil
industry. The industry concentration has the potential to impact the Company’s overall exposure to credit risk in that its customer
may be similarly affected by changes in economic, industry or other conditions. There is risk that the Company would not be able to identify
and access replacement markets at comparable margins.
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.
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.
Net
Income/Loss Per Share
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 14,560 and 192,834
shares of common stock, stock options granted to employees of 1,421,760 and 183,333 shares of common stock, stock options granted to
Board members or consultants of 395,139 and 466,667 shares of common stock. The Company also has a warrant outstanding to purchase 80,000
shares of common stock as of December 31, 2022.
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 3,009,552 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 $28,664,284.
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:
Schedule of recognized identified assets acquired and liabilities assumed | |
| | |
Common stock | |
$ | 4,287,655 | |
Note payable to seller | |
| 28,664,284 | |
Fair value of total consideration paid | |
$ | 32,951,939 | |
| |
| | |
Net assets acquired and liabilities assumed | |
| | |
| |
| | |
Assets acquired in business combination | |
| | |
Current assets | |
$ | 6,573,359 | |
Finance lease right-of-use assets (property, plant and equipment) | |
| 3,579,544 | |
Property, plant and equipment, net | |
| 705,110 | |
Other assets | |
| 546,834 | |
Contract-based intangible assets | |
| 19,095,420 | |
Total assets acquired | |
$ | 30,500,265 | |
| |
| | |
Liabilities assumed in business combination | |
| | |
Current liabilities | |
$ | (7,489,639 | ) |
Long term liabilities | |
| (2,736,795 | ) |
Total liabilities acquired | |
$ | (10,226,434 | ) |
| |
| | |
Total net assets acquired | |
$ | 20,273,831 | |
| |
| | |
Goodwill | |
$ | 12,678,108 | |
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 $28,058,374 of sales in aggregate is attributed to SFD
and WCCC. The unaudited financial information in the table below summarizes the combined results of operations of the Company, SFD, and
WCCC for the years ended December 31, 2022 and 2021, on a pro forma basis, as though the companies had been combined as of January 1,
2021. The pro forma earnings for the years ended December 31, 2022 and 2021, were adjusted to include intangible amortization expense
of contracts acquired of $2,027,832, respectively. The pro forma earnings for the years ended December 31, 2022 and 2021, were adjusted
to include interest expense on notes payable that were issued as consideration of $1,152,842 and $1,773,603, respectively. The $174,592
of acquisition-related expenses were excluded from the year ended December 31, 2022, and included in the year ended December 31,
2021, as if the acquisition occurred at January 1, 2021. The unaudited pro forma financial information does not purport to be indicative
of the Company’s combined results of operations which would actually have been obtained had the acquisition taken place on January 1,
2021, nor should it be taken as indicative of future consolidated results of operations.
Schedule of proforma information | |
| | | |
| | |
| |
(Unaudited) | |
| |
Years ended
December 31, | |
| |
2022 | | |
2021 | |
Total net sales | |
$ | 64,009,714 | | |
$ | 34,361,233 | |
Loss from operations | |
| 21,659,746 | | |
| 7,429,978 | |
Net loss (attributable to Vivakor, Inc.) | |
$ | 23,944,546 | | |
$ | 8,085,238 | |
| |
| | | |
| | |
Basic and diluted loss per share | |
| (1.35 | ) | |
| (0.54 | ) |
Weighted average shares outstanding | |
| 17,733,117 | | |
| 14,985,668 | |
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 none and $33,000 was deemed necessary. Trade accounts receivable are zero interest bearing. Trade accounts receivable of $948,352
are with a vendor of which our CEO is a beneficiary.
Note
6. Prepaid Expenses and Other Assets
As
of December 31, 2022 and 2021, we other assets of $700,298 and $73,245. Our other assets consist of various deposits with vendors, professional service agents, or security
deposits on office and warehouse leases, including operating lease deposits in the amount of $132,688 and $47,388 as of December 31, 2022 and 2021, a deposit for a reclamation bond with the Utah Division of Oil, Gas and Mining in the amount
of $14,288 as of December 31, 2022 and 2021, and finance lease deposits of $553,322 as of December 31, 2022, which will be returned at the end of the finance
leases after we have complied with the terms of the lease (see Note 17).
As of December 31, 2022, our prepaid expenses
of $31,523 mainly consists of prepaid insurances.
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 3,309,758 shares of common stock of Odyssey Group International, Inc. (“Odyssey”) ticker: ODYY,
OTC Markets in a private transaction for a purchase price of $860,491, with $10,000 cash delivered at signing and a note issued in favor
of Vivakor in the amount of $850,491 (see Note 10), reflecting the market price at that time. The Company recorded an unrealized gain
of $203,540 on these marketable securities for the year ended December 31, 2021.
The
Company owns 826,376,882 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 $81,768 of our note receivable with Scepter into 26,376,882
shares of Scepter common stock pursuant to the terms of the note at $0.0031 per share. On the date of the conversion, the Scepter 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. The Company
accounted for such securities based on the quoted price from the OTC Markets where the stock is traded which resulted in the Company
recording an unrealized loss on marketable securities of $578,464 and $1,297,594 for the years ended December 31, 2022 and 2021.
The Company’s previous Chief Executive Officer, who resigned on October 6, 2022, had an immediate family member who sits on
the board of directors of Scepter Holdings, Inc. As of December 31, 2022 and 2021 our marketable securities were valued at $1,652,754
and $2,231,218.
As
of December 31, 2022 and 2021, marketable securities were $1,652,754 and
$2,231,218.
For the years ended December 31, 2022 and 2021, the Company recorded a total net unrealized loss of $578,464
and $1,094,054
on marketable securities in the statement of operations.
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 $192,000 related to the Fenix Iron was realized.
As of December 31, 2021 inventories consist primarily of the Fenix Iron. The nano Fenix Iron are finished goods that have a 20-year
shelf life and were acquired at cost for $192,000. Inventories are valued at the lower of cost or market (net realizable value).
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 $1,166,709
against its precious metal concentrate asset based on estimates that the Company received if it were to sell the precious metal
concentrate in its current concentrated form to processing refineries. The Company intends to sell our precious metal concentrate in
its current state or refine it into dore bars for sale or monetization and investment purposes. As of December 31, 2021 the net
realizable value of our precious metal concentrate was $1,166,709.
The operations surrounding our precious metals were temporarily suspended until recently. Due to these suspended activities, and a shift in 2022 of the Company’s focus to the oil and gas industry, we have
not been able to sell our precious metals in their concentrate form as anticipated, and have reserved the remaining $1,166,709
surrounding our precious metal concentrate for the year ended December 31, 2022.
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:
Schedule Of notes receivable | |
| | | |
| | |
| |
December 31, | |
| |
2022 | | |
2021 | |
PLC International Investments,
Inc.(a) | |
| - | | |
| 860,491 | |
TMC Capital,
LLC(b) | |
| - | | |
| 333,744 | |
Total Notes Receivable | |
$ | - | | |
$ | 1,194,235 | |
(a) |
In December 2021
we sold such 3,309,578 shares of Odyssey common stock 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. As of December 31,
2022 we have reserved against the note in the amount of $828,263. |
(b) |
The Company
has a $333,744 note receivable with TMC Capital, LLC, an affiliate of MCW Energy Group Limited. The parties amended the agreement
in December 2021 to have the note paid on or before October 1, 2022. As of December 31, 2022 we have reserved against
the note in the amount of $333,744. |
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:
Schedule of property and equipment, net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
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 | |
$ | 14,998 | | |
$ | 5,912 | | |
$ | 9,086 | | |
$ | 14,998 | | |
$ | 4,000 | | |
$ | 10,998 | |
Vehicles | |
| 36,432 | | |
| 26,110 | | |
| 10,322 | | |
| 48,248 | | |
| 26,306 | | |
| 21,942 | |
Equipment | |
| 763,852 | | |
| 277,288 | | |
| 486,564 | | |
| - | | |
| - | | |
| - | |
Property | |
| 140,000 | | |
| - | | |
| 140,000 | | |
| - | | |
| - | | |
| - | |
Finance
lease- Right of use assets | |
| 3,579,544 | | |
| 349,253 | | |
| 3,230,291 | | |
| - | | |
| - | | |
| - | |
Precious
metal extraction machine- 1 ton | |
| - | | |
| - | | |
| - | | |
| 2,280,000 | | |
| 228,000 | | |
| 2,052,000 | |
Precious
metal extraction machine- 10 ton | |
| - | | |
| - | | |
| - | | |
| 5,320,000 | | |
| 532,000 | | |
| 4,788,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Construction
in process: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bioreactors | |
| - | | |
| - | | |
| - | | |
| 1,440,000 | | |
| - | | |
| 1,440,000 | |
Wash
Plant Facilities | |
| 199,800 | | |
| - | | |
| 199,800 | | |
| | | |
| | | |
| | |
Nanosponge/Cavitation
device | |
| 44,603 | | |
| - | | |
| 44,603 | | |
| 22,103 | | |
| - | | |
| 22,103 | |
Remediation
Processing Unit 1 | |
| 4,396,753 | | |
| - | | |
| 4,396,753 | | |
| 6,249,082 | | |
| - | | |
| 6,249,082 | |
Remediation
Processing Unit 2 | |
| 6,285,547 | | |
| - | | |
| 6,285,547 | | |
| 5,201,098 | | |
| - | | |
| 5,201,098 | |
Remediation
Processing Unit System A | |
| 3,893,051 | | |
| - | | |
| 3,893,051 | | |
| 2,561,467 | | |
| - | | |
| 2,561,467 | |
Remediation
Processing Unit System B | |
| 3,845,398 | | |
| - | | |
| 3,845,398 | | |
| 2,345,421 | | |
| - | | |
| 2,345,421 | |
Total
fixed assets | |
$ | 23,256,006 | | |
$ | 677,130 | | |
$ | 22,578,876 | | |
$ | 25,482,417 | | |
$ | 790,306 | | |
$ | 24,692,111 | |
For
the year ended December 31, 2021 the Company paid $64,950 with 5,413 shares of Series C-1 Preferred Stock for equipment, which has
been valued based on similar cash purchases of the Series C-1 Preferred Stock at approximately $12.00 per share. For the years ended
December 31, 2022 and 2021 depreciation expense was $638,073 and $11,561. For the years ended December 31, 2022 and 2021 capitalized
interest to equipment from debt financing was none and $1,614,697. Equipment that is currently being manufactured is considered construction
in process and is not depreciated until the equipment is placed into service. Equipment that is temporarily not in service is not depreciated
until placed into service.
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.
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 $2,416,572 and is amortized over its useful life of 20 years. As of December 31, 2022 and 2021 the
accumulated amortization of the license was $644,419 and $523,591. For the years ended December 31, 2022 and 2021 amortization expense
of the license was $120,829. Amortization expense for the years 2023 through 2027 is $120,829 in each respective year. As of December 31,
2022 and 2021 the net value of the license is $1,772,153 and $1,892,981, respectively.
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 $225,000 payment
to the licensor, and further amended the agreement in March 2022 to finally extend the payment to be no later than
March 4, 2022. The Company paid consideration of $15,000 for these amended extensions. 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. Ancillary to our Vernal, Utah operations, is our exclusive license agreement
with TBT Group, Inc., For the year ended December 31, 2022 we realized an impairment loss of $447,124 on
this license agreement due to the current disruptions at the Vernal, Utah facility. The Company is in the process of analyzing data
received for this product.
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:
Schedule Of Intellectual Property | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
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 | |
| 19,095,420 | | |
| 844,930 | | |
| 18,250,490 | | |
| - | | |
| - | | |
| - | |
Ammonia synthesis patents | |
| - | | |
| - | | |
| - | | |
| 4,931,380 | | |
| 2,095,836 | | |
| 2,835,544 | |
Total Intellectual property | |
$ | 35,594,007 | | |
$ | 7,342,954 | | |
$ | 28,251,053 | | |
$ | 21,429,967 | | |
$ | 7,767,930 | | |
$ | 13,662,037 | |
The
changes in the carrying amount of goodwill are as follows:
Schedule of goodwill | |
Goodwill | |
January 1, 2021 | |
$ | - | |
Acquisition | |
| 12,678,108 | |
December 31, 2022 | |
$ | 12,678,108 | |
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 $32.9 million, after post-closing adjustments.
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.
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 $12,678,108 and $19,095,420 on August 1, 2022.
The acquired contracts are amortized over a 9 year, 5 month life. The amortization expense of the acquired contracts was $844,930 from
the date of acquisition on August 1, 2022 through December 31, 2022, and amortization expense for the years 2023 through 2027
is $2,027,832 in each respective year. As of December 31, 2022 the net carrying value of the acquired contracts is $18,250,490.
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 $, which consists of the consideration of $11,800,000 and the Company assuming a deferred tax liability in the amount of
$4,585,157. All ownership in the Extraction Technology (including all future enhancements, improvements, modifications, supplements,
or additions to the Extraction Technology) was assigned to the Company and is currently being applied to the Company Remediation Processing
Centers, which are the units that remediate material. The Extraction Technology is amortized over a -year life. For
the years ended December 31, 2022 and 2021 the amortization expense of the technology was $. Amortization expense
for the years 2023 through 2027 is $ in each respective year. As of December 31, 2022 and 2021 the net carrying value of the Extraction
Technology is $ and $.
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 patents were placed in service in 2021 and are amortized over the patents’ useful life
of twenty years. For the year ended December 31, 2022 and 2021 the amortization expense of
the patents was $ and $. Amortization expense for the years 2023 through 2027 is $ in each respective year. As
of December 31, 2022 and 2021 the net carrying value of the patents is $ and $.
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 $4,931,380,
which consists of the consideration of $3,887,982 and the Company assuming a deferred tax liability in the amount of $1,043,398. The
patents grant the Company ownership of a nano catalyst technology that facilitates chemical manufacturing, with a focus on the
production of ammonia, specifically for the gas phase condensation process used to create the
iron catalyst. As of December 31, 2022 we continued to pursue a test facility or third party reactor for our nano
catalyst technology. 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. After taking into consideration
this new information, we noted that the newly requested capital expenditure to test and scale the business triggered a net
impairment loss to fully impair the patents, and the deferred tax liability related to the patents was reduced, yielding a net
impairment loss of $1,622,998.
The
patents were being amortized over their useful life of 10 years before the impairment was triggered. For the years ended December 31,
2022 and 2021 the amortization expense of the patents was $493,138. As of December 31, 2022 and 2021 the net carrying value of the patents
was none and $2,835,544.
Note
14. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following:
Schedule of accounts payable and accrued expenses | |
| | | |
| | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Accounts payable | |
$ | 5,022,302 | | |
$ | 1,450,531 | |
Office access deposits | |
| 235 | | |
| 340 | |
Accrued compensation | |
| 1,302,890 | | |
| 175,000 | |
Unearned revenue | |
| 20,936 | | |
| - | |
Accrued interest (various notes and loans payable | |
| 380,175 | | |
| - | |
Accrued interest (working interest royalty programs) | |
| 1,437,711 | | |
| - | |
Accrued tax penalties and interest | |
| 524,286 | | |
| 398,114 | |
Accounts payable and accrued expenses | |
$ | 8,688,535 | | |
$ | 2,023,985 | |
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 $4,000,681
is with a vendor who our CEO is a beneficiary of. $37,685 of accounts payable related to services rendered, which are not trade payables,
are with a vendor who our CEO is a beneficiary of. $43,934 of accounts payable related to services rendered, which are not trade payables,
are with a vendor where our Chief Financial Officer sits on the board of the directors and is an officer.
As
of December 31, 2021 the Company accrued $225,000 for a milestone payment to be paid to TBT
Group, Inc. (of which an independent Vivakor Board member is a 7% shareholder) related to our worldwide, exclusive license agreement
for the license of piezo electric and energy harvesting technologies for creating self-powered sensors for making smart roadways. This
milestone payment was paid in March 2022.
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 $505,467 (included in accrued compensation) and $421,222 (included in accounts payable),
respectively.
Note
15. Stock Payable
In
2019, the Company had an outstanding payable of $11,800,000
payable in common stock to Sustainable Fuels, Inc. (“SFI”) for the Extraction Technology (See Note 13). Before the
Common Stock was issued, the owner of SFI died and the matters and affairs of his estate were passed to the executor of his estate.
We attempted to contact SFI and the executor of the estate multiple times to issue and send the common stock to the company or
appropriate successor of the estate to no avail. In 2021, the Company was able to make contact with the new owner of SFI and we issued 20,000,000
shares of Common Stock to SFI per the terms of the agreement.
Note
16. Loans and Notes Payable
Loans
and notes payable and their maturities consist of the following:
Schedule of loans and notes payable | |
December 31, | |
| |
2022 | | |
2021 | |
Various promissory notes
and convertible notes(a) | |
$ | 50,960 | | |
$ | 50,960 | |
Novus Capital Group LLC Note(b) | |
| 171,554 | | |
| 378,854 | |
Triple T Notes(c) | |
| 342,830 | | |
| 353,330 | |
National Buick GMC(d) | |
| 16,006 | | |
| 19,440 | |
Various Convertible Bridge Notes(e) | |
| - | | |
| 1,075,813 | |
Blue Ridge Bank(f) | |
| 410,200 | | |
| 410,200 | |
Small Business Administration(g) | |
| 299,900 | | |
| 318,175 | |
JP Morgan Chase Bank(h) | |
| - | | |
| 90,645 | |
Jorgan Development, LLC(i) | |
| 27,977,704 | | |
| - | |
Various variable
interest promissory notes(j) | |
| 2,224,500 | | |
| 3,416,379 | |
Total Notes Payable | |
$ | 31,493,654 | | |
$ | 6,113,796 | |
| |
| | | |
| | |
Loans and notes payable, current | |
$ | 885,204 | | |
$ | 1,511,447 | |
Loans and notes payable, current attributed to variable interest entity | |
| 1,924,500 | | |
| 3,416,379 | |
Loans and notes payable, long term | |
$ | 28,683,950 | | |
$ | 1,185,970 | |
Schedule of maturities of loans and notes payable | |
| | |
2023 | |
$ | 2,809,704 | |
2024 | |
| 16,843,748 | |
2025 | |
| 11,577,052 | |
2026 | |
| 33,640 | |
2027 | |
| 17,232 | |
Thereafter | |
| 212,278 | |
Total | |
$ | 31,493,654 | |
(a) |
From 2013 through 2018
the Company issued a series of promissory notes and convertible notes with various interest rates ranging up to 12% per annum. The
convertible notes convert at the holder’s option after 1 year of issuance and may be converted into shares of common stock.
The conversion price is generally equal to the specified per share conversion rate as noted in the note agreements. |
(b) |
In 2017, the Company acquired
assets, including patents, in the amount of $4,931,380 in which the Company also agreed to assume the encumbering debt on asset in
the amount of $334,775. The debt currently accrues interest at 10% per annum. In November 2021, the lender agreed to extend
the maturity of the note to April 1, 2022. On April 1, 2022, the lender agreed to extend the maturity of the note to April 1,
2023 with an initial payment of $52,448 and approximate monthly payment of $29,432 thereafter until the note is fully paid. |
(c) |
The balance of this note
is due to a related party, a company owned by the 51% owner of Vivakor Middle East LLC. The loan was granted to Vivakor Middle East
LLC by the majority owner for operational use. On March 10, 2021, the Company entered into a master revolving note with Triple
T Trading Company LLC to set forth the relationship of the parties to retain the previous terms of the note payable to Triple T Trading
Company LLC, to include a note maturity of March 10, 2023, and maximum lending amount of 1,481,482 QAR or approximately $400,000,
valued at an exchange rate of approximately $0.27 per QAR on December 31, 2022. Subsequent to December 31, 2022 the parties
agreed to extend the maturity date of the loan to March 10, 2024. |
(d) |
In May 2019, the Company
purchased a vehicle for $36,432 and financed $34,932 over six years with an interest rate of 6.24% per annum. Monthly payments of
$485 are required and commenced in July 2019. |
(e) |
In 2020 the Company entered
into various convertible promissory notes as follows: |
Throughout
2021 and 2020 the Company entered into convertible promissory notes with an aggregate principal of $415,000. The notes accrue interest
at 10% per annum and have a maturity of the earlier of 12 months or the consummation of the Company listing its Common Stock on a senior
stock exchange. The notes are convertible at the Company’s option into shares of the Company’s common stock at a price equal
to 80% of the opening price of the Company’s common stock on the national exchange or the offering price paid by the investors
in the financing in connection with the uplist, whichever is lower, or (ii) repaid in cash in an amount equal to the indebtedness being
repaid plus a premium payment equal to 15% of the amount being repaid. If an event of default has occurred and the Company does not convert
the amounts due under the Note into the Company’s common stock, then the Company will have the option to convert the outstanding
indebtedness into shares of the Company’s common stock at a price equal to 80% of the weighted average trading price of the Company’s
common stock, or be repaid in cash in an amount equal to all principal and interest due under the Note. All of these
notes were converted to common stock as of April 5, 2022.
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) |
In
May 2020, the Company entered into a Paycheck Protection Program (“PPP”) loan agreement for $205,100 with Blue Ridge
Bank, subject to the Small Business Administration’s (“SBA”) Paycheck Protection Program. The loan carries an annual
interest rate of one (1) percent per annum with payment beginning in the seventh month with monthly payments required until maturity
in the 18th month. The loan may be fully forgivable according to the CARES Act if the Company can provide proper documentation
for the use of the proceeds of the loan. The Company has achieved the milestones for loan forgiveness and anticipates that this debt
will be forgiven in full in 2021. On January 6, 2021 the Company was granted an extension of the PPP and granted an additional
$205,100 from Blue Ridge Bank, subject to the Small Business Administration’s (“SBA”) Paycheck Protection Program.
The loan carries an annual interest rate of one (1) percent per annum with payment beginning in the tenth month with monthly payments
required until maturity in five years. The loan may be fully forgivable according to the CARES Act if the Company can provide proper
documentation for the use of the proceeds of the loan. The Company has achieved the milestones for loan forgiveness, has applied
for loan forgiveness, and anticipates that this debt will be forgiven in full. |
(g) |
From
May through August 2020, the Company entered into two loan agreements with the Small Business Administration for an aggregate
loan amount of $299,900. The loans carry an interest rate of 3.75% per annum. The loans shall mature in 30 years. |
(h) |
In
April 2021, the Company entered into a Paycheck Protection Program loan agreement with JP Morgan Chase Bank, subject to the
Small Business Administration’s (“SBA”) Paycheck Protection Program. The loan may be fully forgivable according
to the CARES Act if the Company can provide proper documentation for the use of the proceeds of the loan. The Company received loan
forgiveness of this debt in 2022. |
(i) |
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 consideration for the membership interests included
secured three-year promissory 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, the Company has 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
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. In October 2022, we entered into an agreement amending the notes issued as consideration in the MIPA, whereby, as soon
as is practicable, following and subject to the approval of the Company’s shareholders, and provided there are no applicable
prohibitions under the rules of The Nasdaq Capital Market or other restrictions, the Company will issue 7,042,254 restricted shares
of the Company’s common stock as a payment of $10,000,000 toward the principal of the note on a pro rata basis, reflecting
a conversion price of $1.42 per share. Once the registration statement is declared effective by the SEC, the Note Payment will count
against the threshold payment amount, as defined in the notes and the MIPA. For the year ended December 31, 2022, the Company
paid $399,932 in principal and $872,404 in interest to Jorgan. For the year ended December 31, 2022, the Company paid $286,643
in principal and $6,111 in interest to JBAH paying this note off in full. |
(j) |
The balance
of these various promissory notes are related to the special purchase vehicle, Viva Wealth Fund I, LLC (VWFI) of which the balance
primarily related to an offering up to $25,000,000 in convertible notes in a private offering. As of December 31, 2022, VWFI
has raised $11,750,000 and converted $10,425,000 of this debt to VWFI LLC units. A convertible note will automatically convert into
the LLC units at the earlier of (i) the date that the Equipment is placed into quality control and testing or (ii) six months from
the date of investment. The convertible notes will accrue interest at 12% per annum and are paid quarterly. At the maturity date,
remaining interest will be paid, at which time no further interest payments will accrue. Upon the offering termination date, all
units accepted for any series of equipment will automatically convert to Vivakor common stock if the Company has not accepted subscriptions
for at least $8,250,000 for Series B of the equipment. The conversion price of the automatic stock conversion will be the greater
of $13.50 or a 10% discount to market per share or in the event of a public offering, 200% of the per share price of the Company
common stock sold in an underwritten offering, which was closed on February 14, 2022 at $5.00 per share. The termination date
of the offering has been extended until March 31, 2023 in the sole discretion of VWFI. As of April 28, 2021 VWFI has reached
$6,250,000 in funding and has released the funding for construction of RPC Series A. VWFI has commenced fundraising for RPC Series
B, and as of December 31, 2022, VWFI has raised approximately $5,500,000 to manufacture RPC Series B. Subsequent to December 31,
2022 an additional $1,980,000 has been raised in relation this offering, and $555,000 of this debt has been converted into units
of the LLC. VWFI has also entered into various master revolving notes outside of the offering: $599,500, from a related party of
VWFI, 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; $300,000, from a related party of VWFI, 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. |
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 $1,025,000
and subsequently entering into an agreement to lease the assets back from Maxus for 60 monthly payments of $22,100.
At the end of the lease term there is an option purchase the assets back from Maxus at a purchase price of $1.
The second transaction involved the Company assigning the remaining property at the oil gathering facility with the exception of land, to Maxus for consideration of $1,350,861
and subsequently entering into an agreement to lease the assets back from Maxus for 60 monthly payments of $18,912.
At the end of the lease term, there is an option to purchase the assets back from Maxus at a purchase price of $877,519.
The land, contains the oil gathering facility, is being used as collateral by the lessor
for both lease obligations.
We
are required to make minimum cash reserve payments of at least $24,000 ($8,945 and $15,055 for the first and second lease, respectively)
each month in addition to the base lease payments. The cash reserve payments are to be used in the event of a default. At the end of
the term, Maxus will return the balance of any cash reserve payments. As of December 31, 2022, the balances of the cash reserves
for these leases were $369,109 (see Note 6). As these leases grant the lessee an option to purchase the underlying asset that the lessee is reasonably
certain to be exercised, the leases are accounted for as finance leases. We have recorded right of use assets in our property, plant,
and equipment, and depreciated them on a straight-line basis. We have also recorded a finance lease liability due to Maxus. According to ASC 842, the Company has measured the lease liability and at the present value of the remaining lease payments, as if the lease were acquired on acquisition date of August 1, 2022. This measurement as
imputed interest rate of 18% for the first and second lease obligations, which results in the carrying value of the financial
liabilities equating the estimated book value of the leased assets at the end of the lease terms and the dates at which the Company may
exercise its buy-back options. Future minimum lease payments for each of the next three years under the Maxus lease obligations is as
follows: 2023 $492,144, 2024 $492,144, and 2025 $123,036.
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 $2,500,000
and entered into a lease agreement to lease the China Grove Station back from Maxus for 60 monthly payments of $39,313. At the end of
the lease term, the Company has an option to purchase the China Grove Station back from Maxus at 35% of the original cost, or $875,000.
The Company has pledged 100% of its interests in accounts receivable as collateral for the lease obligation. The Company is required
to make minimum cash reserve payments of at least $16,100 each month in addition to the base lease payments until Maxus has received
$471,756. The cash reserve payments are to be used in the event of default. As of December 31, 2022, the balance of the cash reserves
for these leases were $144,900. As these leases grant the lessee an option to purchase the underlying asset that the lessee is reasonably
certain to be exercised, the leases are accounted for as finance leases. We have recorded right of use assets in our property, plant,
and equipment, and depreciated them on a straight-line basis. We have also recorded a finance lease liability due to Maxus. According to ASC 842, the Company has measured the lease liability and at the present value of the remaining lease payments, as if the lease were acquired on acquisition date of August 1, 2022. This measurement as yielded an imputed interest rate of 18% for the lease obligation, which results in the carrying value of the financial liability equating
the estimated book value of the China Grove Station at the end of the lease term and the date at which the Company may exercise its buy-back
option. Future minimum lease payments for each of the next four years under the Maxus lease obligation are as follows:
2023 $471,756, 2024 $471,756, 2025 $471,756, and 2026 $471,756.
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:
Schedule of financing lease liability | |
| | |
2023 | |
$ | 963,900 | |
2024 | |
| 963,900 | |
2025 | |
| 594,792 | |
2026 | |
| 471,756 | |
Total undiscounted lease payments | |
| 2,994,348 | |
Less: Imputed interest | |
| 1,484,488 | |
Present value of lease payments | |
| 1,509,860 | |
Add: carrying value of lease obligation at end of lease term | |
| 1,753,000 | |
Total finance lease obligations | |
$ | 3,262,860 | |
| |
| | |
Finance lease liabilities, current | |
$ | 963,900 | |
Finance lease liabilities, long-term | |
$ | 2,298,960 | |
| |
| | |
Weighted-average discount rate | |
| 18.00 | % |
Weighted-average remaining lease term (months) | |
| 40.23 | |
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 $21,927, Year 2 $22,832, Year 3 $23,737, Year 4 $24,712, Year 5 $25,686. As a condition of the lease, we were required
to provide a $51,992 security deposit.
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 $1,950, Year 2 $2,028,
Year 3 $2,110. As a condition of the lease, we were required to provide a $2,418 security deposit.
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 $867, June 2022
to March 2023 $3,550, Year 2 $3,657, Year 3 $3,766. As a condition of the lease, we were required to provide a $3,766 security deposit.
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 $2,000 as long as the Company remains in the space.
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 $1,880,056 and $663,291. Rent expense for the years
ended December 31, 2022 and 2021 was $404,383 and $292,410.
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:
Schedule of lessee operating lease liability | |
| | |
2023 | |
$ | 471,991 | |
2024 | |
| 435,906 | |
2025 | |
| 162,545 | |
2026 | |
| 136,975 | |
2027 | |
| 153,089 | |
Thereafter | |
| 2,865,620 | |
Total undiscounted lease payments | |
| 4,226,126 | |
Less: Imputed interest | |
| 2,296,652 | |
Present value of lease payments | |
$ | 1,929,474 | |
| |
| | |
Operating lease liabilities, current | |
$ | 471,991 | |
Operating lease liabilities, long-term | |
$ | 1,457,483 | |
| |
| | |
Weighted-average remaining lease term | |
| 209.88 | |
Weighted-average discount rate | |
| 9.93 | % |
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 503,935
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.
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 $7,735 in the second quarter of 2021. The RPCs are estimated to enter
scaled up operations in 2023 and make estimated payments. The Company estimates future payments based on revenue projections for the
RPCs. Due to delays and limitations in achieving scaled up operations (see Note 3 Long Lived Assets) the effective interest rate
of these agreements range from approximately 11% to 31% and 33% to 34% for the years ended December 31, 2022 and 2021.
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
113,000 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 106,167 common stock warrants to investors. The relative
fair value of the warrants and Series B-1 preferred stock in aggregate was $1,488,550, and was recorded as a debt discount, which is
amortized to interest expense over the term of the agreements using the effective interest method. During the manufacturing phase of
the asset, the interest expense is capitalized to the asset.
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.
Long-term
debt consists of the following:
Schedule Of Long-Term Debt | |
| | | |
| | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Principal | |
$ | 2,196,233 | | |
$ | 2,196,233 | |
Accrued interest | |
| 1,922,621 | | |
| 4,205,144 | |
Debt discount | |
| (211,938 | ) | |
| (226,823 | ) |
Total long-term debt | |
$ | 3,906,916 | | |
$ | 6,174,554 | |
| |
| | | |
| | |
Long term debt, current | |
$ | 9,363 | | |
$ | 3,256 | |
Long term debt | |
$ | 3,897,553 | | |
$ | 6,171,298 | |
The
following table sets forth the estimated payment schedule of long-term debt as of December 31, 2022:
Schedule of long-term debt maturities | |
| | |
2023 | |
$ | 11,134 | |
2024 | |
| 28,361 | |
2025 | |
| 34,324 | |
2026 | |
| 40,113 | |
2027 | |
| 47,141 | |
Thereafter | |
| 2,035,159 | |
Total | |
$ | 2,196,233 | |
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 15,000,000
shares of preferred stock. The Company is authorized to issue 66,667 shares of Series A Preferred Stock, 3,266,667 shares of Series B
Preferred Stock, 1,666,667 shares of Series B-1 Preferred Stock, 3,333,333 shares of Series C Preferred Stock, and 3,333,333 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 none and $400,000. Holders of shares of Series A Preferred Stock are
not currently entitled to dividends. The Company has the right, but not the obligation, to redeem shares of Series A Preferred Stock.
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 12.5% and cumulative and are payable only when, as, and if
declared by the Board of Directors.
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 12.5% and cumulative and are payable only when, as, and if declared by the Board of Directors.
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.
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 (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, and converted
into 833,333 shares of Common Stock.
For
the year ended December 31, 2021, $9,467,604 or 950,972 shares of Series B, Series B-1, and Series C-1 Preferred Stock were converted
into 955,947 shares of Common Stock.
For
the year ended December 31, 2021, the Company issued 5,413 Series C-1 Preferred Stock or $64,950 for a reduction in stock payables.
For
the year ended December 31, 2021, the Company issued 5,626 shares of Series B-1 Preferred Stock as a $42,196 stock dividend paid
to Series B Preferred Shareholders.
Common
Stock
The
Company is authorized to issue 41,666,667 shares of common stock. As of December 31, 2022 and 2021, there were 18,064,838 and 12,330,859
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
$32.9 million, after post-closing adjustments, payable in part by the issuance of 3,009,552 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 closing.
JBAH and Jorgan have entered into 18-month lock-up agreements to the 3,009,552 common shares issued for consideration (see Note 4).
For
the year ended December 31, 2021, $9,467,604 or 950,972 shares of Series B, Series B-1, and Series C-1 Preferred Stock were converted
into 955,947 shares of Common Stock.
For
the years ended December 31, 2022 and 2021, the Company issued 272,156 and 68,611 common shares for a $1,144,992 and $495,799 reduction
of liabilities.
For
the years ended December 31, 2021, the Company issued 33,667 shares of Common Stock for $438,004 in services to the Company.
For
the year ended December 31, 2021, the Company issued 16,667 shares for a $225,000 payment for a technology license (see Note 10).
Noncontrolling
Interest
For
the years ended December 31, 2022 and 2021, the Company converted $4,865,000 and $5,560,000 in Viva Wealth Fund I, LLC convertible
promissory notes into 973 and 1,112 units of noncontrolling interest in Viva Wealth Fund I, LLC, and paid distributions to unit holders
of $861,691 and $55,050.
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.
Schedule Of Temporary Equity | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Convertible Preferred Stock | |
| |
Series B | | |
Series B-1 | | |
Series C-1 | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | |
December 31, 2020 | |
| 216,916 | | |
$ | 1,301,500 | | |
| 467,728 | | |
$ | 3,507,981 | | |
| 255,290 | | |
$ | 4,550,977 | |
Series C-1 Issue for a reduction in stock payables | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,413 | | |
| 64,950 | |
Dividend paid in Series B-1 Preferred Stock | |
| - | | |
| - | | |
| 5,626 | | |
| 42,196 | | |
| - | | |
| - | |
Conversion of Series B and B-1 Preferred Stock to Common Stock | |
| (216,916 | ) | |
| (1,301,500 | ) | |
| (473,354 | ) | |
| (3,550,177 | ) | |
| (260,703 | ) | |
| (4,615,927 | ) |
December 31, 2021 | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
Note
21. Share-Based Compensation & Warrants
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 2,000,000.
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.
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.
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 16,667 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 1,872,918 employee
stock options granted in June 2022 that were to vest over a period of two years, for which 451,158 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 $2,606,703 and $446,112. In 2020, the Company also granted non-statutory stock options, including
133,333 stock options to the Board of Directors, which vested over 1 year, and a 333,334 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 100,000 stock options per independent board member, exercisable at $2.50 per share, vesting immediately. Non-statutory stock-based compensation was $1,472,888 and $1,585,000 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 |
|
0.24 4.57% |
Expected dividend yield |
|
None |
Expected life of warrants |
|
3.33-10 years |
Expected volatility rate |
|
156 - 273% |
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 | |
| 650,000 | | |
$ | 12.00 | | |
| 8.53 | |
| |
| | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | |
Outstanding, December 31, 2021 | |
| 650,000 | | |
$ | 12.00 | | |
| 7.53 | |
| |
| | | |
| | | |
| | |
Granted | |
| 2,412,918 | | |
| 2.28 | | |
| 5.78 | |
Exercised | |
| (16,667 | ) | |
| 11.10 | | |
| - | |
Forfeited | |
| (1,212,685 | ) | |
| 7.05 | | |
| - | |
Outstanding, December 31, 2022 | |
| 1,833,566 | | |
$ | 2.59 | | |
| 6.47 | |
| |
| | | |
| | | |
| | |
Exercisable, December 31, 2021 | |
| 180,000 | | |
$ | 12.00 | | |
| 7.01 | |
| |
| | | |
| | | |
| | |
Exercisable, December 31, 2022 | |
| 1,526,869 | | |
$ | 2.65 | | |
| 5.94 | |
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 80,000 and no warrants outstanding. On February 14, 2022, the Company closed
on its underwritten public offering of 1,600,000 shares of common stock, at a public offering price of $5.00 per share. In addition,
the Company has issued the underwriter, EF Hutton, a 5-year warrant to purchase 80,000 shares of common stock at an exercise price equal
$5.75. and were valued with a fair market value of $374,000. The impact of these warrants has no effect on stockholder’s equity,
as they are considered equity-like instruments, and are considered a direct expense of the offering.
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:
Schedule of warrant activity |
|
|
Risk-free interest rate |
|
1.92% |
Expected dividend yield |
|
None |
Expected life of warrants |
|
5 years |
Expected volatility rate |
|
167% |
Note
22. Income Tax
Benefit for income taxes is as follows:
Schedule of components of income tax | |
| | | |
| | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | | |
| | |
State | |
$ | 800 | | |
$ | 800 | |
Total current | |
| 800 | | |
| 800 | |
Deferred: | |
| | | |
| | |
Federal | |
| (3,082,578 | ) | |
| (718,868 | ) |
State | |
| (1,354,913 | ) | |
| (332,139 | ) |
Total Deferred | |
| (4,437,491 | ) | |
| (1,051,007 | ) |
| |
| | | |
| | |
Net provision | |
$ | (4,436,691 | ) | |
$ | (1,050,207 | ) |
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 | |
$ | (4,985,329 | ) | |
| 21.00 | % |
State Tax, Net Of Fed Tax Benefit | |
| (1,312,478 | ) | |
| 5.53 | % |
Nondeductible Expenses | |
| 515,476 | | |
| -2.17 | % |
Flowthrough Entity not Subject to Tax | |
| 422,216 | | |
| -1.78 | % |
Foreign Corporation - Minority Interest | |
| 6,201 | | |
| -0.03 | % |
Other | |
| 92,854 | | |
| -0.39 | % |
Valuation Allowance | |
| 824,368 | | |
| -3.47 | % |
Benefit
for income taxes | |
$ | (4,436,691 | ) | |
| 18.69 | % |
| |
December 31,
2021 | |
Tax Computed At The Federal Statutory Rate | |
$ | (1,338,184 | ) | |
| 21.00 | % |
State Tax, Net Of Federal Tax Benefit | |
| (263,892 | ) | |
| 4.14 | % |
Nondeductible Expenses | |
| 85,025 | | |
| -1.33 | % |
Flowthrough Entity not Subject to Tax | |
| 454,587 | | |
| -7.13 | % |
Foreign Corporation - Minority Interest | |
| 3,140 | | |
| -0.05 | % |
Valuation Allowance | |
| 9,117 | | |
| -0.14 | % |
Benefit for income taxes | |
$ | (1,050,207 | ) | |
| 16.48 | % |
Significant
components of the Company’s deferred tax assets and liabilities are as follows:
Schedule of deferred tax assets and liabilities | |
| | |
| |
December 31,
2022 | |
Reserves | |
$ | 572,650 | |
Fixed Assets | |
| (1,747,971 | ) |
Leases | |
| (3,312 | ) |
Intangibles | |
| (2,302,728 | ) |
Net Operating Losses | |
| 4,253,740 | |
Impairment Losses | |
| 3,117,046 | |
Stock Options | |
| (129,350 | ) |
Accruals | |
| 1,011,016 | |
Other | |
| (231,111 | ) |
Net Deferred Asset | |
| 4,539,981 | |
Less: Valuation Allowance | |
| (4,539,981 | ) |
Total deferred tax liability: | |
$ | - | |
| |
| | |
| |
December 31,
2021 | |
Reserves | |
$ | 336,875 | |
Fixed Assets | |
| (1,915,092 | ) |
Leases | |
| 16,395 | |
Intangibles | |
| (3,622,638 | ) |
Net Operating Losses | |
| 3,553,164 | |
Impairment Losses | |
| - | |
Stock Options | |
| 598,849 | |
Accruals | |
| (32,905 | ) |
Other | |
| (393,154 | ) |
Net Deferred Liability | |
| (1,458,506 | ) |
Less: Valuation Allowance | |
| (3,698,393 | ) |
Total deferred tax liability: | |
$ | (5,156,899 | ) |
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.
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 $23.7 and $14.3 million, respectively. Federal and state net operating
losses will begin to expire in 2028.
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 $517,000 and $289,000, respectively. The Company does not expect this reserve to reverse within the next 12 months,
as they will apply for a penalty waiver when the tax returns are ultimately filed. Due to the non-filing of income tax returns, statutes
of limitations on the potential examination of those income tax periods will continue to run until the returns are filed, at which time
the statutes will begin. The Company expects to file all past due income tax returns within the next 12 months.
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.
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.
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 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 $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.
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, VWFI has extended the termination date of its $25M offering until March 31,
2023. VWFI has raised $1,980,000 in conjunction with the $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 RPC Series B. Subsequent to December 31, 2022, VWFI has also converted $555,000 of convertible debt into VWFI LLC
units.