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. 19 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, a Louisiana limited liability company, White Claw Colorado City, LLC, a Texas limited liability company, RPC Design and Manufacturing LLC (“RDM”), a Utah limited liability company, Vivaventures Remediation Corp., a Texas corporation, Vivaventures Management Company, Inc., a Nevada corporation, Vivasphere, Inc., a Nevada corporation, Vivaventures Oil Sands, Inc., a Utah corporation. We have a 99.95% ownership interest in Vivaventures Energy Group, Inc., a Nevada Corporation; the 0.05% minority interest in Vivaventures Energy Group, Inc. is held by a private investor unaffiliated with us. We also have an approximate 49% ownership interest in Vivakor Middle East Limited Liability Company, a Qatar limited liability company. 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. Business 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 utilizing our Remediation Processing Centers (RPCs). 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 currently focusing our soil remediation efforts on our project in Kuwait and our upcoming project in the Houston, Texas area. Reclassifications Certain reclassifications may have been made to prior years’ amounts to conform to the 2023 presentation. 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 had 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 issued policies intended to stop or slow the further spread of the disease. In March 2020 we temporarily suspended operations in Kuwait and Utah due to COVID-19 government restrictions. Utah and Kuwait have since resumed site preparations for operations. We have experienced supply chain disruptions in building our Remediation Processing Centers (“RPC”) and completing certain refurbishment on our precious metal extraction machines. These suspensions 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 significantly affected 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. 20 Recent Developments DIC Note Proceeds In conjunction with our Services Agreement we signed with DIC on December 14, 2021, on June 20, 2023, we issued a 15% secured promissory note (the “Note”) due as described below, to Al Dali International for Gen. Trading & Cont. Co., a company organized under the laws of Kuwait (“DIC”), in the principal amount of up to $1,950,000 (the “Principal Amount”). We are using the proceeds of the Note to relocate, refurbish, and fully install our RPC to DIC’s location in Kuwait. The installation of this RPC in Kuwait will allow us to perform under the Services Agreement. During the nine months ended September 30, 2023 we received note proceeds of $1,220,651. Maxus Proceeds On May 23, 2023, our subsidiary White Claw Colorado City, LLC (“WCCC”), supplemented an existing Master Agreement (the “Master Agreement”) with Maxus Capital Group, LLC (“Maxus”), under a two year agreement, which Maxus agreed to finance the build-out of our new facility located on the land leased by our subsidiary, VivaVentures Remediation Corp., in Houston, Texas. We expect Maxus to fund approximately $2.2 million to finance the build-out of the Houston location in the form of a finance lease (see Note 8) for the wash plant, and we will lease the wash plant facility financed by Maxus under WCCC’s supplement to the Master Agreement. During the construction phase of this agreement, the Company controls the asset with construction costs funded by Maxus recorded as a liability. As of September 30, 2023 the Company has recorded a $1,564,771 liability in accounts payable related to the construction related to this agreement that has been funded by Maxus. Hiring Vice President, Operations and Construction On July 1, 2023, we hired Leslie D. Patterson to be our Vice President, Operations & Construction. In this position, Mr. Patterson is in charge of managing the development and operations for our facilities. In connection with his hiring we signed an Executive Employment Agreement with Mr. Patterson. Under the terms of the Agreement, Mr. Patterson will receive $150,000 in annual salary, shares of our common stock equal to $25,000 annually, and a one-time bonus of shares of our common stock equal to $125,000, payable on the one year anniversary of his employment. Mr. Patterson is entitled to other bonuses and benefits on par with our general employment policies. Convertible Promissory Note On July 25, 2023, a non-affiliated investor loaned us $500,000 under the terms of a 10% Convertible Promissory Note dated July 6, 2023 (the “Investor Note”). Under the terms of the Investor Note, the loan is at a 10% per annum interest rate, matures two years from the date of issuance, and is convertible into shares of our common stock at $2.50 per share, unless such conversion would cause the investor to own more than 4.9% of our outstanding common stock. Results of Operations for the Three and Nine Months ended September 30, 2023 and 2022 Revenue For the three months ended September 30, 2023 and 2022 we realized revenues of $16,313,406 and 11,765,975, respectively, representing an increase of $4,547,431 or 38.65%. For the nine months ended September 30, 2023 and 2022 we realized revenues of $45,448,916 and $11,765,975, respectively, representing an increase of $33,682,941 or 286.27%. The increase in revenue is primarily attributed to our oil and natural gas liquid sales which have been realized through the operations from SFD and WCCC, which were acquired through our business combination, which closed on August 1, 2022. 21 Cost of Revenue For the nine months ended September 30, 2023, 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 three months ended September 30, 2023 and 2022 costs of revenue were $14,766,494 and $10,553,375, respectively, representing an increase of $4,213,119 or 39.92%. For the nine months ended September 30, 2023 and 2022 costs of revenue were $41,174,082 and $10,553,375, respectively, representing an increase of $30,620,707 or 290.15%. 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 three months ended September 30, 2023 and 2022 we realized gross profit of $1,546,912 and $1,212,600, respectively, representing an increase of $334,312 or 27.57%. For the nine months ended September 30, 2023 and 2022 we realized gross profit of $4,274,834 and $1,212,600, respectively, representing an increase of $3,062,234 or 252.53%. For the nine months ended September 30, 2023, 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. Operating Expenses For the three months ended September 30, 2023 and 2022, we realized operating expenses of $2,292,026 and $3,543,526, which represents a decrease of $1,251,500, or 35.32%. For the nine months ended September 30, 2023 and 2022, we realized operating expenses of $6,982,754 and $9,023,490, which represents a decrease of $2,040,736, or 22.62%. The decrease in operating expenses is attributed to the net effect of the following: For the nine months ended September 30, 2023 and 2022, we realized amortization and depreciation expense of $2,269,445 and $2,053,550, which represents an increase of $215,895 or 10.51%. The increase in amortization and depreciation expense is primarily attributed to the amortization of our newly acquired contracts 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. For the nine months ended September 30, 2023 and 2022, we realized an aggregate decrease in sales and marketing expense and general and administrative expense of $2,256,631 or 32.38% due to the net effect of a decrease in stock compensation expense and marketing expenses in 2023. For the nine months ended September 30, 2023 and 2022, we realized employee stock option expense of $1,260,476 and $2,185,615, which represents a decrease of $925,139, or a 42.33% decrease. New management and board of director compensation agreements were entered into in June 2022, October 2022, and January 2023. The new compensation agreements included stock option agreements for $2,096,247 for the nine months ended September 30, 2022 as a result of the previous executive management being significantly undercompensated prior to the underwritten public offering and uplist to Nasdaq in 2022. In October 2022, our previous CEO resigned and the remainder of his stock options were forfeited. For the nine months ended September 30, 2023 and 2022, non-qualified stock options for services were $467,409 and $1,172,500, which represents a decrease of $704,991 or 60.13% related to certain stock options with consultants that were forfeited or cancelled in 2022. For the nine months ended September 30, 2023 and 2022, we realized marketing expense of $2,457 and $360,765, which represents a decrease of $358,308 or 99.32%, which such expenses related to the expenses associated with the uplist to Nasdaq in 2022. 22 Interest Expense For the three months ended September 30, 2023 and 2022, we realized interest expense of $1,345,096 and $512,217, which represents an increase of $832,879, or 162.60%. For the nine months ended September 30, 2023 and 2022, we realized interest expense of $3,814,253 and $627,163, which represents an increase of $3,187,090, or 508.18%. 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. Unrealized Gain or Loss on Marketable Securities For the three months ended September 30, 2022, we reported an unrealized gain of $1,074,290. For the three months ended September 30, 2023, we reported an unrealized loss of $661,101, which represents a decrease of $1,735,391, or 161.54%. For the nine months ended September 30, 2022, we reported an unrealized gain of $661,101. For the nine months ended September 30, 2023, we reported an unrealized loss of $991,652, which represents a decrease of $1,652,753, or 250.00%. 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 gains or losses as noted above. Cash flows The following table sets forth the primary sources and uses of cash and cash equivalents for the nine months ended September 30, 2023 and 2022 as presented below: September 30, 2023 2022 Net cash used in operating activities $ (838,693 ) $ (3,452,980 ) Net cash used in investing activities (3,841,589 ) (1,648,722 ) Net cash provided by financing activities 2,696,586 8,129,774 Liquidity and Capital Resources We have historically suffered net losses and cumulative negative cash flows from operations and, as of September 30, 2023 and December 31, 2022, we had an accumulated deficit of approximately $62.1 million and $55.2 million. As of September 30, 2023 and December 31, 2022, we had a working capital deficit of approximately $19 million and $3.77 million, respectively. Subsequent to September 30, 2023 $10 million of the working capital deficit was paid with an issuance of common stock. As of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of $1,199,097 and $3,182,793, with $181,058 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 nine months ended September 30, 2023 and 2022, our net cash used in operating activities was mainly comprised of net effect of the consolidated net loss of $7,391,089 and $7,716,919, and our depreciation and amortization of $2,269,445 and $2,053,550. For the nine months ended September 30, 2023 and 2022, non-qualified stock option expense for services of none and $1,172,500, and stock-based compensation employees of $1,260,476 and $2,185,615 in lieu of using cash. We also realized interest expense on loans and notes payable of $3,058,522 and $627,163, and an unrealized loss of $991,652 and an unrealized gain of $661,101 on marketable securities as described above. 23 For the nine months ended September 30, 2023 and 2022, our net cash used in investing activities was mainly attributed to our purchase of equipment of $3,841,589 and $1,807,140 related to the manufacturing of our RPCs and wash plant facilities. Our net cash provided by our financing activities was mainly attributed to the net effect of the following events: For the nine months ended September 30, 2023 and 2022, and we received proceeds of $4,499,958 and $3,177,622 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 nine months ended September 30, 2023 and 2022, we paid down notes payable by $482,815 and $534,111 and made distributions to Viva Wealth Fund I, LLC unit holders of $1,020,564 and $593,087. We have historically suffered net losses and cumulative negative cash flows from operations, and as of September 30, 2023, we had an accumulated deficit of approximately $62.1 million. As of September 30, 2023 and December 31, 2022, we had a working capital deficit of approximately $19 million and $3.7 million, respectively. Subsequent to September 30, 2023 $10 million of the working capital deficit was paid with an issuance of common stock. As of September 30, 2023 we had cash of approximately $1.2 million. In addition, we have obligations to pay approximately $14.4 million (of which approximately $10 million was satisfied through the issuance of our common stock under the terms of the debt subsequent to September 30, 2023) of debt in cash within one year of the issuance of these financial statements. Our CEO has also committed to provide credit support through December 2024, as necessary, for an amount up to $8 million to provide the Company sufficient cash resources, if required, to execute its plans for the next twelve months. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. We believe the liquid assets and CEO commitment give it adequate working capital to finance our day-to-day operations for at least twelve months through November 2024. Capitalized interest on construction in process was $735,919 and $499,537 for the nine months ended September 30, 2023 and 2022. There are no further existing firm obligations; however, we anticipate further construction costs of approximately $1 million in connection with our construction of our Texas remediation and wash plant facilities; and construction for each Nanosponge costs approximately $200,000, and we intend to manufacture and add a Nanosponge to our current and future 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 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 case, we may need to suspend site and plant construction or further acquisitions until market conditions improve. Contractual Obligations Our contractual obligations as of September 30, 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 September 30, 2023 are as follows: 2023 $ 240,975 2024 963,900 2025 594,792 2026 471,756 Total $ 2,271,423 24 Our contractual obligations as of September 30, 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 September 30, 2023 are as follows: 2023 $ 130,245 2024 435,906 2025 162,545 2026 136,975 2027 153,089 Thereafter 2,931,500 Total $ 3,950,260 Interest Rate and Market 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. 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on May 25, 2023. 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. 25