NOTES
TO FINANCIAL STATEMENTS
Note
1 -
Organization
Overview
Petrogress,
Inc. (the “Company” or “Petrogress”) operates a fully integrated oil commodity business, including upstream,
midstream and downstream operations, primarily serving West African 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 the 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.
Corporate
History
We
were originally incorporated in the State of Florida on February 10, 2010 under the name 800 Commerce, Inc. for the purpose of
marketing credit card processing services on behalf of merchant payment processing service providers. Effective March 25, 2016,
we changed our name from 800 Commerce, Inc. to Petrogress, Inc. and effective November 30, 2016, we changed our state of domicile
from the State of Florida to the State of Delaware.
Securities
Exchange Agreement
On
February 29, 2016, we entered into a Securities Exchange Agreement (the “SEA”) with Petrogres Co. Limited, a Marshall
Islands corporation (“Petrogres”), and its sole shareholder. Pursuant to the terms of the SEA, the Company acquired
100% of Petrogres and its affiliated companies. In exchange, the Company issued to the sole shareholder of Petrogres 136,000,000
shares of restricted common stock, representing 85% of the issued and outstanding shares of the Company’s common stock at
the closing of the transaction. As part of the transaction, the sole shareholder and chief executive officer (“CEO”)
of Petrogres, Christos Traios, was appointed as CEO and as a director of the Company and B. Michael Friedman resigned as an officer
and director. In addition, the Company’s Board of Directors (the “Board”) approved an amendment to the Company’s
Articles of Incorporation, increasing the authorized capital to 490,000,000 shares of common stock, par value $0.001 per share,
and 10,000,000 shares of preferred stock, par value $0.001 per share.
The
SEA has been accounted for as a reverse acquisition and recapitalization of the Company whereby Petrogres effectively became a
public company, which has allowed us to increase our operational efficiency and continue to expand our operations. As a result
of this transaction, we acquired both the assets and operations of Petrogres and its wholly-owned subsidiaries.
Description
of Business
We
operate primarily as a holding company for our three wholly-owned subsidiaries: Petrogres, Co. Limited; Petronav Carriers LLC;
and Petrogress Oil & Gas Energy, Inc.
Petrogres Co.
Limited
, a Marshall Islands corporation (“Petrogres”), was incorporated in 2009 with the purpose of supplying
crude oil and other oil products in West Africa.
Petrogres operates
as an international merchant of petroleum products specializing in crude oil and refined products trade within West African and
Mediterranean countries, with a focus on the supply and trade of light petroleum fuel oil (“LPFO”), refined oil products
and other petrochemical commodities to local refineries in Ghana. Such products are shipped and delivered to these refineries
by its four beneficially-owned affiliated vessels.
Petronav
Carriers LLC
, a Delaware corporation (“Petronav”), was incorporated in March 2016 with the purpose of managing
the day-to-day operations of its four vessels, which are used to transport the Company’s petroleum products within various
countries in West Africa. Petronav is currently exploring opportunities to expand its operations by identifying and acquiring
additional vessels to expand its tanker fleet under management.
Petrogress
Oil & Gas Energy Inc
., a Texas corporation
(“Petrogress Energy”), was incorporated in December
2015 and is focused on identifying and acquiring suitable interests in oil fields in Texas to allow for the Company’s expansion
of its operations to include oil refinery production based within the United States and to export liquefied natural gas (“LNG”)
to Mediterranean markets.
Note
2 -
Summary of Significant Accounting Policies
Basis
of Presentation
These
interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and
in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly
the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such
periods are not necessarily indicative of the results expected for a full year or for any future period.
Emerging
Growth Company
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.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents.
Accounts
Receivable
The
Company and its affiliates are engaged primarily in the purchase, transport and processing of oil and petroleum products. The
Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from
its customers. 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 March
31, 2017 and December 31, 2016, the Company had no significant concentrations of credit risk.
Inventory
The
Company's inventory, which consists primarily of crude oil purchases on the vessel in transport, is valued at the lower of cost
or market using the mark-to-market method of valuation.
Marketable
Securities
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.
Property
and Equipment
Fixed
assets consisted of the following as of March 31, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Vessels
|
|
$
|
9,999,380
|
|
|
$
|
9,999,380
|
|
Furniture and equipment
|
|
|
89,328
|
|
|
|
89,328
|
|
|
|
|
10,088,708
|
|
|
|
10,088,708
|
|
Less: accumulated depreciation
|
|
|
(4,343,209
|
)
|
|
|
(4,169,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,745,499
|
|
|
$
|
5,919,067
|
|
Property
and equipment are stated at cost, and depreciation is provided by use of straight-line methods over the estimated useful lives
of the assets. The estimated useful lives of property and equipment are as follows:
Vessels
|
15 years
|
Office equipment and furniture
|
10 years
|
Computer hardware
|
5 years
|
Depreciation
expense of $173,568 and $165,907 was recorded for the three months ended March 31, 2017 and 2016, respectively. Depreciation expense
of $676,328 was recorded for the year ended December 31, 2016.
Revenue
Recognition
The
Company recognizes revenues after product is delivered to 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 during the month in which commissions are earned.
Fair
Value of Financial Instruments
Pursuant
to ASC 820,
Fair Value Measurements and Disclosures
, an entity is required to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the
level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC
820 prioritizes the inputs into three levels that may be used to measure fair value:
|
•
|
Level 1 applies to
assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 applies to
assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such
as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
•
|
Level 3 applies to
assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement
of the fair value of the assets or liabilities.
|
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
Company’s financial instruments consist principally of marketable securities, the fair value of which is determined based
on “Level 1” inputs. “Level 1” inputs consist of quoted prices in active markets for identical assets.
The recorded values of all other financial instruments approximate their current fair values because of their nature and respective
maturity dates or durations.
The
Company’s derivative liability resulting from the issuance of convertible debt is adjusted to fair value based on recent
sales of the underlying common stock and the use of an option pricing model, which are consistent with “Level 3” inputs.
See Note 6.
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis as of
March 31, 2017 for each fair value hierarchy level:
March 31, 2017
|
|
Derivative
Liability
|
|
Marketable
Securities
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
20,940
|
|
|
$
|
20,940
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
65,499
|
|
|
$
|
—
|
|
|
$
|
65,499
|
|
The
carrying amount of the Company’s accounts payable approximate fair value to their short term.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC 260, "Earnings per Share." Basic earnings (loss) per
share is computed by dividing net income (loss), after deducting preferred stock dividends accumulated during the period, by the
weighted-average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing
income by the weighted-average number of shares of common stock, common stock equivalents and other potentially dilutive securities
outstanding during the period. Potentially dilutive securities for the periods ended March 31, 2017 includes the Company’s
outstanding convertible debt that is convertible into approximately 3,457,551 shares of common stock.
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.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those
estimates.
Income
Taxes
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 been assessed, nor has the Company paid, any interest or penalties.
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. The Company’s tax years subsequent to 2010
remain subject to examination by federal and state tax jurisdictions.
Comprehensive
Income
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.
Note
3 -
Recent Accounting Pronouncements
Accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the financial statements upon adoption.
Note
4 -
Sales Concentration and Concentration of Credit Risk
Sales
and Accounts Receivable
Following
is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the three months ended
March 31, 2017 and 2016, and the accounts receivable balance as of March 31, 2017:
Customer
|
|
Sales
% Three
Months Ended
March 31, 2017
|
|
Sales
% Three
Months Ended
March 31, 2016
|
|
Accounts
Receivable
Balance as of
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
|
61.0
|
%
|
|
|
35.9
|
%
|
|
$
|
769,528
|
|
|
B
|
|
|
|
30.3
|
%
|
|
|
19.7
|
%
|
|
|
718,729
|
|
|
C
|
|
|
|
0.0
|
%
|
|
|
11.5
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,488,257
|
|
Note
5 -
Convertible Notes Payable
Effective
with the SEA, Petrogress assumed and acquired two convertible promissory notes that were issued to Mammoth Corporation (“Mammoth”).
Mammoth Note 1 had a balance of $31,339 and Mammoth Note 2 had a balance of $38,280. Mammoth Note 1 and Mammoth Note 2 are referred
to as the Mammoth Notes. The Mammoth Notes became due on September 9, 2016.
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 balance of the Mammoth Notes as of March 31, 2017 is as follows:
Balance assumed
|
|
$
|
300,321
|
|
Reduction for conversion
|
|
|
(82,652
|
)
|
Fair Value Change
|
|
|
(152,170
|
)
|
Ending Balance
|
|
$
|
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 March 31, 2017:
|
|
|
Assumption date
|
|
|
|
Remeasurement date
|
|
Expected dividends
|
|
|
-0-
|
|
|
|
-0-
|
|
Expected volatility
|
|
|
363
|
%
|
|
|
366
|
%
|
Expected terms in months
|
|
|
6
|
|
|
|
3
|
|
Risk yield
|
|
|
.49
|
%
|
|
|
.28
|
%
|
A
summary of the convertible notes payable balance as of March 31, 2017 is as follows:
Assumed Balance
|
|
$
|
69,619
|
|
Conversion of convertible notes
|
|
|
(24,732
|
)
|
Ending Balance
|
|
$
|
44,887
|
|
Note
6 -
Related Party Transactions
Due
from Related Parties
As
of March 31, 2017, accounts receivable due from related parties was $766,966.
Due
to Stockholders
Officer’s
compensation
For
the three months ended March 31, 2017 and 2016, the Company recorded officers’ compensation as follows:
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
President/CEO
|
|
|
$
|
30,000
|
|
|
$
|
—
|
|
As
of March 31, 2017, the company has accrued $100,000 in recognition of agreeing to compensate the Company’s CEO $10,000 per
month retroactive to March 1, 2016.
Officer’s
advances
During
the three months ended March 31, 2017, the CEO advanced the Company $78,500. As of March 31, 2017 the Company owed the CEO $208,500.
Intercompany
transactions
All
intercompany accounts and transactions have been eliminated in consolidation.
Note
7 -
Stockholders’ Equity
Common
Stock
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.
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
8 -
Income Taxes
Deferred
income taxes reflect the net tax effects of operating loss and tax credit carry forwards and temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing
the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.
Due to the uncertainty of the Company’s ability to realize the benefit of the deferred tax assets, the deferred tax assets
are fully offset by a valuation allowance at December 31, 2016.
Note
9 -
Commitments and Contingencies
The
Company is not a party to any litigation and, to its knowledge, no action, suit or proceeding has been threatened against the
Company.
Lease
Agreements
Petrogres
leases office space in Piraeus, Greece for monthly rent of €2,500 (approximately $2,783 USD). The amended lease 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 $4,575 through July 12, 2017.
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
rent payments based on the terms for the Company’s leases are as follows:
Twelve months ending
December 31,
|
|
Amount
|
|
2017
|
|
|
$
|
84,750
|
|
|
2018
|
|
|
|
13,375
|
|
|
|
|
|
$
|
98,125
|
|
Note
10 –
Subsequent Events
None.