Vivakor, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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: 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. 20 Business Overview Vivakor, Inc. is a socially responsible operator, acquirer and developer of clean energy technologies and environmental solutions, primarily focused on soil remediation. We 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. 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 plan to expand into other markets, both domestically and globally, where we believe our technology and services will provide a distinct competitive advantage over our competition. 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. 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. Results of Operations for the Three Months ended March 31, 2022 and 2021 Revenue For the three months ended March 31, 2022 and 2021 we realized revenues of none and $95,000, respectively, representing a decrease of $95,000 or 100%. The decrease in revenue is primarily attributed to the Company diverting its resources away from its precious metals business that was entered into during COVID-19 mandated shutdowns, and back to its primary business of manufacturing and site preparations for reopening its Remediation Processing Centers (RPCs) for remediation and production. For the three months ended March 31, 2021, approximately 99% of our revenues were realized from precious metal sales from our business plan of buying and selling precious metal commodities on the open market during the COVID-19 pandemic while our remediation operations were shut down or delayed. These precious metals having been acquired for immediate resale, with the Company acting as intermediary and never keeping an inventory of precious metals. Cost of Revenue 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 March 31, 2022 and 2021 costs of revenue were none and $91,920, respectively, representing a decrease of $91,920 or 100%. The decrease in the cost of revenue directly relates to costs associated with selling our precious metals on the open market and precious metal commodity broker fees. As the decrease in revenue is primarily attributed to the Company diverting its resources away from its precious metals business in 2022 that was entered into during COVID-19 mandated shutdowns, and back to its primary business of manufacturing an site preparations for reopening its RPCs for remediation and production, the Company did not realize costs of revenue from precious metal sales from buying and selling precious metal commodities for the three months ended March 31, 2022. 21 Gross Profit and Gross Margin For the three months ended March 31, 2022 and 2021 we realized gross profit of none and $3,080, respectively, representing a decrease of $3,080 or 100%. The gross profit decreased 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 March 31, 2022 and 2021, we realized operating expenses of $1,879,364 and $2,139,652, which represents a decrease of $260,288, or 12.16%. Our operating expenses decreased due to decreased professional service expenses in regards to reduced operations in Viva Wealth Fund I, LLC, including sales and marketing expense mainly related to the generation of leads and investor sourcing. Other income and expense For the three months ended March 31, 2022 and 2021, other income was $1,154,129 and $12,351,960, which represents a decrease of $11,377,871, or 90.79%. The decrease in other income is mainly attributed to unrealized gains of $1,239,566 and 12,683,444 on marketable securities, which represents a decrease of $11,443,878, or 90.23% 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 $800 and $1,020,388 for the three months ended March 31, 2022 and 2021, respectively, representing a decrease of $1,019,588 or 99.92%. The effective tax rate in the first quarter of 2022 was (0.04)% compared to 9.18% in the first quarter of last year. The difference in effective tax rate was primarily due to the decrease in unrealized gains on marketable securities for the three months ended March 31, 2022 and 2021. Cash flows The following table sets forth the primary sources and uses of cash and cash equivalents for the three months ended March 31, 2022 and 2021 as presented below: March 31, 2022 2021 Net cash used in operating activities $ (866,798 ) $ (1,290,642 ) Net cash used in investing activities (196,298 ) (457,334 ) Net cash provided by financing activities 6,416,601 3,249,310 Liquidity and Capital Resources We have historically suffered net losses and cumulative negative cash flows from operations and, as of March 31, 2022 and 2021, we had an accumulated deficit of approximately $36.3 million and $35.7 million. 22 As of March 31, 2022 and December 31, 2021, we had cash and cash equivalents of $6,847,224 and $1,493,719, with $322,268 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 three months ended March 31, 2022 and 2021, our net cash used in operating activities was driven by the consolidated net income (loss) of ($726,035) and 9,375,000, which change is mainly attributed to unfavorable changes in the market which decreased unrealized gains on marketable securities as described above. For the three months ended March 31, 2022 and 2021, our net cash used in investing activities was mainly attributed to our purchase of equipment of $206,298 and $427,374 related to the manufacturing of our RPCs. For the three months ended March 31, 2022 and 2021, our net cash provided by our financing activities was mainly attributed to proceeds of $427,496 and $3,250,774 related to the issuance of convertible bridge notes and other loans, and in 2022, proceeds of $6,240,000 from the February 14, 2022 underwritten public offering of 1,600,000 shares of common stock. There are no further existing firm obligations; however we anticipate further construction costs of approximately $1 million in connection with our construction in process of our RPCs. 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. Contractual Obligations Our contractual obligations as of March 31, 2022 are for operating lease liabilities for office and warehouse space, which leases end in 2025. Operating lease obligations as of March 31, 2022 are as follows: 2022 $ 266,370 2023 370,902 2024 304,892 2025 16,135 Total $ 958,299 Interest Rate and Market Risk Our financing arrangements are not subject to variable interest rates of the prime rate or LIBOR. 23 Inflation Inflation generally will cause suppliers to increase their rates. 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 for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission on May 2, 2022. Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide the information required by this Item.