SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the quarterly period ended:   March 31, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number:   333-184459

 

PETROGRESS, INC.
(Exact name of registrant as specified in its charter)

 

Delaware   27-2019626

(State or other jurisdiction of incorporation or

organization)

  (I.R.S. Employer Identification No.)

 

757 Third Avenue, Suite 2110 New York, NY 10017

(Address of principal executive office)

 

(212) 376-5228
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
  Smaller reporting company ☑
Emerging growth company ☑    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

The number of shares outstanding of registrant’s $0.001 par value Common Stock, as of May 19, 2017 was 166,795,807 shares.

 

 
 

 

PETROGRESS, INC.

FORM 10-Q

Quarterly Period Ended March 31, 2017

 

INDEX

 

FORWARD-LOOKING STATEMENTS Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements  
  Condensed Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016 2
  Condensed Statements of Operations and Comprehensive Income for the three months ended March 31, 2017 and 2016 (Unaudited) 3
  Condensed Statements of Cash Flows for the three months ended March 31, 2017 (Unaudited) 4
  Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk   14
Item 4. Controls and Procedures 15
     
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Mine Safety Disclosure 16
Item 5. Other Information 16
Item 6. Exhibits 16
     
SIGNATURES 17 

  

 
 
 

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this quarterly report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this quarterly report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2016, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report on Form 10-Q and in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this quarterly report on Form 10-Q, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

     

 

 

 

PETROGRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
      March 31,       December 31,  
      2017       2016  
      (Unaudited)          
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 629,115     $ 362,083  
Accounts receivable     3,049,711       2,427,668  
Prepaid expenses and other current assets     671,301       1,058,088  
Marketable securities     20,940       20,940  
Total current assets     4,371,067       3,868,799  
                 
Property and equipment, net     5,745,499       5,919,067  
                 
Security deposit     8,775       8,775  
                 
Total Assets   $ 10,125,341     $ 9,796,621  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Current Liabilities:                
Accounts payable and accrued expenses   $ 250,746     $ 148,269  
Due to related party     208,500       234,600  
Convertible promissory note     44,887       44,887  
Derivative liability     65,499       65,499  
Total current liabilities     569,632       493,255  
                 
Commitments and Contingencies                
                 
Stockholders' Equity:                
Common stock     166,796       166,796  
Additional paid-in capital     8,423,641       8,423,641  
Accumulated comprehensive loss     15,660       15,660  
Retained earnings     949,612       697,269  
Total stockholders' equity     9,555,709       9,303,366  
                 
Total liabilities and stockholders' equity   $ 10,125,341     $ 9,796,621  
                 
                 
See accompanying notes to condensed consolidated financial statements.

 

  2  

 

 

 

PETROGRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
         
    Three Months Ended March 31,
    2017   2016
    (Unaudited)   (Unaudited)
         
Revenues   $ 4,019,113     $ 5,819,056  
Costs of goods sold     2,274,585       4,206,536  
                 
Gross profit     1,744,528       1,612,520  
                 
Operating expenses:                
Operating Costs     935,500       812,075  
Administrative Costs     383,721       242,301  
Depreciation     173,568       165,907  
Total operating expenses     1,492,789       1,220,283  
                 
Operating income before other expenses and income taxes     251,739       392,237  
                 
Other income (expense):                
Amortization of note discount     —         (9,930 )
Change in fair market value of derivative liabilities     —         99,746  
Gain on foreign currency exchange     1,105       —    
Total other income, net     1,105       89,816  
                 
Income before income taxes     252,844       482,053  
                 
Income tax expense     —         18,000  
                 
Net Income     252,844       464,053  
                 
Other comprehensive loss, net of tax                
Unrealized loss on marketable securities     —         (3,420 )
                 
Comprehensive income (loss)   $ 252,844     $ 460,633  
                 
Net income per share   $ 0.002     $ 0.003  
                 
Weighted average number of common shares outstanding                
Basic and fully diluted     161,016,555       144,188,842  
                 
                 
See accompanying notes to condensed consolidated financial statements.

 

  3  

 

 

 

PETROGRESS, INC.
CONDENSED CONSOLIDATED  STATEMENTS OF CASH FLOWS
         
    Three Months Ended March 31,
    2017   2016
    (Unaudited)   (Unaudited)
Cash Flows from operating activities:                
Net income   $ 252,844     $ 464,053  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:                
Depreciation     173,568       165,907  
Amortization of discount on convertible note     —         9,930  
Interest expense on converted notes payable                
Net cash acquired in recapitalization     (502)       517  
Change in fair value of derivative liabilities     —         (99,746 )
Changes in operating assets and liabilities:                
Decrease (increase) in accounts receivable     (622,043 )     158,320  
Decrease (increase) in prepaid assets     386,788       136,415  
(Decrease) increase in accounts payable and accrued expenses     76,377       (187,110 )
Net cash provided by (used in) operating activities     267,032       648,286  
                 
                 
Cash flows from investing activities:                
Purchase of property plant and equipment     —         (182,340 )
Net cash used in investing activities     —         (182,340 )
                 
                 
Cash flows from financing activities:                
Dividends paid     —         (1,800,000 )
Net cash used in financing activities     —         (1,800,000 )
                 
Net increase (decrease) in cash and cash equivalents     267,032       (1,334,054 )
                 
Cash and cash equivalents, Beginning of Period     362,083       1,882,305  
                 
Cash and cash equivalents, End of Period   $ 629,115     $ 548,251  
                 
Supplemental disclosure of cash flow information:                
                 
Schedule of non-cash investing and financing activities:                
Reclassification of derivative liability upon repayment of convertible debt   $ —       $ 48,523  
Common stock issued for conversion of notes and interest payable   $ —       $ 2,700  
Change in fair value for available for sale marketable securities   $ —       $ 3,420  
                 
                 
See accompanying notes to condensed consolidated financial statements.

 

 

  4  

 

 

PETROGRESS, INC.

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.

 

  5  

 

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.

 

  6  

 

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.

 

  7  

 

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.

 

  8  

 

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.

 

  9  

 

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.

 

  10  

 

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.

  11  

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements, except as may be required under applicable law.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included elsewhere herein.

 

Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

 

Net Sales

 

Net sales for the three months ended March 31, 2017 and 2016 were $4,019,113 and $5,819,056, respectively, a decrease of $1,799,943 or approximately 31.0% and were comprised of the following:

 

      2017       2016  
Crude oil gross sales   $ 2,993,613     $ 2,393,284  
Gas oil gross sales     —         3,070,000  
Other     1,025,500       355,772  
Total   $ 4,019,113     $ 5,819,056  

 

Cost of Sales

 

Cost of goods sold for the three months ended March 31, 2017 and 2016 were $2,274,585 and $4,206,536, respectively, a decrease of $1,931,951, or approximately 46.0% and were comprised of the following:

 

      2017       2016  
Oil purchase costs   $ 1,487,686     $ 3,006,118  
Shipping and handling costs     768,899       1,117,265  
Other     —         83,153  
Total   $ 2,274,585     $ 4,206,536  

 

  12  

 

Operating Expenses

 

Total operating expenses for the three months ended March 31, 2017 and 2016 were $1,492,789 and $1,220,283, respectively, an increase of $272,506, or approximately 22.0%. The increase in operating expenses is primarily due to increased administrative, US travel, legal and accounting expenses, due to company expansion. This increase was offset by lower fleet operating expenses due to the decrease in of shipment of barrels from approximately 80,359 in the 2016 period to 49,575 in the 2017 period.

  

Net Income

 

Net income for the three months ended March 31, 2017 was $252,844 compared to $464,053 for the three months ended March 31, 2016 as a result of the increase in operating expenses being greater than the increase in gross profit the Company generated.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Our net income has been sufficient to meet our working capital requirements for the level of business we are currently experiencing.

 

Cash provided by operating activities was $267,534 for the three months ended March 31, 2017 compared to cash provided by operations of $648,286 for the three months ended March 31, 2016. The 2017 activity was a result of net income of $252,844, depreciation expense of $173,568, and net changes in assets and liabilities of $(158,878). The 2016 activity was a result of net income of $464,053 and depreciation and amortization of $165,907, and net changes in assets and liabilities of $22,624 reduced by a gain in the change in the fair value of derivative liabilities.

 

Prior to the execution of the SEA (February 29, 2016), the Company paid a dividend to the sole shareholder (at the time of the payment) of $1,800,000.

 

For the three months ended March 31, 2017, cash and cash equivalents increased by $267,534 compared to a decrease of $1,334,054 for the three months ended March 31, 2016. Ending cash and cash equivalents at March 31, 2017 was $629,115 compared to $548,251 at March 31, 2016.

 

We are not aware of any known trends or any known demands, commitments or events that will result in our liquidity increasing or decreasing in any material way. We are not aware of any matters that would have an impact on future operations.

 

Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly.

 

Off-Balance Sheet Arrangements

 

None.

 

  13  

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

 

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. The financial statements included herein include the financial position and results of operations of the following affiliated entities (all incorporated in the Republic of the Marshall Islands):

 

Petrogres Co Ltd.

Petronav LLC

Shiba Ship Management Ltd.

Danae Marine Ltd.

Invictus Marine S. A.

Entus Marine Ltd.

 

All intercompany balances and transactions have been eliminated in consolidation. The entities are affiliated through common ownership and control.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

  14  

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow our management to make timely decisions regarding required disclosure. Our President, who serves as our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and he determined that our disclosure controls and procedures were not effective as of March 31, 2017 due to a control deficiency. During the period we did not have additional personnel to allow segregation of duties to ensure the completeness or accuracy of our information. Due to the size and operations of the Company, we are unable to remediate this deficiency until we acquire or merge with another company.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

  15  

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

We are not a party to any material litigation, nor, to the knowledge of management, is any litigation threatened against us that may materially affect us.

 

Item 1A. Risk Factors

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   

None

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

Exhibit

Number

  Description of Exhibit
31.1*   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive and Financial Officer
32.1*   Certification of Principal Executive and Financial Officer pursuant to Section 1350
101.INS*   XBRL Instance
101.SCH*   XBRL Taxonomy Extension Schema
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
101.LAB*   XBRL Taxonomy Extension Labels Linkbase
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith.

 

  16  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: May 22, 2017

 

PETROGRESS, INC.

 

By:   /s/ Christos Traios
    Christos Traios
    Chief Executive Officer (principal executive officer)
    Chief Financial Officer (principal financial and accounting officer)

 

 

17

 

EXHIBIT 31.1

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Christos Traios, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Petrogress, Inc. for the period ended March 31, 2017;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date:  May 22, 2017    
  By: /s/ Christos Traios
    Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)

EXHIBIT 32.1

 

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the Quarterly Report of Petrogress, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christos Traios, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

 

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:  May 22, 2017    
     
  By: /s/ Christos Traios
    Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)