Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended, (the "Exchange Act") that reflect management's current
views with respect to future events and financial performance. These statements
are based upon beliefs of, and information currently available to, the Company's
management as well as estimates and assumptions made by the Company's
management. Readers are cautioned not to place undue reliance on these
forward-looking statements, which are only predictions and speak only as of the
date hereof. When used herein, the words "anticipate," "believe," "estimate,"
"expect," "forecast," "future," "intend," "plan," "predict," "project,"
"target," "potential," "will," "would," "could," "should," "continue" or the
negative of these terms and similar expressions as they relate to the Company or
the Company's management identify forward-looking statements. Such statements
reflect the current view of the Company with respect to future events and are
subject to risks, uncertainties, assumptions, and other factors, including the
risks relating to the Company's business, industry, and the Company's operations
and results of operations. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated,
expected, intended, or planned.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance, or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results.
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States ("GAAP"). These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments and
assumptions are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results. The
following discussion should be read in conjunction with our financial statements
and notes thereto appearing elsewhere in this report. The forward-looking
statements made in this report are based only on events or information as of the
date on which the statements are made in this report. Except as required by law,
we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise,
after the date on which the statements are made or to reflect the occurrence of
unanticipated events. You should read this report and the documents we refer to
in this report and have filed as exhibits to this report completely and with the
understanding that our actual future results may be materially different from
what we expect.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, or performance. Readers are urged to carefully review and consider the
various disclosures made by us in this report and in our other reports filed
with the Securities and Exchange Commission ("SEC"). We undertake no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes in the future operating
results over time except as required by law. We believe that our assumptions are
based upon reasonable data derived from and known about our business and
operations. No assurances are made that actual results of operations or the
results of our future activities will not differ materially from our
assumptions.
As used in this Quarterly Report on Form 10-Q and unless otherwise indicated,
the terms "Company," "we," "us," and "our" refer to 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. 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.
30
Business Overview
We are a socially responsible operator, acquirer and developer of clean energy
technologies and environmental solutions. Our current efforts are primarily
focused on soil remediation and owning and operating crude oil gathering,
storage and transportation facilities.
The soil remediation segment of our business specializes 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.
We are focused on the remediation of contaminated soil and water resulting from
either man-made spills or naturally occurring deposits of oil. 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. We may expand into other markets, both in Utah and globally, where
we believe our technology and services will provide a distinct competitive
advantage over our competition.
Our current focus is on the clean-up of greater than 7% hydrocarbon contaminated
soil located in Kuwait as a result of the Iraqi invasion, and naturally
occurring oil sands deposits in Utah. We have deployed 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 (which is presently operating).
The crude oil gathering, storage and transportation segment of our business
focuses on owning and operating crude oil gathering, storage and transportation
facilities. 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 operates 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.
Recent Developments
Vernal Utah
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
anticipate that these limitations may be resolved prior to January 31, 2023.
31
Membership Interest Purchase Agreement
On June 15, 2022, we entered into a Membership Interest Purchase Agreement, a
copy of which is filed herewith as Exhibit 2.1 (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.
Resignation of Chief Executive Officer and Chairman of the Board of Directors
On September 30, 2022, the Board of Directors of the Company received notice
from Matthew Nicosia, the Company's 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.
32
Appointment of Chief Executive Officer and Chairman of the Board; Note Amendment
Agreement
On October 28, 2022, we entered into an executive employment agreement with
James Ballengee (the "Employment Agreement") with respect to our 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 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.
Pursuant to the Employment Agreement, Mr. Ballengee is granted the right to
nominate two additional directors for appointment to the Board in his sole
discretion, as well as a third additional director upon issuance of the Note
Payment Shares (defined below), subject to such directors passing a background
check.
On October 28, 2022, in connection with the Employment Agreement, we entered
into an agreement with the Sellers amending the Notes (the "Note Amendment"),
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 (the "Note Payment Shares") as a payment
of $10,000,000 toward the principal of the Notes on a pro rata basis, reflecting
a conversion price of $1.42 per share (the "Note Payment"). 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.
No later than thirty (30) days following the date the Note Payment and the Note
Payment Shares are approved by our shareholders, we shall use our reasonable
best efforts to prepare and file with the SEC, a registration statement on Form
S-1 or any other available form (the "Registration Statement") for an offering
of the Note Payment Shares to be made on a continuous basis pursuant to Rule 415
of the Securities Act.
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.
Our Kuwait operations were suspended to comply with the social distancing
measures implemented in Kuwait. Our Utah operations were temporarily suspended
from March through May 2020, but have since resumed in full. We have experienced
supply chain disruptions in building our Remediation Processing Centers ("RPC")
and completing certain refurbishment on our precious metal extraction machines.
Kuwait has allowed for the Company to obtain site personnel visas to recommence
operations. These suspensions have had a negative impact on our business and
there can be no guaranty that we will not need to suspend operations again in
the future as a result of the pandemic.
COVID-19 and the U.S. response to the pandemic are significantly affecting the
economy. There are no comparable events that provide guidance as to the effect
the COVID-19 pandemic may have in the long-term, and, as a result, the ultimate
effect of the pandemic is highly uncertain and subject to change. We do not yet
know the full extent of the effects on the economy, the markets we serve, our
business, or our operations.
33
Results of Operations for the Three and Nine Months ended September 30, 2022 and
2021
Revenue
For the three months ended September 30, 2022 and 2021 we realized revenues of
$11,756,975 and $965,757, respectively, representing an increase of $10,800,218
or 1,118.32%. For the nine months ended September 30, 2022 and 2021 we realized
revenues of $11,765,975 and $1,082,757, respectively, representing an increase
of $10,683,218 or 986.67%. The increase in revenue is primarily attributed to
our oil and natural gas liquid sales which have been realized through the
operations from our newly acquired businesses in SFD and WCCC, which were
acquired through our business combination, which closed on August 1, 2022. For
the three and nine months ended September 30, 2021, approximately 99% of our
revenues were realized from precious metal sales from our business plan of
buying and selling precious metal commodities on the open market during the
COVID-19 pandemic while our remediation operations were shut down or delayed.
These precious metals were acquired for immediate resale, with us acting as
intermediary and never keeping an inventory of precious metals.
Cost of Revenue
For the nine months ended September 30, 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 nine months ended September 30, 2021, our cost of revenues consisted
primarily of costs associated with selling our precious metals on the open
market and precious metal commodity broker fees.
For the three months ended September 30, 2022 and 2021 costs of revenue were
$10,536,628 and $938,226, respectively, representing an increase of $9,598,402
or 1,023.04%. For the nine months ended September 30, 2022 and 2021 costs of
revenue were $10,536,628 and $1,050,676, respectively, representing a increase
of $9,485,952 or 902.84%. The increase in the cost of revenue is primarily
attributed to the cost of goods sold for our oil and natural gas liquid sales
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 three months ended September 30, 2022 and 2021 we realized gross profit
of $1,229,347 and $27,531, respectively, representing an increase of $1,201,816
or 4,365.32%. For the nine months ended September 30, 2022 and 2021 we realized
gross profit of $1,229,347 and $32,081, respectively, representing an increase
of $1,197,266 or 3,732.01%. For the nine months ended September 30, 2022, the
gross profit increased in proportion to the revenue and costs of revenue related
to the purchase and sale of oil and natural gas liquid. For the nine months
ended September 30, 2021, the gross profit increased in proportion to the
revenue and costs of revenue related to the purchase and sale of precious metals
as described above.
Operating Expenses
For the three months ended September 30, 2022 and 2021, we realized operating
expenses of $3,543,526 and $1,433,548, which represents an increase of
$2,109,978, or 147.19%. For the nine months ended September 30, 2022 and 2021,
we realized operating expenses of $9,023,490 and $5,299,296, which represents an
increase of $3,724,194, or 70.28%. The increase in our operating expenses was
mainly attributed to accrued signing bonuses and employee stock options that
were issued related to the executive employment agreements entered into in June
2022 after the Company' successful underwritten public offering of gross
proceeds of $8.0 million and uplist to Nasdaq in February 2022. Whereas prior to
the underwritten public offering and uplist to Nasdaq, the executive employment
agreements had no signing bonuses, paid the executives $50,000 per year, and
only one executive had a stock option grant. Although the executives are
currently accruing substantial portions of their wages and signing bonuses to
assist the Company, the new employment agreements issued stock options to all
executives, increased annual wages for all executives. For the nine months ended
September 30, 2022 and 2021 company has paid or accrued employee cash
compensation of $599,067 and $101,568, which represents an increase of $497,499,
or 489.82%. For the nine months ended September 30, 2022 and 2021, we realized
employee stock option expense of $2,185,615 and $334,584, which represents an
increase of $1,851,031, or 553.23% increase.
34
Other income and expense
For the three months ended September 30, 2022 and 2021, other income (expense)
was $567,724 and $(2,712,825), which represents an increase of $3,280,099, or
120.91%. The increase is mainly attributed to an unrealized gain (loss) of
$1,074,290 and $(2,481,175) on marketable securities, which represents an
increase of $3,555,465, or 143.30% in marketable securities. For the nine months
ended September 30, 2022 and 2021, other income (expense) was $94,140 and
$722,350, which represents a decrease of $628,210, or 86.97%. The decrease in
other income is mainly attributed to unrealized gains of $661,101 and 1,253,100
on marketable securities, which represents a decrease of $591,999, or 47.24% in
marketable securities. These securities were accounted for at a fair value based
on the quoted prices in the active markets and fluctuate based on market prices
of the securities.
Provision for income tax
The Company recorded an income tax provision of none and $723,911 for the three
months ended September 30, 2022 and 2021, respectively, representing a decrease
of $723,911 or 100%. The Company recorded an income tax provision of $800 and
none for the nine months ended September 30, 2022 and 2021, respectively,
representing a decrease of $800 or 100%. The effective tax rate as of September
30, 2022 and 2021 was (0.01)% and 9.18%. The difference in effective tax rate
was primarily due to the decrease in unrealized gains on marketable securities
for the nine months ended September 30, 2022 and 2021.
Cash flows
The following table sets forth the primary sources and uses of cash and cash
equivalents for the nine months ended September 30, 2022 and 2021 as presented
below:
September 30,
2022 2021
Net cash used in operating activities $ (3,452,980 ) $ (2,553,026 )
Net cash used in investing activities (1,648,722 ) (2,311,919 )
Net cash provided by financing activities 8,129,744 7,651,607
Liquidity and Capital Resources
We have historically suffered net losses and cumulative negative cash flows from
operations and, as of September 30, 2022 and 2021, we had an accumulated deficit
of approximately $42.8 million and $33.1 million.
As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents
of $4,521,791 and $1,493,719, with $147,865 and $199,952 attributed to variable
interest entities, respectively.
To date we have financed our operations primarily through debt financing,
private equity offerings and our working interest agreements, although on
February 14, 2022, the Company closed an underwritten public offering of
1,600,000 shares of common stock, at a public offering price of $5.00 per share,
for aggregate gross proceeds of $8.0 million, prior to 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 nine months ended September 30, 2022 and 2021, our net cash used in
operating activities was driven by the consolidated net loss of $7,716,919 and
4,544,865, including expense related amortization and depreciation expense,
stock options issued for services, and the increase in stock-based compensation
as described above.
35
For the nine months ended September 30, 2022 and 2021, our net cash used in
investing activities was mainly attributed to our purchase of equipment of
$1,807,140 and $2,260,458 related to the manufacturing of our RPC plants.
For the nine months ended September 30, 2022 and 2021, our net cash provided by
our financing activities was mainly attributed to proceeds of $3,177,622 and
$8,033,407 related to the issuance of convertible bridge notes and other loans,
and from the proceeds of $6,240,000 from our February 14, 2022 underwritten
public offering of 1,600,000 shares of common stock. We made distributions to
noncontrolling interests of $593,087 and none for the nine months ended
September 30, 2022 and 2021. We also made payments on notes payable of $534,111
and $374,065 for the nine months ended September 30, 2022 and 2021.
There are no further existing firm obligations; however we anticipate further
construction costs of approximately $2.5 million in connection with our
construction in process of our current RPC plants.
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 generate or raise capital through scaled up
operations of our sites, or from further public or private debt financings,
equity offerings, or other means, our ability to grow our business may be
negatively affected.
We believe the liquid assets of the Company give it adequate working capital to
finance our day-to-day operations for at least twelve months through November
2023.
Contractual Obligations
Our contractual obligations as of September 30, 2022 for finance lease
liabilities are for the sale and leaseback of certain land, property, plant, and
equipment that were acquired in the closing of our business combination, which
acquired SFD and WCCC on August 1, 2022, which leases end in 2025 and 2026.
Finance lease obligations as of September 30, 2022 are as follows:
2022 $ 240,975
2023 963,901
2024 963,901
2025 553,780
2026 432,443
Total $ 3,155,000
Our contractual obligations as of September 30, 2022 for operating lease
liabilities are for office and warehouse space, which leases end in 2024 and
2025. Operating lease obligations as of September 30, 2022 are as follows:
2022 $ 91,560
2023 370,902
2024 304,892
2025 16,135
Total $ 783,489
36
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
There have been no material changes to our critical accounting policies and the
use of estimates from these disclosures reported in the Amendment No. 1 to our
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021 filed
with the Securities and Exchange Commission on May 2, 2022. On August 1, 2022,
we closed a Membership Interest Purchase Agreement ("MIPA"), with Jorgan
Development, LLC, and JBAH Holdings, LLC, 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 (the "Membership Interests"), making SFD and WCCC wholly owned
subsidiaries of the Company. The measurement of assets acquired and liabilities
assumed in the business combination is based on preliminary estimates made by
management and subject to adjustment within twelve months. Management estimated
the provisional fair values of the intangible assets and goodwill related to
this business combination at September 30, 2022. Management is performing a
valuation study to calculate the fair value of the acquired intangible assets
and goodwill, which it plans to complete within the one-year measurement period.
With the close of the MIPA on August 1, 2022, we adopted ASU No. 2021-08,
Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers,which was issued by FASB 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
does not believe this pronouncement will materially impact our consolidated
financial statements.
37
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