Notes
to Consolidated Financial Statements
June
30, 2017 and December 31, 2016
Note
A - Background and Description of Business
Petrogress,
Inc. (the “Company” or “Petrogress”) was incorporated on February 10, 2010 under the Laws of the State
of Florida as 800 Commerce, Inc. (800 Commerce) and was formed for the purpose of marketing credit card processing services on
behalf of merchant payment processing service providers.
On
February 29, 2016, 800 Commerce entered into a Securities Exchange Agreement (the “SEA”) with an unrelated third party,
Petrogres Co. Limited (“Petrogres”), a Marshall Islands corporation, and its sole shareholder. The Company acquired
100% of Petrogres and its affiliated companies. As consideration for the acquisition of Petrogres, the Company issued 136,000,000
shares of its restricted, unregistered common stock, representing approximately 85% of the post- transaction issued and outstanding
shares of the Company’s common stock.
On
March 9, 2016, the Company’s Board of Directors approved an amendment to the Company’s Articles of Incorporation to
change the Company’s name to Petrogress, Inc.
On
November 16, 2016, the Company filed Articles of Merger and Plan of Merger with the State of Florida and the State of Delaware
to change the Company’s domicile from Florida to Delaware by means of a merger with and into a Delaware corporation formed
solely for the purpose of effecting the reincorporation. The Articles of Incorporation and Bylaws of the Delaware corporation
are the Articles of Incorporation and Bylaws of the surviving corporation. Such Articles of Incorporation maintained the Company’s
corporate name of Petrogress, Inc. and modified the Company’s capital structure to allow for the issuance of up to 490,000,000
shares of $0.001 par value common stock and up to 10,000,000 shares of $0.001 par value preferred stock. The effect of this action
is reflected in the accompanying financial statements as of the first day of the first period presented.
The
acquisition of Petrogres, by the Company on February 29, 2016 effected a change in control and was accounted for as a ”reverse
acquisition” whereby Petrogres was the accounting acquiror for financial statement purposes. Accordingly, the historical
financial statements of the Company are those of Petrogres and its subsidiaries from their respective inception and those of the
consolidated entity subsequent to the February 29,2016 transaction date.
Petrogress
operates as a fully integrated international merchant of petroleum products, focused on the supply and trade of light petroleum
fuel oil (LPFO), refined oil products and other petrochemical products to local refineries in West Africa and Mediterranean countries.
The Company operates primarily as a holding company and provides its services through three wholly-owned subsidiaries: Petrogres
Co. Limited, which provides management of crude oil purchases and sales; Petronav Carriers LLC, which manages day-to-day operations
of its beneficially-owned affiliated tanker fleet currently consisting of four vessels; and Petrogress Oil & Gas Energy Inc.,
which is primarily focused on purchasing interests in oil fields in Texas and exporting liquefied natural gas. The Company’s
management team operates from its principal offices located in Piraeus, Greece.
Note
B - Preparation of Financial Statements
The
Company follows the accrual basis of accounting in accordance with generally accepted accounting principles and has elected a
year-end of December 31.
We
qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act of 1933 as amended (the “Securities Act”) for complying with new or revised
accounting standards. As an emerging growth company, we can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period.
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management
further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system
of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is
designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions
are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition,
results of operations and cash flows of the Company for the respective periods being presented.
Note
B - Preparation of Financial Statements - Continued
For
segment reporting purposes, the Company and its subsidiaries operated in only one industry segment during the periods represented
in the accompanying financial statements and makes all operating decisions and allocates resources based on the best benefit to
the Company as a whole.
During
interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the
U. S. Securities and Exchange Commission on its Annual Report on Form 10-K for the year ended December 31, 2016. The information
presented within these interim financial statements may not include all disclosures required by accounting principles generally
accepted in the United States of America and the users of financial information provided for interim periods should refer to the
annual financial information and footnotes when reviewing the interim financial results presented herein.
In
the opinion of management, the accompanying interim financial statements, prepared in accordance with the U. S. Securities and
Exchange Commission’s instructions for Form 10-Q, are unaudited and contain all material adjustments, consisting only of
normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the
Company for the respective interim periods presented. The current period results of operations are not necessarily indicative
of results which ultimately will be reported for the full fiscal year ending December 31, 2017.
The
accompanying consolidated financial statements, as of and for the periods ended June 30, 2017 and 2016, respectively and as appropriate,
contain the accounts of the Company and its wholly-owned subsidiaries: Petrogres Co Ltd., Petronav LLC, Shiba Ship Management
Ltd., Danae Marine Ltd., Invictus Marine S. A. and Entus Marine Ltd. (all incorporated in the Republic of the Marshall Islands)
and Petrogress Oil & Gas, Inc. (a State of Texas corporation). All significant intercompany transactions have been eliminated.
The consolidated entities are collectively referred to as “Company”.
Note
C - Summary of Significant Accounting Policies
|
1.
|
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.
|
2.
|
Accounts
receivable and revenue recognition
|
The
Company, through its subsidiaries, is primarily engaged in the purchase, transport and processing of oil and petroleum products.
In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are located principally
in Africa. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral
from its customers. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects
its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure
to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non- performance.
The
Company recognizes revenues after product is delivered to a contracted customer. Product in transit at the end of an accounting
period is recorded at an estimated value which is adjusted upon load certification. The Company recognizes revenue in accordance
with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605,
Revenue Recognition. ASC 605 requires that the following four basic criteria are met (1) persuasive evidence of an arrangement
exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectability is reasonably
assured. The Company recognizes revenue from commissions during the month in which commissions are earned.
The
Company's inventory, which consists primarily of purchased crude oil in transit on a marine vessel at the respective balance sheet
date, is valued at the lower of cost or market using the mark-to-market method of valuation.
Note
C - Summary of Significant Accounting Policies - Continued
The
Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on
the quoted market prices of the securities with unrealized gains and losses, net of deferred income taxes, reported as accumulated
other comprehensive income (loss), a separate component of stockholders’ equity. Realized gains and losses on available-for-sale
securities are included in net earnings in the period earned or incurred.
Other
investments, if any, that do not have a readily determinable fair value are recorded at amortized cost. For purposes of computing
realized gains and losses, the specific identification method is used.
|
5.
|
Property
and equipment
|
Property
and equipment are recorded at historical cost. These costs are depreciated over the estimated useful lives of the individual assets
using the straight-line method, generally 5 to 10 years.
Gains
and losses from disposition of property and equipment are recognized as incurred and are included in operations.
In
accordance with the appropriate sections of the Fixed Asset topic of the FASB ASC, the Company follows the policy of evaluating
all property and equipment as of the end of each reporting quarter. At June 30, 2017 and 2016, respectively, management has not
provided any impairment for the future recoverability of these assets.
The
Company has adopted the provisions of provisions required by the Start-Up Activities topic of the FASB ASC whereby all costs incurred
with the incorporation and reorganization of the Company were charged to operations as incurred.
The
Company files income tax returns in various jurisdictions, as appropriate and required. The Company is no longer subject to U.S.
federal, state and local, as applicable, income tax examinations by regulatory taxing authorities for any period prior to January
1, 2012.
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. The Company recognizes deferred tax assets and
liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization.
The Company records a valuation allowance related to a deferred tax asset when it is more likely than not that some portion of
the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, the
Company has not incurred any liability for unrecognized tax benefits, including assessments of penalties and/or interest.
The
Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized.
Note
C - Summary of Significant Accounting Policies - Continued
|
8.
|
Income
(Loss) per share
|
Basic
earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average
number of common shares outstanding during the respective period presented in our accompanying financial statements.
Fully
diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased
to include the number of common stock equivalents (primarily outstanding options and warrants).
Common
stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the
treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later,
and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at
the calculation date.
As
of June 30, 2017, the Company does not have any outstanding items which could be deemed to be dilutive. As of June 30, 2016, the
Company had potentially dilutive securities related to the Company’s outstanding convertible debt that could have potentially
converted into approximately 6,018,760 shares of common stock.
|
9.
|
Accounting
for Stock-based Compensation
|
The
Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees.
The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity
instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees
are valued at their respective measurement dates based on the trading price of the Company’s common stock and recognized
as expense during the period in which services are provided.
The
Company has adopted ASC Topic 220, "Comprehensive Income." This statement establishes standards for reporting comprehensive
income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Items included in the Company’s comprehensive loss consist of unrealized losses
on available-for-sale securities.
|
12.
|
New
and Pending Accounting Pronouncements
|
The
Company is of the opinion that any and all other pending accounting pronouncements, either in the adoption phase or not yet required
to be adopted, will not have a significant impact on the Company's financial position or results of operations.
Note
D - Concentrations of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments
and trade accounts receivables. The Company places its temporary cash investments with financial institutions and limits the amount
of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited
due to the short payment terms dictated by the industry and operating environment. As of June 30, 2017 and December 31, 2016,
management is of the opinion that the Company had no significant concentrations of credit risk.
Note
E - Fair Value of Financial Instruments
The
Company's financial instruments consist primarily of cash, accounts receivable, inventory, marketable securities, accounts payable
and accrued expenses, and convertible debt.
The
carrying amount of cash, accounts receivable, inventory, accounts payable and accrued expenses, and convertible debt, as applicable,
approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current
market conditions.
Note
E - Fair Value of Financial Instruments - Continued
Marketable
securities are adjusted to fair value each balance sheet date, based on quoted prices; which are considered level 1 inputs. The
Company’s derivative liability is valued using the level 3 inputs. The estimated fair value is not necessarily indicative
of the amounts the Company would realize in a current market exchange or from future earnings or cash flows.
Interest
rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or
on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate
its exposure to interest rate risk, if any.
Financial
risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and
are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure
to financial risk, if any.
Fair
value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation
techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained
from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions
about market participant assumptions developed based on the best information available in the circumstances (“unobservable
inputs”). Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e.,
the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair
value, the Company primarily uses prices and other relevant information generated by market transactions involving identical or
comparable assets (“market approach”). The Company also considers the impact of a significant decrease in volume and
level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.
The
highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
The
three hierarchy levels are defined as follows:
Level
1 - Quoted prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets
or liabilities;
Level
2 - Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities
in active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level
3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit
risk adjustments are applied to reflect the Company’s own credit risk when valuing all liabilities measured at fair value.
The methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company’s
own credit risk as observed in the credit default swap market.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
June 30, 2017 and December 31, 2016, respectively, for each fair value hierarchy level:
|
|
|
|
|
|
|
|
|
Derivative
|
|
Marketable
|
|
|
June
30, 2017
|
|
Liability
|
|
Securities
|
|
Total
|
Level I
|
|
$
|
—
|
|
|
$
|
20,940
|
|
|
$
|
20,940
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
20,940
|
|
|
$
|
20,940
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
65,499
|
|
|
$
|
—
|
|
|
$
|
65,499
|
|
Note
F - Property and Equipment
Property
and equipment consist of the following components:
|
|
June
30,
|
|
December
31,
|
|
Estimated
|
|
|
2017
|
|
2016
|
|
useful
life
|
Marine
vessels
|
|
$
|
10,171,930
|
|
|
$
|
9,999,380
|
|
|
10
years
|
Furniture
and equipment
|
|
|
116,808
|
|
|
|
89,328
|
|
|
5-10
years
|
|
|
|
10,288,738
|
|
|
|
10,088,708
|
|
|
|
Accumulated
depreciation
|
|
|
(4,518,671
|
)
|
|
|
(4,169,641
|
)
|
|
|
Net
property and equipment
|
|
$
|
5,770,067
|
|
|
$
|
5,919,067
|
|
|
|
Total
depreciation expense charged to operations for the six month periods ended June 30, 2017 and 2016, respectively, was approximately
$348,930 and $334,877. Total depreciation expense for the year ended December 31, 2016 was approximately $676,328.
Note
G - Income Taxes
The
components of income tax (benefit) expense for the each of the six month periods ended June 30, 2017 and 2016, respectively, are
as follows:
|
|
Six
months
ended
June
30,
2017
|
|
Six
months
ended
June
30,
2016
|
Federal:
|
|
|
|
|
Domestic –
current
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign
– current
|
|
|
—
|
|
|
|
34,700
|
|
Deferred
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
34,700
|
|
State:
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
Deferred
|
|
|
—
|
|
|
|
34,700
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
34,700
|
|
Note
H - Convertible Notes Payable
On
May 1, 2015, the Company entered into a Convertible Promissory Note with LG Capital Funding LLC in the amount of $21,500 and on
May 26, 2015, entered into a Convertible Promissory Note with Crown Bridge Partners LLC in the amount of $24,000. On December
9, 2015, both of these notes were acquired by Mammoth Corporation and restructured to the principal amount of $31,259 and $38,280,
respectively. The notes had a scheduled maturity of September 9, 2016.
Each
note was non-interest bearing and contained a conversion feature, at the option of the holder, whereby the principal amount and
any accrued interest, if any, could be converted to common stock of the Company at a conversion price of 54% of the lowest closing
price for the Company’s common stock during the 20 trading days preceding the date of the conversion notice.
The
Company tendered a cash payment of approximately $44,887 as payment in full on the outstanding principal and accrued interest,
if any, on July 3, 2017. Given the timing of this debt retirement in relation to the date of the accompanying financial statements,
the retirement of the underlying derivative is effectively retired as of June 30, 2017.
Note
H - Convertible Notes Payable - Continued
The
Company determined that the conversion feature of the Mammoth Notes represent an embedded derivative since the Notes are convertible
into a variable number of shares upon conversion. Accordingly, the Mammoth Notes were not considered to be conventional debt under
EITF 00-19 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.
Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with
the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the
maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income
or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability
on the balance sheet. The embedded feature included in the Mammoth Notes resulted in a debt discount of $48,975 on the date the
Mammoth Notes were assumed and a derivative liability of $300,321.
A
summary of the derivative liability of the Mammoth Notes as of June 30, 2017 and December 31, 2016, is as follows:
June
30, 2017
Balance
assumed
|
|
$
|
300,321
|
|
Reduction for conversion
in prior periods
|
|
|
(82,652
|
)
|
Fair value changes
over time
|
|
|
(152,170
|
)
|
Cancellation
due to debt retirement in cash
|
|
|
(65,499
|
)
|
|
|
|
|
|
Balance at
June 30, 2017
|
|
$
|
—
|
|
December
31, 2016
Balance
assumed
|
|
$
|
300,321
|
|
Reduction for conversion
in prior periods
|
|
|
(82,652
|
)
|
Fair value changes
over time
|
|
|
(152,170
|
)
|
|
|
|
|
|
Balance at
December 31, 2016
|
|
$
|
65,499
|
|
The
fair value at the assumption and re-measurement dates for the Company’s derivative liabilities were based upon the following
management assumptions as of June 30, 2017 and December 31, 2o16, respectively:
June
30, 2017
|
|
Assumption
date
|
|
Remeasurement
date
|
Expected
dividends
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Expected
volatility
|
|
|
363
|
%
|
|
|
366
|
%
|
Expected
term in months
|
|
|
6
|
|
|
|
3
|
|
Risk
yield
|
|
|
0.49
|
%
|
|
|
0.28
|
%
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Expected
dividends
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
Expected
volatility
|
|
|
363
|
%
|
|
|
366
|
%
|
Expected
term in months
|
|
|
6
|
|
|
|
3
|
|
Risk
yield
|
|
|
0.49
|
%
|
|
|
0.28
|
%
|
A
summary of the convertible notes payable balance as of June 30, 2017 and December 31, 2016 is as follows:
Assumed
balance
|
|
$
|
69,619
|
|
Conversion of debt in March and April
2016
|
|
|
(24,732
|
)
|
Balance at December 31, 2016
|
|
|
44,887
|
|
Activity through
June 30, 2017
|
|
|
-0-
|
|
Balance at June 30, 2017
|
|
|
44,887
|
|
Payment in cash
on July 3, 2017
|
|
|
(44,887
|
)
|
Balance at July 3, 2017
|
|
$
|
-0-
|
|
Note
I - Note Payable to Stockholder
In
conjunction with the aforementioned change-in-control transaction on February 29, 2016, the Company and its current controlling
stockholder, Christos Traios, recognized that sufficient working capital would be required for the foreseeable future to support
the operations of the parent holding company, including the maintenance of the corporate entity and compliance with the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended.
Note
I - Note Payable to Stockholder - Continued
For
the period February 29, 2016 through July 13, 2017, this arrangement was undocumented and informal. On July 13, 2017 (Closing
Date), the Company issued a $1,000,000 Revolving Line of Credit Note (LOC Note) in favor of the Company’s principal stockholder
and sole officer/director, Christos Traios (Holder). As previously mentioned, Mr. Traios and the Company have agreed that additional
working capital will be required by the Company to support the day-to-day operations of Petrogress Incorporated, the consolidated
group’s parent and holding company and this note codifies the existence of that previously informal relationship.
The
LOC Note bears interest payable on the outstanding principal from accrue from the Closing Date at eight percent (8%) per annum
and will be computed for actual days elapsed on the basis of a 360 day year. The principal and any accrued but unpaid interest
on this Note (collectively, the “Principal”) is due and payable on or before July 13, 2018 (Maturity Date). At the
Maturity Date, provided that Borrower is not in default under this Agreement or the Promissory Note, the Company, at the Company’s
option may extend and renew the LOC Note for additional terms of twelve (12) months, with a new Effective Date and Maturity Date
assigned for each successive extension and renewal.
Interest
shall be due and payable every six (6) months, with payments due on the first business day six (6) months following the Effective
Date (the “Interest Due Date”) and on the Maturity Date, and each successive iteration of such dates upon extension
and renewal thereafter for so long as this Agreement shall remain in effect.
The
Principal amount of this Note may be prepaid by the Company, in whole or in part, without penalty, at any time. Upon any prepayment
of a portion of this LOC Note, a new LOC Note containing the same date and provisions of this Note shall, at the request of the
Holder, be issued by the Company to the Holder for the principal balance of this Note which shall not have been paid.
Upon
the Interest Due Date or Maturity Date, or any of them, regardless of any Event of Default, as defined, the Lender may demand
payment of any or all of the interest due on the principal amount by delivery of a number of common shares converted at a rate
of $0.001 per share. There is no provision for any of the Principal to be repaid in common stock of the Company. Except in the
Event of a Default (as defined), in no instance shall the Lender convert amounts due for accrued interest to the extent that said
repayment in common stock will cause the Company to issue a number of shares constituting ten percent (10%) or more of the Company’s
then issued and outstanding common shares.
In
consideration of Lender's extending the Credit Line to the Company, the Company agreed to issue to Lender a Warrant (the "Warrant")
to purchase 15,000,000 shares of the Company’s common stock at an exercise price of $0.05 for a period of five years. The
Warrant will provide for cashless exercise privileges, and be transferrable or assignable at the Holder’s option, with the
Company’s approval.
Activity
on the LOC Note, including activity from inception, is as follows:
Balance at February 29, 2016
|
|
$
|
—
|
|
Net changes
during the period
|
|
|
134,600
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
134,600
|
|
Net changes during the
period
|
|
|
236,945
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
$
|
371,545
|
|
Note
J - Common Stock Transactions
On
November 16, 2016, the Company filed Articles of Merger and Plan of Merger with the State of Florida and the State of Delaware
to change the Company’s domicile from Florida to Delaware by means of a merger with and into a Delaware corporation formed
solely for the purpose of effecting the reincorporation. The Articles of Incorporation and Bylaws of the Delaware corporation
are the Articles of Incorporation and Bylaws of the surviving corporation. Such Articles of Incorporation maintained the Company’s
corporate name of Petrogress, Inc. and modified the Company’s capital structure to allow for the issuance of up to 490,000,000
shares of $0.001 par value common stock and up to 10,000,000 shares of $0.001 par value preferred stock. The effect of this action
is reflected in the accompanying financial statements as of the first day of the first period presented.
Effective
February 29, 2016, the Company issued 1,101,642 shares of the Company’s common stock to Agritek Holdings, Inc. pursuant
to a Debt Settlement Agreement in full settlement of the amount owed to Agritek of $283,547.
Note
J - Common Stock Transactions - Continued
Upon
completion of the SEA between the Company and Petrogres, the Company issued to the sole Petrogres shareholder 136,000,000 shares
of common stock of the Company in exchange for one hundred percent (100%) of the issued and outstanding share capital of Petrogres
from the sole shareholder of Petrogres.
On
March 7, 2016, the Company issued 1,000,000 shares of common stock to Mammoth upon the conversion of $2,700 of principal at a
conversion price of $0.0027 per share.
On
April 11, 2016, the Company issued 6,800,000 shares of common stock to Mammoth upon the conversion of $22,032 of principal at
a conversion price of $0.00324 per share.
Note
K - Preferred Stock
The
Company is authorized to issue up to 10,000,000 shares of preferred stock, $0.001 par value. As of June 30, 2017 and December
31, 2016, respectively, there are no shares of preferred stock issued and outstanding.
On
July 14, 2017,the Company’s Board of Directors approved a resolution authorizing the establishment of Series A Preferred
Stock. The Series A Preferred Stock shall consist of 100 shares in total with a redesignated par value of $100.00 per share. The
Holder(s) of the Series A share shall as a class have rights in all matters requiring shareholder approval to a number of votes
equal to two (2) times the sum of: (I) the total number of shares of common stock which are issued and outstanding at the time
of any election or vote by the shareholders; plus (ii) the number of shares of Preferred Stock issued and outstanding of any other
class that has voting rights, if any. These voting rights may, if required, extend to a number of votes in excess of the total
number of shares authorized. The Holder(s) of the Series A share shall not be entitled to convert the Series A share to shares
of Common Stock or any other class of the Corporation’s stock and the Holder(s) of the Series A shares shall not be entitled
to dividends. In the event of liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the
Holder(s) of the Series A share will be entitled to receive out of the assets of the Corporation, prior to and in preference to
any distribution of the assets or surplus funds of the Corporation to the holders of any other class of preferred stock or the
Common Stock, the amount of One Hundred Dollars ($100.00) per share, and
will
not be entitled to receive any portion of
the remaining assets of the Corporation except by reason of ownership of shares of any other class of the Corporation’s
stock. The Series A shares shall not be subject to redemption by the Corporation.
Note
L - Common Stock Warrants
The
Company has issued an aggregate 15,000,000 warrants to purchase an equivalent number of shares of common stock at a price of $0.05
per share as a component of the July 13, 2017 Revolving Line of Credit Agreement by and between the Company and Christos Traios,
the Company’s Chief Executive Officer.
|
|
Number
of
Warrant
Shares
|
|
Weighted
Average
Price
|
Balance
at January 1, 2017
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2017
|
|
|
—
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Issued
on July 13,2017 as a component of the Revolving Line of Credit Agreement with stockholder
|
|
|
15,000,000
|
|
|
$
|
0.05
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance at
July 13, 2017
|
|
|
15,000,000
|
|
|
$
|
0.05
|
|
Note
L - Common Stock Warrants - Continued
As
of July 13, 2017, the warrants break down as follows:
#
warrants
|
exercise
price
|
15,000,000
|
$0.05
|
15,000,000
|
$0.05
|
|
|
#
warrants
|
expiring
in
|
15,000,000
|
2022
|
Note
M - Officer Compensation
On
April 1, 2016, the Company entered into an Employment Agreement (Employment Agreement) between Christos P. Traios, an individual
residing in Piraeus - Greece (Executive) and the Company.
The
Company has agreed to employ the Executive to perform managerial and executive functions for the Company and the Executive has
agreed to perform such services for the Company on the terms and conditions defined in the Employment Agreement, subject to the
directives of the Company’s Board of Directors. The term of this Employment Agreement commenced on April 1, 2016 and terminates
on March 31, 2021, provided, however, that the Employment Agreement shall automatically renew on a year-to-year basis unless terminated
by either party via written notice at least four (4) months prior written notice during any given year, unless terminated as provided
for in the Employment Agreement.
The
Executive is entitled to receive:
(a)
- During the Term of Employment, the Company shall pay the Executive a salary at an annual rate of U.S. $120,000.00 (One Hundred
Twenty Thousand) U. S. Dollars (Base Salary). The Base Salary will be payable in monthly installments of $10,000 (Ten Thousand)
U. S. Dollars on the 1st day of each calendar month, commencing on the starting date of the Agreement;
(b)
- In addition to his Base Salary, the Company shall issue to the Executive shares of Preferred stock with super-voting rights,
which he shall hold until the parties, either of them, terminate this Agreement;
(c)
- The Executive will also be given an expense allowance of $5,000 (Five Thousand) U. S. Dollars per month, subject to the Company
receiving supporting receipts and other required documentation for any such expenses on a monthly basis. Any expenses in excess
of that amount will require the prior approval of the Company’s Board of Directors;
(d)
- The Executive shall also be eligible to participate in any future bonus, profit sharing and/or ESOP plans approved and enacted
by the Company’s Board of Directors on the same basis with all other senior executives of the Company, subject to the terms
thereof. The Executive understands, however, that no such plans are currently in effect or anticipated.
The
Executive is also entitled to receive any other normal and ordinary benefits offered by the Company on a basis equal to any other
senior executive(s) of the Company.
The
Agreement may be terminated as follows: (a) at any time by the mutual written consent of the Executive and the Company; (b) at
any time for cause (as defined in the Employment Agreement) by the Company upon written notice to the Executive; (c) upon the
Executive’s death or upon the Executive’s permanent disability (as defined in the Employment Agreement) continuing
for a period of ninety (90) days; (d) at any time by the Executive with sixty (60) days written notice of intent to terminate
to the Company; or (e) at any time without cause (as defined in the Employment Agreement) by the Company upon written notice to
the Executive of not less than thirty (30) days, subject to the caveats that the Company will pay the Executive the Executive’s
Base Salary for a period of six (6) months as severance pay and shall pay any unpaid bonus and benefits in each case through the
effective date of termination.
During
the six months ended June 30, 2017 and the year ended December 31, 2016, the Company paid or accrued approximately $60,000 and
$100,000 pursuant to this Employment Agreement.
Note
N - Rental Commitments
The
Company leases office and other facilities benefitting the Company on long-term operating leases, as follows:
Office
space in Piraeus, Greece for monthly rent of €2,500 (approximately $2,942 USD at August 1, 2017). The lease, as amended,
expires on May 31, 2018. The Company believes that this office space is adequate for its operations at the present time.
Effective
June 13, 2016, the Company entered into a thirteen (13) month lease for a corporate apartment in New York City, to be used by
the Company’s CEO during his travel to New York. Mr. Traios spends approximately 35% of his time in New York on business
matters. The monthly rental is for $4,100 through July 12, 2018.
Effective
October 1, 2016, the Company entered into a one year Office Services Agreement for office space and other services for a total
base monthly fee of $2,800. The Company utilizes the New York office space for administrative purposes.
Future
minimum rental payments on the above leases are as follows:
Year
ended
|
|
|
December
31,
|
|
Amount
|
|
|
|
|
2017
|
|
|
$
|
84,750
|
|
|
2018
|
|
|
$
|
13,375
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
$
|
98,125
|
|
For
the six months ended June 30, 2017 and the year ended December 31, 2016, respectively, the Company paid an aggregate of $
62,200
and $88,181.3 for rent under these agreements.
Note
O - Related Party Transactions
The
Company has accounts receivable from affiliated entities of approximately $475,632 and $-0- at June 30, 2017 and December 31,
2016, respectively.
Note
P - Revenue Concentrations
The
Company sells to commercial customers in foreign markets. The following table shows the Company’s gross revenue composition:
Foreign
Commercial
|
|
Six
months
ended
Jun.
30, 2017
|
|
Six
months
ended
Jun.
30, 2016
|
|
Six
months
ended
Dec.
31, 2016
|
|
Accounts
Receivable
Balance
at
Jun.
30, 2017
|
|
|
|
|
|
|
|
|
|
A
|
|
|
52.10
|
%
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,059,439
|
|
B
|
|
|
11.40
|
%
|
|
|
28.50
|
%
|
|
|
25.40
|
%
|
|
|
685,264
|
|
C
|
|
|
—
|
|
|
|
33.90
|
%
|
|
|
20.10
|
%
|
|
|
93,980
|
|
D
|
|
|
—
|
|
|
|
11.80
|
%
|
|
|
21.60
|
%
|
|
|
280,875
|
|
E
|
|
|
—
|
|
|
|
10.70
|
%
|
|
|
—
|
|
|
|
80,000
|
|
F
|
|
|
—
|
|
|
|
10.20
|
%
|
|
|
13.70
|
%
|
|
|
121,000
|
|
|
|
|
63.50
|
%
|
|
|
95.10
|
%
|
|
|
80.80
|
%
|
|
|
3,320,558
|
|
Others
|
|
|
36.50
|
%
|
|
|
4.90
|
%
|
|
|
19.20
|
%
|
|
|
608,633
|
|
Totals
|
|
|
100.00
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
3,929,191
|
|
Note
Q - Subsequent Events
Management
has evaluated all other activity of the Company through the issue date of the financial statements and concluded that, except
as disclosed in the appropriate notes listed above, no other subsequent events have occurred that would require recognition in
the accompanying financial statements or disclosure in the Notes to Consolidated Financial Statements as of the date of this filing.