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. 23 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. Recent Developments 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 the specifications for PG 64-22 grade, as set forth by the Nevada Department of Transportation and the American Association of State Highway and Transportation Officials (the “Product”) from a to-be-scaled processing plant to be located in Uintah County, Utah, and as may be relocated from time to time by the Company (the “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. HOT will also have the first right of refusal to purchase all or any portion of additional Product that may be produced by the Company within the state of Utah upon the same terms and conditions, except that the purchase price shall be at market rate as determined in the Company’s sole discretion. Pursuant to the Off-Take Agreement, the rates for the sale and purchase of up to 1,000 tons of Product per week will be determined on the basis of an average 1,000 tons per week, a price per ton using the “Argus Rockies Rail Low” price for asphalt in the Rocky Mountain region as set forth in the most recent edition of Argus Americas Asphalt report, produced by Argus Media Group, as of the date of delivery (the “Unit Price”). Once calculated, the weekly purchase price will be reduced by $1,500 in order to compensate Buyer for costs associated with testing, providing storage tanks for Buyer’s minimum quantity purchases, and certifying the quality of the Product, for so long as Buyer is providing the testing facilities for the Product. As noted above, the purchase price for any Product over 1,000 tons per week will be at market rate, as determined by the Company. In the event the Unit Price drops below $250, the Company will have the right to suspend production of the Product upon written notice to HOT. 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. 24 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 $37.4 million, subject to post-closing adjustments, payable by the Company in 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, in the form of Exhibit 4.1 The purchase price is subject to certain assumptions and adjustments set forth in the MIPA. 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, assuming a closing under the MIPA after July 1, 2022, on August 20, 2022, and continuing thereafter on the twentieth (20 th ) 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, in the form of Exhibit 10.4 hereto, between each of the Sellers and SFD and WCCC. SFD owns and 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 blended 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 blended crude oil sold thereunder. At present, SFD is blending and selling approximately 1,400 to 1,700 barrels of blended 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 owns 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 the Medallion and Wolf pipeline systems if the acquisition of WCCC is successfully completed. 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 blend and sell oil which has been recovered via a RPC machine from tank bottom sludge and contaminated soil which exists in the Permian Basin. This disclosure should be read in connection with, and is subject to, the MIPA, a copy of which is attached hereto as Exhibit 2.1. 25 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 and Six Months ended June 30, 2022 and 2021 Revenue For the three months ended June 30, 2022 and 2021 we realized revenues of none and $22,000, respectively, representing a decrease of $22,000 or 100%. For the six months ended June 30, 2022 and 2021 we realized revenues of none and $117,000, respectively, representing a decrease of $117,000 or 100%. The decrease in revenue is primarily attributed to our decision to divert our resources away from our precious metals business that we entered into during COVID-19 mandated shutdowns, and back to its primary remediation business and the manufacturing and site preparations for reopening our Remediation Processing Centers (RPCs) for remediation and production. For the three and six months ended June 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 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 June 30, 2022 and 2021 costs of revenue were none and $20,530, respectively, representing a decrease of $25,530 or 100%. For the six months ended June 30, 2022 and 2021 costs of revenue were none and $112,450, respectively, representing a decrease of $112,450 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 our decision to divert its resources away from our precious metals business in 2022 that was entered into during COVID-19 mandated shutdowns, and back to our primary remediation business, and the manufacturing an site preparations for reopening our RPCs for remediation and production, we did not realize costs of revenue from precious metal sales from buying and selling precious metal commodities for the three and six months ended June 30, 2022. 26 Gross Profit and Gross Margin For the three months ended June 30, 2022 and 2021 we realized gross profit of none and $1,470, respectively, representing a decrease of $1,470 or 100%. For the six months ended June 30, 2022 and 2021 we realized gross profit of none and $4,550, respectively, representing a decrease of $4,550 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 June 30, 2022 and 2021, we realized operating expenses of $3,600,600 and $1,726,096, which represents an increase of $1,618,766, or 108.60%. For the six months ended June 30, 2022 and 2021, we realized operating expenses of $5,479,964 and $3,865,748, which represents an increase of $1,618,766, or 41.92%. The increase in our operating expenses were 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, and the company paid or accrued signing bonuses of $225,000, For the three months ended June 30, 2022 and 2021, we realized employee stock option expense of $1,229,175 and $111,528, which represents an increase of $1,121,466, or 1,002.1% increase. For the six months ended June 30, 2022 and 2021, we realized employee stock option expense of $1,321,466 and $200,000, which represents an increase of $1,121,466, or 561% increase. Other income and expense For the three months ended June 30, 2022 and 2021, other expense was $1,627,263 and $9,096,785, which represents a decrease of $7,469,522, or 82.11%. The decrease is mainly attributed to unrealized loss of $1,652,755 and $8,949,169 on marketable securities, which represents a decrease of $7,296,414, or 81.53% in marketable securities. For the six months ended June 30, 2022 and 2021, other income (expense) was $(473,134) and $3,435,175, which represents a decrease of $3,908,309, or 113.77%. The decrease in other income is mainly attributed to unrealized gain (loss) of $(413,189) and 3,734,275 on marketable securities, which represents a decrease of $4,147,464, or 111.06% 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 $296,477 for the three months ended June 30, 2022 and 2021, respectively, representing a decrease of $296,477 or 100%. The Company recorded an income tax provision of $800 and $723,911 for the six months ended June 30, 2022 and 2021, respectively, representing a decrease of $723,111 or 99.89%. The effective tax rate as of June 30, 2022 and 2021 was (0.04)% and 9.18%. The difference in effective tax rate was primarily due to the decrease in unrealized gains on marketable securities for the six months ended June 30, 2022 and 2021. Cash flows The following table sets forth the primary sources and uses of cash and cash equivalents for the six months ended June 30, 2022 and 2021 as presented below: June 30, 2022 2021 Net cash used in operating activities $ (2,808,793 ) $ (2,053,627 ) Net cash used in investing activities (1,067,562 ) (1,384,452 ) Net cash provided by financing activities 7,587,227 6,656,612 27 Liquidity and Capital Resources We have historically suffered net losses and cumulative negative cash flows from operations and, as of June 30, 2022 and 2021, we had an accumulated deficit of approximately $41.2 million and $30.1 million. As of June 30, 2022 and December 31, 2021, we had cash and cash equivalents of $5,204,591 and $1,493,719, with $296,257 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 six months ended June 30, 2022 and 2021, our net cash used in operating activities was driven by the consolidated net loss of $5,953,898 and 1,149,934, which change is mainly attributed to unfavorable changes in the market which decreased unrealized gains on marketable securities and the increase in stock-based compensation as described above. For the six months ended June 30, 2022 and 2021, our net cash used in investing activities was mainly attributed to our purchase of equipment of $1,129,515 and $1,334,123 related to the manufacturing of our RPCs. For the six months ended June 30, 2022 and 2021, our net cash provided by our financing activities was mainly attributed to proceeds of $1,968,261 and $6,666,811 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. We made distributions to noncontrolling interests of $343,889 and none for the six months ended June 30, 2022 and 2021. We also made payments on notes payable of $277,145 and $2,464 for the six months ended June 30, 2022 and 2021. There are no further existing firm obligations; however we anticipate further construction costs of approximately $1.35 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. 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 August 2023. Contractual Obligations Our contractual obligations as of June 30, 2022 are for operating lease liabilities for office and warehouse space, which leases end in 2024 and 2025. Operating lease obligations as of June 30, 2022 are as follows: 2022 $ 180,195 2023 370,902 2024 304,892 2025 16,135 Total $ 872,124 28 Interest Rate and Market Risk Our financing arrangements are not subject to variable interest rates of the prime rate or LIBOR. 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/A 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.