Vivakor, Inc. 10-K

Item 5 - Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our Common Stock is listed on the Nasdaq Capital Market under the symbol “VIVK.” Holders As of April 4, 2024, there were 27,710,253 shares of Common Stock outstanding held by approximately 534 holders of record (not including an indeterminate number of beneficial holders of stock held in street name). Warrants There is a warrant to purchase 80,000 shares of common stock issued and outstanding as of April 4, 2024. Dividends To date, we have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future. The declaration and payment of dividends on the common stock is at the discretion of our Board of Directors and will depend on, among other things, our operating results, financial condition, capital requirements, contractual restrictions or such other factors as our Board of Directors may deem relevant. Securities Authorized for Issuance under Equity Compensation Plans On November 10, 2023, our 2023 Equity and Incentive Plan went effective. The plan was approved by our Board of Directors and by the holders of a majority of our common stock. The Plan’s number of authorized shares is 40,000,000. As of April 4, 2024, no options had been granted or exercised under the Plan. As of April 4, 2024, there were stock awards granted of 3,584,340 shares of common stock at a weighted exercise price of $0.83 per share under the plan. As of April 4, 2024, the Plan had 2,394,882 vested shares and 1,189,458 non-vested shares underlying the stock awards. We have not issued any other type of equity awards under the Plan. On February 14, 2022, our 2021 Equity and Incentive Plan went effective. The plan was approved by our Board of Directors. The Plan’s number of authorized shares is 2,000,000. As of April 4, 2024, there were stock options and awards granted to acquire 1,816,900 shares of common stock at a weighted exercise price of $2.50 per share under the plan. As of April 4, 2024, the Plan had 1,720,221vested shares and 96,679 non-vested shares underlying the stock options. As of April 4, 2024, no options had been exercised under the Plan. We have not issued any other type of equity awards under the Plan. The stock options issued under the Plan are held by certain of our current and former executive officers. Recent Issuance of Unregistered Securities The following sets forth information regarding all unregistered securities sold by us in transactions that were exempt from the requirements of the Securities Act in the last fiscal year. Except where noted, all of the securities discussed in this Item 5 were all issued in reliance on the exemption under Section 4(a)(2) of the Securities Act. 2023 On June 20, 2023, we issued a 15% secured promissory note (the “Note”) due as described below, to DIC, in the principal amount of up to $1,950,000 (the “Principal Amount”), in relation to the Services Agreement. The Company will use the proceeds of the Note in refurbishing, relocating and fully installing the Company’s RPC currently located in Vernal, Utah to DIC’s location in Kuwait. As security interest to secure repayment of the Note, the Company issued DIC an option to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.179 per share (the “Option”). At any time there are amounts due to DIC under the Note, DIC may use the amounts then outstanding to purchase some or all of the shares under the Option by using the outstanding amounts as payment of the exercise price under the Option. 30 On August 29, 2023, we issued 154,744 shares of common stock at approximately $1.42 per share for a $220,000 reduction of liabilities. On October 6, 2023, we issued 35,000 shares of common stock at approximately $1.00 per share for a $35,000 reduction of liabilities. On October 28, 2022, we agreed to issue 7,042,254 restricted shares of our common stock in exchange for the forgiveness and cancellation of $10,000,000 of principal under certain promissory notes held by entities controlled by James Ballengee, our Chief Executive Officer, on a pro rata basis, reflecting a conversion price of $1.42 per share. These shares were issued on November 10, 2023. On October 28, 2022, we entered into an executive employment agreement with James Ballengee (the “Employment Agreement”) with respect to the Company’s appointment of Mr. Ballengee as Chief Executive Officer and Chairman of the Board. Pursuant to the Employment Agreement, Mr. Ballengee will receive annual compensation of $1,000,000 payable in shares of the Company’s Common Stock, 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 Shares”). 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 (the “CEO Compensation Shares Issuance”). We issued 923,672 shares of our common stock for the CEO Compensation Shares Issuance on November 10, 2023. Item 7 - Management ’ s Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on 10-K. Overview Vivakor, Inc. is a socially responsible operator, acquirer and developer of technologies and assets in the oil and gas industry, as well as related environmental solutions. Currently, our efforts are primarily focused on operating crude oil gathering, storage and transportation facilities, as well as contaminated soil remediation services. One of our facilities sells crude oil in amounts up to 60,000 barrels per month under agreements with a large energy company. A different facility owns a 120,000 barrel crude oil storage tank near Colorado City, Texas. The storage tank is presently connected to the Lotus pipeline system and we plan to further connect the tank to major pipeline systems. Our soil remediation services specialize in the remediation of soil and the extraction of hydrocarbons, such as oil, from properties contaminated by or laden with heavy crude oil and other hydrocarbon-based substances. Our patented process allows us to successfully recover the hydrocarbons which we believe could then be used to produce asphaltic cement and/or other petroleum-based products. Reclassifications Certain reclassifications may have been made to prior years’ amounts to conform to the 2023 presentation. Revenue For the years ended December 31, 2023 and 2022, we realized revenues of $59,321,752 and $28,107,223, respectively, representing an increase of $31,214,529 or 111.06%. The increase in revenue is primarily attributed to our oil and natural gas liquid sales which have been realized through the operations from our newly acquired businesses in SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. 31 Cost of Revenue For the year ended December 31, 2023 and 2022, our cost of revenues consisted primarily of costs associated with selling oil and natural gas liquid through the operations from our newly acquired businesses in SFD and WCCC, which were acquired through our business combination which closed on August 1, 2022. For the years ended December 31, 2023 and 2022, costs of revenue were $54,300,788 and $25,239,962, respectively, representing an increase of $29,060,826 or 115.14%. The increase in the cost of revenue is primarily attributed to the cost of goods sold for our oil and natural gas liquid products realized through the operations from our newly acquired businesses in SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. Gross Profit and Gross Margin For the years ended December 31, 2023 and 2022, we realized gross profit of $5,020,964 and $2,867,261, respectively, representing an increase of $2,153,703 or 75.11%. For the year ended December 31, 2023 and 2022, the gross profit increased in proportion to the revenue and costs of revenue related to the purchase and sale of our oil and natural gas liquid products. Our gross margin will continue to be affected by a variety of factors that include the market prices of our oil products, the volume produced by our facilities, and our ability to raise capital to continue to fund our operations or other ancillary agreements outside of the oil gathering, transportation, and storage activities. Operating Expenses Our operating expenses consist primarily of marketing, general and administrative expenses, bad debt expense, impairment loss, and amortization and depreciation expense. Marketing expenses include marketing fees of company representatives for marketing the business and its products and services as well as investor customer service. General and administrative expenses include professional services, including audit, tax, and legal fees associated with the costs for services in finance, accounting, administrative activities and the formation and compliance of a public company. Bad debt expense includes the expense associated with assets that management analyses and estimates may be uncollectible. Impairment loss includes the expense associated with events or changes in circumstances that indicate the carrying amount of an asset may not be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized. Amortization and depreciation expense uses the useful life of the asset to calculate the amortization or depreciation expense in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and management’s judgment. For the years ended December 31, 2023 and 2022, we realized operating expenses of $11,352,624 and $25,611,216, which represents a decrease of $14,258,592, or 55.67%. Our operating expenses decreased due to multiple substantial events and their associated expenses throughout 2022, including approximately $12,300,837 in impairment loss and bad debt expense, as discussed below. For the years ended December 31, 2023 and 2022, we realized an impairment loss of none and $11,138,830, which represents a decrease of $11,138,830 or 100%. Our impairment loss directly related to multiple events throughout 2022, including disruptions at our Vernal, Utah plant due to supply and personnel limitations, in which we realized an impairment loss of $447,124 on a license agreement with TBT Group and the possibilities of embedding self-powered sensors directly into the asphaltic cement we may generate from the Vernal, Utah RPC; After taking into consideration new information in 2022 related to the costs of building our own test facility or using new partners to test our ammonia synthesis catalyst, we realized an impairment loss of $3,254,999 to our ammonia synthesis assets; The operations surrounding our precious metals extraction services were suspended until 2022, although due to these suspended activities and a shift in 2022 of the Company’s focus to the oil and gas industry, we have realized an impairment loss $6,269,998 surrounding the extraction machinery, and we reserved further against our work-in-process precious metal concentrate in the amount of $1,166,709 as it had not been sold as anticipated in its concentrate form during 2022. In 2023 we agreed with TBT Group, Inc. to cancel the license agreement and both parties agreed to fully release and discharge any and all known and unknown claims they may have against the other party, with neither party owing the other party any money and TBT retaining the ownership of the piezo electric and energy harvesting technology that was the subject of the license agreement. 32 For the years ended December 31, 2023 and 2022, we realized bad debt expense of none and $1,162,007, which represents a decrease of $1,162,007 or 100%. The decrease in bad debt expense is directly related to two note receivables. The first note receivable relates to the sale of 3,309,578 shares of marketable securities in December 2021 in a private transaction for a purchase price of $860,491, reflecting the market price as of such time. Such purchase price was paid in the form of $10,000 cash delivered at signing and a note issued in favor of Vivakor in the amount of $850,491 with payments due quarterly over a five-year term. The purchaser made their initial payment in the first quarter of 2022 but has not made further payments. The second note receivable is a $333,744 note receivable with TMC Capital, LLC, an affiliate of MCW Energy Group Limited. The parties amended their agreement in December 2021 to have the note paid on or before October 1, 2022, but we have not received payment. In 2022 we reserved against these notes in the amount of $828,263 and $333,744. Throughout 2022 we recognized increased professional services and compensation expenses, which relate to our registration statement, its amendments, preparing for and completing an underwritten public offering of our common stock, including our preparations and completion of an uplist of our common stock to a senior stock exchange, and two substantial acquisitions of SFD and WCCC. For example, for the years ended December 31, 2023 and 2022, we realized stock option expense of $2,064,466 and $4,079,591, which represents an decrease of $2,015,125, or 49.40% decrease. For the years ended December 31, 2023 and 2022, we realized amortization and depreciation expense of $3,932,744 and $2,953,629, which represents an increase of $979,115 or 33.15%. The increase in amortization and depreciation expense is primarily attributed to the amortization of our newly acquired contracts (see Note 13) and depreciation from our newly acquired property, plant and equipment held by SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. Loss from Operations For the years ended December 31, 2023 and 2022, we realized a loss from operations of $6,331,660 and $22,743,955, which represents a decrease of $16,412,295, or 72.16%. The decrease in loss is attributed to the net effect of the increase in gross profit and decrease in operating expenses discussed above. Interest expense For the years ended December 31, 2023 and 2022, we realized interest expense of $4,025,077 and $1,519,281, which represents an increase of $2,505,796, or 164.93%. The increase in interest expense is mainly attributable to the $28,664,284 in notes payable issued as consideration for our newly acquired entities, SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. The notes accrue interest of prime plus 3% on the outstanding balance of the notes. For the years ended December 31, 2023 and 2022, the Company accrued $2,993,121 and $1,126,429 in interest on these notes payable. Unrealized loss on marketable securities For the years ended December 31, 2023 and 2022, we reported an unrealized loss of $1,156,928 and $578,464 on marketable securities, which represents an increase in the unrealized loss of $578,464, or 100%. Our marketable securities were considered to be traded on an active market and were accounted for at a fair value based on the quoted prices in the active markets resulting in aggregate unrealized losses as noted above. Gain on deconsolidation of variable interest entity In accordance with ASC 810, as of October 1, 2023, we deconsolidated Viva Wealth Fund I, LLC (VWFI), recognizing a gain on deconsolidation of $438,099. The assets ($10.2 million), liabilities ($551,950) and equity ($10.1 million) related to VWFI were removed from our financial statements (Note 3 Principles of Consolidation ), resulting in the gain on deconsolidation. 33 Provision for income tax The Company recorded an income tax benefit (provision) of (92,703) and $4,436,691 for the years ended December 31, 2023 and 2022, respectively. The Company’s effective tax rate for 2023 and 2022 was -0.88% and 18.69%, which was the result of the (provision) or benefit of book income/losses offset by an additional valuation allowance on the net operating losses. Cash flows The following table sets forth the primary sources and uses of cash and cash equivalents for the years ended December 31, 2023 and 2022 as presented below: December 31, 2023 2022 Net cash used in operating activities $ (764,902 ) $ (4,143,297 ) Net cash used in investing activities (3,712,839 ) (2,332,754 ) Net cash provided by financing activities 2,039,255 8,165,125 Liquidity and Capital Resources We have historically suffered net losses and cumulative negative cash flows from operations and, as of December 31, 2023 and 2022, we had an accumulated deficit of approximately $65.9 million and $55.2 million. As of December 31, 2023 and 2022, we had a working capital deficit of approximately $34.9 million and $3.77 million, respectively. As of December 31, 2023 and 2022, we had cash and cash equivalents of $744,307 and $3,182,793, with none and $81,607 attributed to variable interest entities, respectively. To date we have financed our operations primarily through debt financing, private equity offerings and our working interest agreements, although on February 14, 2022, the Company closed an underwritten public offering of 1,600,000 shares of common stock, at a public offering price of $5.00 per share, for aggregate net proceeds of $6.2 million, after deducting underwriting discounts, commissions, and other offering expenses. The Company’s Common Stock began trading on the Nasdaq Capital Market under the symbol “VIVK”. For the years ended December 31, 2023 and 2022, our net cash used in operating activities was mainly comprised of net effect of the consolidated net loss of $10,835,275 and $20,247,621, a $88,323 and $(4,437,492) related to our provision for income taxes and the net effect on deferred tax liabilities (deferred tax assets), our depreciation and amortization of $3,932,744 and $2,953,629, an impairment loss of none and $11,138,830, a bad debt expense of none and $1,162,007, a gain on the deconsolidation of a variable interest entity of $438,099 and none, a decrease in accounts receivable of $930,893 and $2,613,278, a decrease in accounts payable of $366,592 and $3,408,157, an increase in other assets of $417,890 and $80,220. For the years ended December 31, 2023 and 2022, we were also able to issue stock for services of none and $1,472,888, and stock-based compensation of $1,597,881 and $2,606,703 in lieu of using cash. We also realized interest expense on loans and notes payable of $3,476,577 and $1,454,752 related to the original $28,664,284 in notes payable issued as consideration for our newly acquired entities, SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. For the years ended December 31, 2023 and 2022, we also realized an unrealized loss of $1,156,928 and $578,464 on marketable securities as described above. For the years ended December 31, 2023 and 2022, our net cash used in investing activities was mainly attributed to our purchase of equipment of $3,320,918 and $2,491,175 related to the manufacturing of our RPCs and wash plant facilities. The Company also reported $210, 862 of notes receivable assumed and a decrease in $181,509 of cash and cash equivalents in the deconsolidation of a variable interest entity and as of December 31, 2023. 34 Our net cash provided by our financing activities was mainly attributed to the net effect of the following events: For the years ended December 31, 2023 and 2022, we received proceeds of $2,944,697 and $3,640,046 related to the issuance of notes and other loans. We also received proceeds of $6,240,000 from our February 14, 2022 underwritten public offering of 1,600,000 shares of common stock. For the years ended December 31, 2023 and 2022, we paid down notes payable and related party notes payable by $470,160 and $853,230 and made distributions to Viva Wealth Fund I, LLC unit holders of none and $861,691. For the years ended December 31, 2023 and 2022, we paid down finance lease liabilities by $446,782 and $429,578. There are no further existing firm obligations; however, we anticipate construction for each Nanosponge costs approximately $200,000, and we intend to manufacture and add a Nanosponge to our current RPCs. We have historically suffered net losses and cumulative negative cash flows from operations, and as of December 31, 2023, we had an accumulated deficit of approximately $65.9 million. As of December 31, 2023 and 2022, we had a working capital deficit of approximately $34.9 million and $3.77 million, respectively. As of December 31, 2023, we had cash of approximately $744,000. In addition, we have obligations to pay approximately $18.1 million of debt within one year of the issuance of these financial statements. Of the $18.1 million, $15.3 million can be satisfied through the issuance of registered common stock under the terms of the debt. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. During the year ended December 31, 2023, subject to available cash flows, the Company continued to develop its technologies, its strategy to monetize its intellectual properties and execute its business plan. To date we have financed our operations primarily through debt financing, private and public equity offerings and our working interest agreements. For the fiscal year 2023 we raised approximately $3 million through debt financings with individual investors, $2.2M through a sale lease back agreement, and subsequent to year end we raised an additional $3 million through additional debt financing (Note 22). The Company entered into merger and acquisition agreements with anticipated closing dates in 2024 (Note 22). Even though these merger and acquisition transactions are projected to close in 2024 and yield substantial cash flow that may provide adequate working capital to finance its day-to-day operations and current obligations, these events were not considered probable as of December 31, 2023 because they have not closed as of the date of our filing. Based on the above, we believe there is 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 be able to execute its plans to raise additional capital, close its merger and acquisitions, or that its operations or business plan will be profitable. Our ability to continue to access capital could be affected adversely by various factors, including general market and other economic conditions, interest rates, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us. If we cannot raise capital through public or private debt financings, equity offerings, or other means, our ability to grow our business may be negatively affected. In such a case, we may need to suspend site and plant construction or further acquisitions until market conditions improve. Contractual Obligations Our contractual obligations as of December 31, 2023 for finance lease liabilities are for the sale and leaseback of certain land, property, plant, and equipment that were acquired in the closing of our business combination, which acquired SFD and WCCC on August 1, 2022, which leases end in 2025 and 2026. Finance lease obligations as of December 31, 2023 are as follows: 2024 $ 963,900 2025 594,792 2026 471,756 Total $ 2,030,448 35 Our contractual obligations as of December 31, 2023 for operating lease liabilities are for office and warehouse space, which leases end in 2024 and 2025, and a land lease which ends in 2042. Operating lease obligations as of December 31, 2023 are as follows: 2024 $ 435,906 2025 162,545 2026 136,975 2027 153,089 2028 143,237 Thereafter 2,823,472 Total $ 3,855,244 Interest Rate and Market Risk Interest Rate Risk Interest rate risk is the potential for reduced net interest income and other rate-sensitive income resulting from adverse changes in the level of interest rates. We do not have variable interest rate-sensitive income agreements. We do have financing arrangements that were issued on August 1, 2022 as consideration for the business combination and acquisition of SFD and WCCC, in which the three-year notes have variable interest rates based on the prime rate, which exposes us to further interest expense if the prime rate increases. We believe that the LIBOR is being phased out globally and do not have any financings with variable interest rates based on the LIBOR. Market Risk — Equity Investments Market risk is the potential for loss arising from adverse changes in the fair value of fixed-income securities, equity securities, other earning assets, and derivative financial instruments as a result of changes in interest rates or other factors. We own equity securities that are publicly traded. Because the fair value of these securities may fall below the cost at which we acquired them, we are exposed to the possibility of loss. Equity investments are approved, monitored, and evaluated by members of management. Inflation Prolonged periods of slow growth, significant inflationary pressures, volatility and disruption in financial markets, could lead to increased costs of doing business. Inflation generally will cause suppliers to increase their rates, and inflation may also increase employee salaries and benefits. In connection with such rate increases, we may or may not be able to increase our pricing to consumers. Inflation could cause both our investment and cost of revenue to increase, thereby lowering our return on investment and depressing our gross margins. Off Balance Sheet Arrangements None. Critical Accounting Policies & Use of Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements included in this report, which have been prepared in accordance with GAAP. For further information on the critical accounting policies see Note 3 of the Notes to the Consolidated Financial Statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Estimates by their nature are based on judgments and available information. Our estimates are made based upon historical factors, current circumstances and the experience and judgment of management. Assumptions and estimates are evaluated on an ongoing basis, and we may employ outside experts to assist in evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. We believe our critical accounting estimates relate to the following: Recoverability of current and noncurrent assets, stock-based compensation, income taxes, effective interest rates related to long-term debt, marketable securities, lease assets and liabilities, valuation of stock used to acquire assets, and derivatives. 36 Item 7A - Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8 - Financial Statements and Supplementary Data The consolidated financial statements required by this item begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.