ELVG Elvictor Group Inc (PK)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” except where the context otherwise requires, the term “we,” “us,” “our,” or “the Company,” refers to the business of Elvictor Group, Inc. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “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 are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Organizational Overview

Together with our wholly owned crew management subsidiaries, Elvictor is a crewing and crew management company responsible for sourcing, recruitment, selection, deployment, scheduling, training, and on-going management of seafarers. Our services also include administrative functions related to crew management services, including payroll services, travel arrangements, and verifying the insurance coverage information of all onboarded seafarers. Our Company benefits from over 65 years of combined experience in various value adding activities of the shipping sector such as ship management, technical management, ship agency, crewing and crew management of Mr. Stavros Galanakis and Mr. Konstantinos Galanakis.

Through the crew management platform developed by our affiliate, Seatrix, our personnel can collaborate with many different cultures in many different time zones with ever rising complexities, presenting a uniform service level to our principals, regardless of the point of origin of the crew. This innovation allows us to hire junior operators, who after a short training procedure are able to serve our principals with high quality standards, helping Elvictor be cost effective while maintaining the highest possible service level.

We currently manage over 2,500 seafarers of seven different nationalities who are aboard seven different ship types. On any one day, we manage over 250 seafarers traveling worldwide while processing over 500 multilingual applicants daily, supporting our clients.

The Company intends to expand the services it offers by also providing ship management services. In furtherance thereof, we acquired Ultra Shipmanagement from Mr. Stavros Galanakis and Mr. Konstantinos Galanakis, which has received its Det Norske Veritas AS approved Interim Document of Compliance provided under the authority granted by the Government of the Republic of the Marshall Islands, and specialized personnel have also been employed by the Company. The Interim Document of Compliance is the license required for a ship management company to start providing its services.

Known Trends, Demands, Commitments, Events or Uncertainties Impacting Our Business

The shipping industry is currently experiencing historical uncertainty in sustainability logistics and daily operations as a result of the COVID-19 pandemic, geopolitical tensions and the war between Russia and Ukraine.  Additionally, shortages of crew members have also been created due to aging crew members leaving the maritime business. As a result of the foregoing, competition in crew resources is becoming stiffer and more unpredictable resulting in higher wage demands by crew members. These wage demands, accompanied by incentive compensation requested by crew members, are increasing vessel operating expenses. The impact of global inflation has also added to these increases.  Additionally, smaller contract durations are requested and timely changes in ports, increasing the costs of changing crews and the costs and volume of such logistics.

To address these issues, we are implementing short and long-term strategies based on proactive scheduling and recruitment, with the help of our cloud-based system and intelligent metrics that have been developed in-house to monitor the “trends and fashions” of the maritime industry. Our goal is to build new pools of seafarers by accelerating promotions, cadetship programs, and the employment of more cadets onboard. These cadets are scheduled to be promoted to junior officers in the near future, generating a new breed of officers to address the global shortage and maintain crews at reasonable costs. We have also developed interactive screens through HTML5 links to communicate with seafarers and to keep crews updated, monitor their welfare and provide better services to them. We are also in the process of designing an upgrade to our cloud-based system to elevate logistics intelligence, allowing us to handle growth and recruitment volumes more efficiently.  While we believe that these actions will help address many of these issues, if we are unable to effectively do so, the shortage of crew members and significant increase in expenses could have a materially adverse impact on our business.

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in the notes to our consolidated financial statements. Those material accounting estimates that we believe are the most critical to an investor’s understanding of our financial results and condition are discussed immediately below and are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management to determine the appropriate assumptions to be used in the determination of certain estimates.

Basis of Presentation

The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in U.S. dollars, unless indicated otherwise. The Company believes that the disclosures in these financial statements are adequate and not misleading. In the opinion of management, the financial statements and notes contain all adjustments necessary for a fair presentation of the Company’s financial position as of September 30, 2022 and 2021 and statements of operations and cash flows for the three-month and nine-month periods ended September 30, 2022 and 2021.

The accompanying financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the financial statements.

Principles of Consolidation

The consolidated financial statements incorporate the assets and liabilities of all entities controlled by Elvictor Group, Inc. as of September 30, 2022 and 2021 and the results of controlled subsidiaries for the period then ended. Elvictor Group, Inc. and its subsidiaries together are referred to in this financial report as the consolidated entity. The effects of all transactions between entities in the consolidated entity are eliminated in full. The financial statements of the Company’s subsidiaries are prepared for the same reporting period as the parent entity using consistent accounting policies.

Accounting Basis

The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America (“GAAP”). The Company has adopted a December 31 fiscal year end.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all cash on hand and in banks, certificates of deposit and other highly liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.

Accounts Receivable

For the nine-month periods ended September 30, 2022 and December 31, 2021, the Company had operations of crew manning and management and had accounts receivable due from its customers in the shipping industry. Contracts receivable from crew manning in the shipping industry are based on contracted prices. The Company provides an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, individual credit valuation and specific circumstances of the customer and existing economic conditions. Normal contracts receivable are due 30 days after the issuance of the invoice, normally at the month’s end. Receivables past due more than 120 days are considered delinquent and they are included in the provision for doubtful accounts. There is no interest charged on past due accounts.

The Company does not have an allowance for doubtful accounts as of September 30, 2022 or December 31, 2021.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these financial statements.

Beneficial Conversion Features

The Company issued convertible bonds that resulted in a beneficial conversion feature. A beneficial conversion feature arises when the conversion price of a convertible instrument is below the per share fair value of the underlying stock into which it is convertible. The holder realizes a benefit to the extent of the price difference and the issuer of the convertible instrument realizes a cost based on the theory that the intrinsic value of the price difference represents an additional financing cost.

Income Taxes

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

Revenue Recognition

The Company recognizes revenue in accordance with FASB ASC 606 upon the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue recognized from contracts with customers is disclosed separately from other sources of revenue. ASC 606 includes guidance on when revenue should be recognized on a Gross (Principal) or Net (Agent) basis.

Most of the Company’s revenues are recognized primarily under long-term contracts, including those for which revenues are based on either a fixed price, or cost-plus-fee basis, and primarily as performance obligations are satisfied. Revenue from crew manning services where Elvictor acts as a principle is recognized as gross revenue and when acting as an agent, revenue is recognized as net revenue in the accounting period in which the services are rendered. For all fixed-price contracts, revenue is recognized based on the actual service provided to the end of the reporting period. The accounting treatment for the reporting of revenues may vary materially between whether the revenue is reported on a Principal (Gross) or an Agent (Net) basis.

The measurement and recognition of stock-based compensation expense is based on estimated fair values for all share-based awards made to employees and directors, including stock options and for non-employee equity transactions as per ASC 718 rules.

For transactions in which we obtain certain services of employees, directors, and consultants in exchange for an award of equity instruments, we measure the cost of the services based on the grant date fair value of the award. We recognize the cost over the vesting period

Basic Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing the Company’s net profit (loss) applicable to common shareholders by the weighted average number of shares of common stock during the period. Diluted earnings per share is calculated by dividing the Company’s net income (loss) applicable to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. There were no such common stock equivalents outstanding as of September 30, 2022.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued ASU 2020-03 “Codification Improvements to Financial Instruments” which modifies the measurement of expected credit losses of certain financial instruments. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2022. Management is currently assessing the impact of ASU 2020-03, but it is not expected to have a material impact on the Company’s consolidated financial statements.

Subsequent Events

In accordance with SFAS 165 (ASC 855-10) the Company has analyzed its operations subsequent to September 30, 2022, through November 15, 2022, the date these financial statements were issued, and has determined the following subsequent events.

On October 26, 2022, the Company determined that it would pay on behalf of certain Board members and executive officers the applicable income taxes payable, related to the payment of their compensation for the year ended December 31, 2021. The Board approved the income tax payment of $29,676 on behalf of Konstantinos Galanakis, the CEO and board member, $15,614 on behalf of Christodoulos Tzoutzakis, the COO and $7,783 on behalf of Stavros Galanakis, Vice President and Chairman of the Board. The Company has accrued for these expenses in its Condensed Consolidated Statement of Operations under Salaries as of September 30, 2022.

Plan of Operations

In order to meet business goals, we must (a) execute effectively our current business of crew management; and (b) continue to focus on new business development in order to acquire new agreements.

In order to raise sufficient funds to proceed with the implementation of our business plan, we may have to find alternative sources of funds, like a second public offering, a private placement of securities, or loans from third parties (such as banks or other institutional lenders). Equity financing could result in additional dilution to then existing shareholders. If we are unable to meet our needs for cash from either the money that we raise from private placements, or possible alternative sources, then we may be unable to continue to maintain, develop or expand our operations.

We incurred revenues of $1,781,966 for the nine-month period ended September 30, 2021 while for the nine-month period ended September 30, 2022 we increased our revenues to $1,878,002. Accordingly, for the three-month period ended September 30, 2021 we recognized revenues of $608,614 and increased revenues to $662,647 for the same period ended September 30, 2022, We believe consistent growth in our shipping crew management operations is key to the success of our Company.

In the second quarter of 2021, we entered into an exclusive Software License Agreement with Seatrix Software Production Single Member S.A. in order to have the rights to use crew software that facilitates our operations. Thereafter in the fourth quarter of 2021 the Company signed a new Software License Agreement, effective on January 1, 2022, that granted the perpetual exclusive and non-transferable license in exchange of shares of common stock. Through this agreement we are entitled to use the crew management platform and our personnel can collaborate with many different cultures in many different time zones with ever rising complexities, presenting a uniform service level to our principals regardless of the point of origin of the crew.

Results of Operations

Revenues

For the nine-month periods ended September 30, 2022 and September 30, 2021, we generated $1,878,002 and $1,781,966 in total revenue, respectively, representing an increase in total revenue of $96,036 between the two periods, or 5.4%. The increase in total revenue between these two periods is primarily due to an increase in net revenue we received as an agent in connection with our providing onboarding services to crew management clients.

For the three-month periods ended September 30, 2022 and September 30, 2021, we generated $662,647 and $608,614 in total revenue, respectively, representing an increase in total revenue of $54,033 between the two periods, or 8.9%. The increase in total revenue between these two periods is primarily due to an increase in crew management clients.

Operating Expenses

For the nine-month periods ended September 30, 2022 and September 30, 2021, we incurred $1,561,103 and $959,739, respectively in total operating expenses, representing an increase in total operating expenses between the two periods of $601,364, or 62.7%. The increase in operating expenses between the two periods is primarily due to (i) an increase of $434,805 (95.1%) in salaries payable to our employees from $457,407 for the nine-month period ended September 30, 2021 to $892,212 for the same period in 2022, as a result of increases in salaries payable to management and an increase in the number of employees, (ii) an increase of $166,871 (62.6%) in professional fees from $266,384 for the nine-month period ended September 30, 2021 to $433,255 for the same period in 2022, as a result of legal and public relations fees.

For the three-month periods ended September 30, 2022 and September 30, 2021, we incurred $589,097 and $438,516, respectively in total operating expenses, representing an increase in total operating expenses between the two periods of $150,581, or 34.3%. The increase in operating expenses in 2022 is primarily due to (i) an increase of $153,591 (67.5%) in salaries payable to our employees from $227,453 for the three-month period ended September 30, 2021 to $381,043 for the same period in 2022, as a result of increases in salaries payable to management and an increase in the number of employees

Net Loss and Gross Profit

For the nine-month periods ended September 30, 2022 and September 30, 2021, we incurred a net loss of $43,928, after provision for income taxes, and a loss of $43,106,201, after provision for income taxes, respectively, representing an increase in net profit of $43,062,273 between the two periods, or 99.9%. This decrease in net loss, after provision for income taxes, for the nine-month period ended September 30, 2022 compared to a net loss, after provision for income taxes, for the same period in 2022 is mainly due to the $43,147,786 loss recognition resulting from the non-cash conversion of the preferred shares outstanding to common shares, and a decrease of $78,781, or 461.2 %, in gain from operations to a loss of $61,722 for the nine-month period ended September 30, 2022 from a gain of $17,059 for the same period in 2021. This decrease in gain from operations is attributable to the increased operating expenses described above, despite the fact that the gross profit increased by $522,583, or 53.5%, from $976,798 for the nine-month period ended September 30, 2021 to $1,499,381 for the same period in 2022.

For the three-month periods ended September 30, 2022 and September 30, 2021, we incurred a net loss, after provision for income taxes of $54,273 and $68,812, respectively, representing a decrease in net loss of $14,539 between the two periods, or approximately 21.1%. This decrease in net loss, after provision for income taxes, for the three-month period ended September 30, 2022 compared to a net loss, after provision for income taxes, for the same period in 2022 is due to a decrease of $29,752, or 35.6%, in loss from operations to a loss of $53,706 for the three-month period ended September 30, 2022 from a loss of $83,458 for the same period in 2021. This decrease in loss from operations is attributable to the increased gross profit by $180,333, or 50.8%, from $355,058 for the three-month period ended September 30, 2021 to $535,391 for the same period in 2022 despite the increased operating expenses as described above.

Liquidity, Capital Resources, and Off-Balance Sheet Arrangements

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had a working capital surplus during the nine-month period ended September 30, 2022 of $407,147 compared to the surplus of $371,736 for the nine-month period ended September 30, 2021, which is calculated as current assets minus current liabilities.

Cash flows for the nine-month period ended September 30, 2022

Net cash flow provided by operating activities was $99,598 for the nine-month period ended September 30, 2022, compared to $74,747 provided by operating activities during same period in 2021. This change was directly attributable to the cash receivables from our customers.

Net cash flow used in investing activities was $12,025, mainly deriving from the purchase of office equipment, and $11,744 for the nine-month periods ended September 30, 2022 and September 30, 2021, respectively.

Net cash used for financing activities was $0, for the nine-month period ended September 30, 2022. For the same period ended September 30, 2021 net cash provided by financing activities was $111,833.

Cash Requirements

We believe our cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, and capital expenditure requirements for at least the next twelve months. We will require additional capital to implement our business development and fund our operations. In the event that our plans or assumptions change, we may need to raise additional capital sooner than expected.

Since the commencement of our crew management business, we have funded our operations primarily through equity financings and we expect that we will continue to fund our business through equity and debt financing, either alone or through strategic alliances. Additional funding may not be available on favorable terms, if at all, which could harm our business plans, financial condition and operating results. We intend to continue to fund our business by way of equity or debt financing along with the revenues that can support the Company. If we raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our common stock.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.

Contractual Obligations

The Company leases its office space in Vari, Greece under a non-cancelable operating lease that was entered into on July 10, 2020 and most recently amended on April 1, 2021. The lease requires monthly rental payments, included by year in the table below, which escalate during the lease term and expires on December 31, 2022. Furthermore, on October 1, 2021, the Company entered into a second lease agreement for its subsidiary Ultra Shipmanagement that requires monthly rental payments and expire on September 30, 2024. Both contractual obligations to make future payments are included in the table below while the difference between straight-line rent expense and rent paid is immaterial as of September 30, 2022.

Rent expense for the nine-months ended September 30, 2022 and 2021 were $43,152 and $43,703, respectively.

Rent expense for the three-months ended September 30, 2022 and 2021 were $13,610 and $12,577, respectively.

Outlook

The outbreak of COVID-19 has adversely affected both our and our clients’ operations. During the pandemic there were cases where crews were likely to be unable to travel to join a vessel or be repatriated following the completion of their contract due to travel restrictions creating several challenges in our operations. Additionally, specialized staff such as inspectors were often restricted from accessing vessels and thus conducting the legally required inspections (safety, environmental, training, etc.), supplies were often difficult to reach the vessels and support from head offices could be of lower quality since a large part of the staff was working remotely. The Company was able to continue to operate with minor interruptions although the vast majority of our staff worked remotely from the beginning of the pandemic. However, in the future similar epidemics, pandemics or outbreaks may impact our business due to closures or restrictions requested or mandated by governmental authorities, disruption to supply chains and workforce, reduction of demand for our services, and credit losses when customers and other counterparties fail to satisfy their obligations to us, among other factors.

The shipping industry and especially the crew management segments will likely continue to face increasing pressures, further due to the ongoing COVID-19 crisis, as well as due to the war in Ukraine. According to the International Chamber of Shipping (the “ICS”), which represents approximately 80% of the worlds’ merchant fleet, Ukrainian and Russian seafarers make up 14.5% of the global shipping workforce.

The management team of Elvictor is assessing alternative plans to mitigate potential challenges arising from the ongoing war in the Ukraine, among other things.

The demand for our services depends on the demand for maritime shipping services which are subject to normal economic cycles affecting the general economy including the effect of increased inflation. Inflationary pressures may result to important increases to our operating costs that we may not be able to fully transfer to our clients thus affecting our profitability. Additionally, increase in operating costs of our clients may lead to delays in payments for our services and accumulation of bad debt, although as a Company we closely monitor their credit behavior to avoid such incidents. Additionally, significant deteriorations of economic conditions over a prolonged period could produce a material adverse effect on the demand for our services.