NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
NOTE 1 –
ORGANIZATION AND BASIS
OF PRESENTATION
Organization
Petrone Worldwide, Inc. (the “Company”)
was incorporated as Sheridan Industries, Inc. on December 14, 1998 in the State of Nevada. On December 31, 1998, the Company changed
its name to Diabetex International Corp. and effective February 18, 2014, the Company changed its name to Petrone Worldwide, Inc.
The Company is in the hospitality industry and is a supplier of tabletop kitchenware and hotel room products thru an exclusive
licensing agreement with a leading supplier. Additionally, in August 2016, the Company began providing logistic services to one
customer.
On January 29, 2014 and
effective March 3, 2014, the Company entered into a purchase agreement (the “Purchase Agreement”) with Petrone Food
Works, Inc. (“PFW”) and the shareholder of PFW. Pursuant to the Purchase Agreement, the Company acquired 100% of PFW’s
issued and outstanding common stock from the PFW shareholder in exchange for the issuance of 11,760,542 shares of the Company’s
common stock, representing 98.4% of the outstanding common stock, (the “Exchange”), after giving effect to a 1-for-500
reverse stock split (the “Reverse Stock Split”) which resulted in 195,607 common shares outstanding prior to the Exchange
for liabilities of $30,000. Accordingly, the PFW shareholder became a shareholder of the Company and PFW became a subsidiary of
the Company. The Exchange has been accounted for as a reverse-merger and recapitalization since the stockholder of PFW obtained
voting and management control of the Company. PFW is the acquirer for financial reporting purposes and the Company is the acquired
company. Consequently, the assets and liabilities and the operations reflected in the historical financial statements prior to
the Exchange are those of PFW and was recorded at the historical cost basis of PFW, and the consolidated financial statements after
completion of the Exchange included the assets and liabilities of both the Company and PFW and the Company’s consolidated
operations from the closing date of the Exchange. All share and per share data in the accompanying consolidated financial statements
have been retroactively restated to reflect the effect of the Reverse Stock Split and recapitalization. PFW was formed under the
laws of the State of Nevada in October 2013.
Basis of Presentation and Principles of
Consolidation
The Company’s unaudited consolidated
financial statements include the financial statements of its wholly-owned subsidiary, Petrone Food Works, Inc. (inactive). All
significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements for the
three months ended March 31, 2017 and 2016 have been prepared by us without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all adjustments necessary to present fairly our financial position,
results of operations, and cash flows as of March 31, 2017 and 2016, and for the periods then ended, have been made. Those adjustments
consist of normal and recurring adjustments. Certain information and note disclosures normally included in our annual financial
statements prepared in accordance with generally accepted accounting principles have been or omitted. The unaudited consolidated
financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended
December 31, 2016 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on May 4,
2017. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected
for the full year.
Going concern
These unaudited consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial
statements, the Company had a loss from operations of $78,097 and $229,658 for the three months ended March 31, 2017 and 2016,
respectively. The net cash used in operations were $147,844 and $276,722 for the three months ended March 31, 2017 and 2016, respectively.
Additionally, the Company had an accumulated deficit, stockholders’ deficit and working deficit of $5,735,625, $1,290,101
and $1,290,101, respectively, at March 31, 2017. These factors raise substantial doubt about the Company’s ability to continue
as a going concern for twelve months from the issuance date of this report. Management cannot provide assurance that the Company
will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Going concern (continued)
The Company is seeking
to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has
historically raised capital from sales of equity and from the issuance of promissory notes, there is no assurance that it will
be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future,
management expects that the Company will need to curtail its operations. These consolidated financial statements do not include
any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
NOTE 2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States 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
consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates for the three months ended March 31, 2017 and 2016 include estimates on
allowance for doubtful accounts, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair
value of derivative liabilities, and the fair value of non-cash equity transactions.
Fair value of financial instruments and fair value measurements
FASB ASC 820 —
Fair Value Measurements
and Disclosures,
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 820 requires disclosures about the fair value of all financial instruments,
whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based
on pertinent information available to the Company on March 31. 2017. Accordingly, the estimates presented in these financial statements
are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820
specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy
are as follows:
Level 1- Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2- Inputs are quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not
active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3- Inputs are unobservable inputs that
reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset
or liability based on the best available information.
The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents, accounts receivable, loans, accounts payable, accrued expenses, and other payables
approximate their fair market value based on the short-term maturity of these instruments.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Fair value of financial instruments and fair value measurements
(continued)
The Company analyzes all financial and non-financial
instruments with features of both liabilities and equity under the FASB’s accounting standard for such instruments. Under
this standard, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The Company accounts for one instrument at fair value using level 3 valuation.
|
|
At March 31, 2017
|
|
At December 31, 2016
|
Description
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,271,007
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
5,070,848
|
|
A roll forward of the level
3 valuation financial instruments is as follows:
|
|
|
Derivative Liabilities
|
|
|
Balance at December 31, 2016
|
|
$
|
$ 5,070,848
|
|
|
Initial valuation of derivative liabilities
|
|
|
609,589
|
|
|
Change in fair value included in net income
|
|
|
(4,409,430
|
)
|
|
Balance at March 31, 2017
|
|
$
|
$ 1,271,007
|
|
|
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities
at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable,
unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that
instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value
option to any outstanding instruments.
Inventory
Inventory,
consisting of finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted
average method. A reserve is established when management determines that certain inventories may not be saleable. If inventory
costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves
for the difference between the cost and the market value. These reserves are recorded based on estimates.
Derivative liabilities
The Company has certain financial instruments
that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine
if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for
in accordance with FASB ASC 815-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any
embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event
that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period
is recorded as either income or expense. Upon conversion or exercise, the derivative liability is marked to fair value at the conversion
date and then the related fair value is reclassified to equity.
Revenue recognition
Pursuant to the guidance of ASC Topic 605,
the Company recognizes sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been provided,
the purchase price is fixed or determinable and collectability is reasonably assured. The Company’s standard terms are “ex
works”, with title transferring to its customer at the Company suppliers’ loading docks or upon embarkation with risk
of loss being assumed by the customer at the shipping point. The Company has a small percentage of sales with other terms, and
revenue is recognized in accordance with the terms of the related customer purchase order. Shipping and handling costs billed to
customers are recognized in revenue.
Advances from customers at March 31, 2017
and December 31, 2016 amounted to $21,423 and $79,780, respectively, and consist of prepayments from customers for merchandise
that had not yet been shipped. The Company will recognize the deposits as revenue when customers take delivery of the goods and
title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.
For logistics services performed, the Company
recognizes revenue upon performance and completion of services rendered.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Income (loss) per share of common stock
Basic income (loss) per share is computed by
dividing net income (loss) available to common shareholders by weighted average number of shares of common stock outstanding during
each period. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the
weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during
the period using the treasury stock method and as-if converted method. Potentially dilutive common shares and participating securities
are excluded from the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s
net losses. The following table presents a reconciliation of basic and diluted net income per share:
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Income (loss) per common share - basic:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,547,720
|
|
|
$
|
(246,959
|
)
|
Weighted average common shares outstanding - basic
|
|
|
29,278,631
|
|
|
|
22,237,625
|
|
Net income (loss) per common share - basic
|
|
$
|
0.12
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share - diluted:
|
|
|
|
|
|
|
|
|
Net income (loss) – basic
|
|
$
|
3,547,720
|
|
|
$
|
(246,959
|
)
|
Add: interest of convertible debt
|
|
|
3,659
|
|
|
|
—
|
|
Less: expense of debt discount upon assumed conversion
|
|
|
(260,486
|
)
|
|
|
—
|
|
Less: gain on derivative liabilities
|
|
|
(3,290,893
|
)
|
|
|
—
|
|
Numerator for income (loss) per common share - diluted
|
|
$
|
—
|
|
|
$
|
(246,959
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
29,278,631
|
|
|
|
22,237,625
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
|
19,485,281
|
|
|
|
—
|
|
Weighted average common shares outstanding – diluted
|
|
|
48,763,912
|
|
|
|
22,237,625
|
|
Net income (loss) per common share - diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
For the three months ended March 31, 2016,
potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive
impact on the Company’s net loss and consisted of the following:
|
|
March 31, 2016
|
Convertible notes
|
|
|
432,856
|
|
|
|
|
|
|
NOTE 3 –
CONVERTIBLE NOTES
Securities Purchase Agreements and Debentures
Peak securities
purchase agreement and debenture
On October 24, 2016
(the “Issuance Date”), the Company entered into a securities purchase agreement (the “SPA”) with Peak
One Opportunity Fund, L.P., an accredited investor (“Peak”), whereby Peak agreed to invest up to $346,500 (the “Purchase
Price”) in the Company in exchange for the convertible debentures, upon the terms and subject to the conditions thereof.
Pursuant to the SPA, the Company issued a convertible debenture to Peak on October 26, 2016, in the original principal amount
of $85,000, which bears interest at 0% per annum (the “First Debenture”). On October 26, 2016, the Company received
net cash proceeds of $70,000 under this convertible note which was net of debt issuance costs and legal fees of $15,000 which
were treated as a debt discount and will be amortized into interest expense over the term of the respective note. Each convertible
debenture issued pursuant to the SPA and any accrued and unpaid interest relating to each convertible debenture, is due and payable
three years from the issuance date of the respective convertible debenture. Any amount of principal or interest that is due under
each convertible debenture, which is not paid by the respective maturity date, will bear interest at the rate of 18% per annum
until it is satisfied in full. In connection with the issuance of the SPA, in 2016, the Company issued 650,000 shares of the Company’s
common stock to Peak
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Peak is entitled to,
at any time or from time to time, convert each convertible debenture issued under the SPA into shares of the Company’s common
stock, at a conversion price per share (the “Conversion Price”) equal to either: (i) if no event of default has occurred
under the respective convertible debenture and the date of conversion is prior to the date that is one hundred eighty days after
the issuance date of the respective convertible debenture, $0.25, or (ii) if an event of default has occurred under the respective
convertible debenture or the date of conversion is on or after the date that is one hundred eighty days after the issuance date
of the respective convertible debenture, the lesser of (a) $0.25 or (b) 65% of the lowest closing bid price of the common stock
for the twenty trading days immediately preceding the date of the date of conversion (provided, further, that if either the Company
is not DWAC operational at the time of conversion or the common stock is traded on the OTC Pink at the time of conversion, then
65% shall automatically adjust to 60%), subject in each case to equitable adjustments resulting from any stock splits, stock dividends,
recapitalizations or similar events.
The Company may redeem each convertible debenture
issued under the SPA, upon not more than two days written notice, for an amount (the “Redemption Price”) equal to:
(i) if the Redemption Date is ninety days or less from the date of issuance of the respective convertible debenture, 105% of the
sum of the Principal Amount so redeemed plus accrued interest, if any; (ii) if the Redemption Date is greater than or equal to
ninety one days from the date of issuance of the respective convertible debenture and less than or equal to one hundred twenty
days from the date of issuance of the respective convertible debenture, 110% of the sum of the Principal Amount so redeemed plus
accrued interest, if any; (iii) if the Redemption Date is greater than or equal to one hundred twenty one days from the date of
issuance of the respective convertible debenture and less than or equal to one hundred fifty days from the date of issuance of
the respective convertible debenture, 120% of the sum of the Principal Amount so redeemed plus accrued interest, if any; (iv) if
the Redemption Date is greater than or equal to one hundred fifty one days from the date of issuance of the respective convertible
debenture and less than or equal to one hundred eighty days from the date of issuance of the respective convertible debenture,
130% of the sum of the Principal Amount so redeemed plus accrued interest, if any; and (v) if either (1) the respective convertible
debenture is in default but the Buyer consents to the redemption notwithstanding such default or (2) the Redemption Date is greater
than or equal to one hundred eighty one days from the date of issuance of the respective convertible debenture, 140% of the sum
of the Principal Amount so redeemed plus accrued interest, if any.
Crown Bridge securities
purchase agreement and debenture
On November 18, 2016
(the “Closing Date”), the Company consummated a transaction with an accredited investor (“Crown”), whereby,
upon the terms and subject to the conditions of that certain securities purchase agreement (the “SPA”), Crown agreed
to invest up to $340,000 (the “Purchase Price”) in our Company in exchange for a convertible promissory note in the
principal amount of $400,000 (the “Crown Bridge Note”). The Crown Bridge Note carries a prorated original issue discount
of $60,000 and bears interest at the rate of 6% per year. Through December 31, 2016, Crown funded the two tranches under the Crown
Bridge Note in principal amounts aggregating $80,000 and the Company received net proceeds of $62,000 in cash after debt issuance
costs of $18,000 which were treated as a debt discount and will be amortized into interest expense over the term of the respective
note.
Each tranche funded under the Crown Bridge
Note (each a “Tranche”), coupled with the accrued and unpaid interest relating to that respective Tranche, is due and
payable twelve months from the funding date of the respective Tranche. Any amount of principal or interest that is due under each
Tranche, which is not paid by the respective maturity date, will bear interest at the rate of 22% per annum until it is satisfied
in full. Crown is entitled to, at any time or from time to time, convert each Tranche under the Crown Bridge Note into shares of
the Company’s common stock, at a conversion price per share equal to fifty five percent (55%) of the lowest traded price
of the common stock for the twenty trading days immediately preceding the date of the date of conversion, upon the terms and subject
to the conditions of the Note. In connection with the issuance of the First Tranche of the Crowne Bridge Note and SPA, in 2016,
the Company issued 450,000 shares of the Company’s common stock to Crown and in connection with the issuance of the first
Tranche of the Crowne Bridge Note, in 2016, the Company issued 50,000 shares of the Company’s common stock to Crown. In January
2017, in connection with the Crowne Bridge Note, the Company issued 50,000 shares of the Company’s common stock to Crown.
These shares were valued on the date of grant at $0.0685 per share or $3,425 based on the quoted trading price of the Company’s
common stock on date of grant. In January 2017, in connection with the issuance of these shares, the Company recorded debt issuance
costs of $3,425.
The Crown Bridge Note contains representations,
warranties, events of default, beneficial ownership limitations, prepayment options, and other provisions that are customary of
similar instruments.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Labrys securities
purchase agreement and debenture
On February 13, 2017, the Company
consummated a transaction with Labrys Fund, L.P. (“Labrys”), whereby, upon the terms and subject to the
conditions of that certain securities purchase agreement (the “First SPA”), the Company issued a convertible
promissory note in the principal amount of $110,000 (the “First Note”) to Labrys. The Company received proceeds
of $100,000 in cash from Labrys. The First Note bears interest at the rate of 12% per year. The First Note is due and payable
six months from the issue date of the First Note. The Company may prepay the First Note at any time during the initial 180
days after the issue date of the First Note, without any prepayment penalty, by paying the face amount of the First Note plus
accrued interest through such prepayment date. Any amount of principal or interest that is due under the First Note, which is
not paid by the maturity date, will bear interest at the rate of 24% per annum until the First Note is satisfied in full.
Labrys is entitled to, at any time or from time to time, convert the First Note into shares of the Company’s common
stock, at a conversion price per share equal to fifty five percent (55%) of the lowest traded price or closing bid price of
the Company’s common stock for the twenty (20) trading days immediately preceding the date of the date of conversion,
upon the terms and subject to the conditions of the First Note. In connection with the issuance of the First Note, the
Company agreed to issue 1,341,463 shares of its common stock (the “First Shares”) to Buyer, provided, however,
that the First Shares must be returned to the Company’s treasury if the Company prepay the First Note as provided
above. On February 20, 2017, the Company entered into an amendment to the First Note, whereby the Holder agreed to return the
First Shares to treasury.
On February 21, 2017, the Company consummated
a transaction with Labrys, whereby, upon the terms and subject to the conditions of that certain securities purchase agreement
(the “Second SPA”), the Company issued a convertible promissory note in the principal amount of $65,000 (the “Second
Note”) to Labrys. The Company received proceeds of $58,000 in cash from Labrys. The Second Note bears interest at the rate
of 12% per year. The Second Note is due and payable six months from the issue date of the Second Note. The Company may prepay the
Second Note at any time during the initial 180 days after the issue date of the Second Note, without any prepayment penalty, by
paying the face amount of the Second Note plus accrued interest through such prepayment date. Any amount of principal or interest
that is due under the Second Note, which is not paid by the maturity date, will bear interest at the rate of 24% per annum until
the Second Note is satisfied in full. Labrys is entitled to, at any time or from time to time, convert the Second Note into shares
of the Company’s common stock, at a conversion price per share equal to fifty five percent (55%) of the lowest traded price
or closing bid price of the Company’s common stock for the twenty (20) trading days immediately preceding the date of the
date of conversion, upon the terms and subject to the conditions of the Second Note. In connection with the issuance of the Second
Note, the Company issued 1,497,000 shares of its common stock (the “Second Shares”) to Buyer. The Second Note contains
representations, warranties, events of default, beneficial ownership limitations, and other provisions that are customary of similar
instruments. These notes contains representations, warranties, events of default, beneficial ownership limitations, and other provisions
that are customary of similar instruments.
The Company determined that the terms of these
debentures contain terms that included a down-round provision under which the conversion price and exercise price could be affected
by future equity offerings undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly,
under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”,
the embedded conversion options contained in the convertible instruments are accounted for as derivative liabilities at the date
of issuance and are adjusted to fair value through earnings at each reporting date.
Other
In 2013, the Company entered into a convertible
promissory note agreement with an individual in the amount of $20,000. The note was non-interest bearing, unsecured and was due
on demand. The note was convertible into shares of stock of the Company at the market price on the date of conversion. Pursuant
to ASC Topic 470-20 (Debt with conversion and other options), since these convertible notes had fixed conversion price at market,
the Company determined it had a fixed monetary amounts that can be settled for the debt. Accordingly, no derivative liability was
calculated. On December 2, 2016, the Company entered into a debt purchase and assignment agreement with the debt holder whereby
a convertible note in the principal amount of $20,000 was assigned to a third party and the Company entered into a new convertible
note agreement (the “Rosen Note”) for $20,000 which became immediately convertible at $.003 per common share. On December
2, 2016, $5,700 of the principal amount was converted into 1,900,000 shares of the Company’s common stock. At March 31, 2017
and December 31, 2016, one note remained due in the principal amount of $14,300 and $14,300, respectively.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
In connection with the issuance of the and
Peak, Crown Bridge and Labrys debentures, the Company determined that the terms of these debentures contain terms that included
a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken
by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC
Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion
options contained in the convertible instruments are accounted for as derivative liabilities at the date of issuance and are adjusted
to fair value through earnings at each reporting date. Additionally, since there is an undeterminable amount of shares issuable
under the debentures, the Company accounted for the Rosen Note under the provisions of FASB ASC Topic No. 815-40. The fair value
of the embedded conversion option derivatives were determined using the Binomial valuation model. During the three months ended
March 31, 2017, on the initial measurement date of the Labrys debentures, the fair values of the embedded conversion option derivatives
of $609,589 was recorded as derivative liabilities and $609,589 was charged to current period operations as initial derivative
expense. At the end of the period, the Company revalued the embedded conversion option derivative liabilities. In connection with
these revaluations, the Company recorded derivative income of $4,409,430 for the three months ended March 31, 2017. Aggregate derivative
income from changes in fair value of derivative liabilities and the initial derivative expense on the Labrys debentures amounted
to $3,799,841, which is recorded as a component of other income/(expense) on the accompanying consolidated statements of operations.
For the three months ended March 31, 2017 and
2016, amortization of debt discounts related to convertible debentures amounted to $68,125 and $46,486, respectively, which has
been included in interest expenses on the accompanying unaudited consolidated statements of operations.
During the three months ended March 31, 2017,
the fair value of the derivative liabilities were estimated using the Binomial option pricing method with the following assumptions:
|
|
Three months ended March 31, 2017
|
Dividend rate
|
|
|
0
|
|
Term (in years)
|
|
|
2.58 to 0.01 years
|
|
Volatility
|
|
|
200.0
|
%
|
Risk-free interest rate
|
|
|
0.76% to 1.50%
|
|
At March 31, 2017 and December 31, 2016, convertible promissory
notes consisted of the following:
|
|
March 31,
2017
|
|
December 31,
2016
|
Principal amount
|
|
$
|
354,300
|
|
|
$
|
179,300
|
|
Less: unamortized debt discount
|
|
|
(260,486
|
)
|
|
|
(153,611
|
)
|
Convertible notes payable, net
|
|
$
|
93,814
|
|
|
$
|
25,689
|
|
NOTE 4 –
LOANS PAYABLE
On September 23, 2016, the Company entered into a business loan
and security agreement with EBF Partners, LLC (the “EBF Loan”). Pursuant to the EBF Loan, the Company borrowed $20,000.
The Company is required to repay the EBF Loan by making daily payments of $204 on each business day until the purchased amount
of $28,200 is paid in full. Each payment is deducted directly from the Company’s bank accounts. The EBF Loan has an effective
interest rate of approximately 116%, is secured by the Company’s assets and is personally guaranteed by the Company’s
chief executive officer. On January 25, 2017, the Company entered into a business loan and security agreement with EBF Partners,
LLC (the “Second EBF Loan”). Pursuant to the Second EBF Loan, the Company borrowed $25,000. The Company is required
to repay the EBF Loan by making daily payments of $235 on each business day until the purchased amount of $35,250 is paid in full.
Each payment is deducted directly from the Company’s bank accounts. The Second EBF Loan has an effective interest rate of
approximately 116%, is secured by the Company’s assets and is personally guaranteed by the Company’s chief executive
officer. In connection with the Second EBF Loan, the Company repaid its first EBF loan. During the three months ended March 31,
2017, the Company borrowed $25,000 and repaid principal amounts of $20,174 and at March 31, 2017 and December 31, 2016, amounts
due under the EBF Loan amounted to $19,355 and $14,529, respectively.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
On September 26, 2016, the Company entered into a business loan
and security agreement with On Deck Capital, Inc. (the “On Deck Loan”). Pursuant to the On Deck Loan, the Company borrowed
$35,000 and received net proceeds of $34,125 after paying a loan origination fee of $875. The Company is required to repay the
On Deck Loan by making 252 daily payments of $190 on each business day until the purchased amount of $47,951 is paid in full. Each
payment is deducted directly from the Company’s bank accounts. The On Deck Loan has an effective interest rate of approximately
66%, is secured by the Company’s assets and is personally guaranteed by the Company’s chief executive officer. During
2017, the Company repaid principal amounts of $7,782 and at March 31, 2017 and December 31, 2016, amounts due under the On Deck
Loan amounted to $19,982 and $27,764, respectively.
NOTE 5 –
RELATED PARTY TRANSACTIONS
From time to time, the Company receives advances
from the Company’s chief executive officer for working capital purposes. The advances are non-interest bearing and
are payable on demand. For the three months ended March 31, 2017, due to related party activity consisted of the following:
|
|
Three Months ended
March 31, 2017
|
Balance due to related party at beginning of period
|
|
$
|
224
|
|
Working capital advances received
|
|
|
47,280
|
|
Repayments made and conversions
|
|
|
(47,500
|
)
|
Balance due to related party at end of period
|
|
$
|
4
|
|
NOTE 6 -
STOCKHOLDERS’ DEFICIT
Preferred stock
The Company’s
board of directors authorized the issuance of 10,000,000 the shares of preferred stock in such series and to fix from time to time
before issuance thereof the number of shares to be included in any such series and the designation, powers, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of such series.
On February 19, 2016, the Board of Directors
of the Company authorized and approved to create a new class of voting preferred stock called “Series A Preferred Stock”,
consisting of 1,000,000 shares authorized, $0.001 par value. The preferred stock is not convertible into any other class or series
of stock and has no liquidation preference value. The Series A Preferred Stock was issued to ensure perpetual control of at least
51% is provided to the holder of the Series A Preferred Stock. On all matters to come before the shareholders of the Company, the
holders of Series A Preferred shall have that number of votes per share (rounded to the nearest whole share) equal to the product
of (x) the number of shares of Series A Preferred held on the record date for the determination of the holders of the shares entitled
to vote (the “Record Date”), or, if no record date is established, at the date such vote is taken or any written consent
of shareholders is first solicited, and (y) fifty.
In the event that the votes by the holders
of the Series A Preferred Stock do not total at least 51% of the votes of all classes of the Company’s authorized capital
stock entitled to vote, then regardless of the provisions of this paragraph, in any such case, the votes cast by a majority of
the holders of the Series A Preferred Stock shall be deemed to equal 51% of all votes cast at any meeting of stockholders, or any
issue put to the stockholders for voting and the Company may state that any such action approved by at least a majority of the
holders of the Series A Preferred Stock was had by majority vote of the holders of all classes of the Company’s capital stock.
On February 19, 2016, the Company issued 1,000,000
shares of Series A Preferred Stock to its chief executive officer. In connection with the issuance of Series A preferred shares,
the Company recorded a nominal amount of stock-based compensation of $1,000 since the shares had no economic value, on the date
of the issuance of such shares, the Company’s chief executive officer was the majority owner of the Company’s common
shares, and the value of such voting rights were not readily and objectively measurable.
Common stock issued for services
For the three months ended March 31, 2017 and
2016, amortization of other prepaid stock-based consulting fees amounted to $10,000 and $60,976, respectively.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Common stock issued in connections with
convertible debts
In January 2017, in connection with the Crown Bridge Note (see Note
3), the Company issued 50,000 shares of the Company’s common stock to Crown. These shares were valued on the date of grant
at $0.0685 per share or $3,425 based on the quoted trading price of the Company’s common stock on date of grant. In January
2017, in connection with the issuance of these shares, the Company recorded debt issuance costs of $3,425.
On February 21, 2017, in connection with a Convertible Note, the
Company issued 1,497,000 shares of its common stock as a debt issuance cost. These common shares were valued at $0.1654 per share
based on the quoted trading price of the Company’s common stock on the note date, In connection with the issuance of these
shares, the Company recorded debt issuance costs of $89,605, which is included in interest expense, and a debt discount of $158,000
which will be amortized into interest expense over the term on the note (see Note 3).
NOTE 7 –
CONCENTRATIONS
Concentrations of credit risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of and cash deposits. The Company places its cash in banks at levels
that, at times, may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of March 31, 2017
and December 31, 2016. The Company has not experienced any losses in such accounts through March 31, 2017.
Geographic concentrations of sales
For the three months ended March 31, 2017, total sales to customers
located in Europe, the United States and Middle East represent approximately 70%, 10% and 14% of total consolidated revenues, respectively.
No other geographical area accounted for more than 10% of total sales during the three months ended March 31, 2017. For the three
months ended March 31, 2016, total sales in Europe, represent approximately 99% of total consolidated revenues.
Customer concentrations
For the three months ended March 31, 2017, four customers accounted
for approximately 48.8% of total consolidated revenues (13.6%, 10.1% and 25.1% from customers in the product segment, and 10.0%
from our only customer in the logistics services segment). For the three months ended March 31, 2016, four customers accounted
for approximately 77.5% of total sales (13.8%, 11.8%, 11.2% and 40.7%, respectively). A reduction in sales from or loss of such
customers would have a material adverse effect on the Company’s consolidated results of operations and financial condition.
Vendor concentrations
For the three months ended March 31, 2017 and 2016, the Company
purchased substantially all of its products from one supplier. The loss of this supplier may have a material adverse effect on
the Company’s consolidated results of operations and financial condition.
NOTE 8 –
SEGMENT REPORTING
The Company’s principal operating segments
coincide with the types of products or services to be sold. The Company’s two reportable segments for the three months ended
March 31, 2017 were (i) the Product Segment and (ii) the Logistics Services Segment. For the three months ended March 31, 2016,
the Company only operated in the Product Segment. The Company’s chief operating decision-maker has been identified as the
Chairman and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the
entire Company. Segment information is presented based upon the Company’s management organization structure as of March 31,
2017 and December 31, 2016 and the distinctive nature of each segment. Future changes to this internal financial structure may
result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues
are only to external customers.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
Segment operating profits or loss is determined
based upon internal performance measures used by the chief operating decision-maker. The Company derives the segment results from
its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the
same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several
metrics, including net revenues, gross profit and operating income (loss). Management uses these results to evaluate the performance
of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the
corporate level and does not allocate such expenses to the segments. Segment income (loss) from operations excludes interest income/expense
and other income or expenses and income taxes according to how a particular reportable segment’s management is measured.
Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
Segment information available with respect
to these reportable business segments for the three months ended March 31, 2017 and 2016 was as follows:
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
Product segment
|
|
$
|
237,966
|
|
|
$
|
107,621
|
|
Logistics services segment
|
|
|
26,387
|
|
|
|
—
|
|
Total segment and consolidated revenues
|
|
|
264,353
|
|
|
|
107,621
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Product segment
|
|
|
45,213
|
|
|
|
32,351
|
|
Logistics services segment
|
|
|
(14,507
|
)
|
|
|
—
|
|
Total segment and consolidated gross profit
|
|
|
30,706
|
|
|
|
32,351
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
(16,205
|
)
|
|
$
|
(164,242
|
)
|
Logistics services segment
|
|
|
(14,507
|
)
|
|
|
—
|
|
Total segment income (loss)
|
|
|
(30,712
|
)
|
|
|
(164,242
|
)
|
Unallocated costs
|
|
|
(47,385
|
)
|
|
|
(65,416
|
)
|
Total consolidated loss from operations
|
|
$
|
(78,097
|
)
|
|
$
|
(229,658
|
)
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product segment
|
|
$
|
211,295
|
|
|
$
|
183,861
|
|
Logistics services segment
|
|
|
79,697
|
|
|
|
53,310
|
|
Total segment and consolidated assets
|
|
$
|
290,992
|
|
|
$
|
237,171
|
|
NOTE 9 -
SUBSEQUENT EVENTS
Forbearance agreements
On April 12, 2017, in connection with certain
with the Crown Bridge Notes (See Note 3), the Company entered into a forbearance agreement (the “Forbearance Agreement”)
with Crown whereby Crown waived any event of default, as defined in the Crown Bridge Notes, that were triggered by the Company’s
execution of the December 2, 2016 debt purchase and assignment agreement (See Note 3) as well as any rights provided in the Crown
Bridge Notes that would permit Crown to incorporate and terms of the Rosen Note (including but not limited to the use of $0.003
as a conversion price per share). In connection with this Forbearance Agreement, the Company increased the principal amounts due
under the Crown Bridge Notes by $20,000.
PETRONE WORLDWIDE, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
On May 8, 2017, in connection with the Peak
Debentures (See Note 3), the Company entered into a settlement agreement (the “Settlement Agreement” with Peak. In
connection with the Settlement Agreement, the Company paid cash of $69,700 to Peak and Peak waived all existing events of default
(including deferred interest at the default rate) and agreed that if the Company elects to redeem all or any part of the then-outstanding
debenture, the Redemption Price shall be the par value of the debenture so redeemed. Additionally, on May 9, 2017, the Company
entered into a forbearance agreement with Peak (the “Peak Forbearance Agreement”) whereby Peak waived any event of
default, as defined in the Peak debenture, that were triggered by the Company’s execution of the December 2, 2016 debt purchase
and assignment agreement (See Note 3) as well as any rights provided in the Peak Debenture that would permit Peak to incorporate
and terms of the Rosen Note (including but not limited to the use of $0.003 as a conversion price per share). In connection with
the Peak Forbearance Agreement, the Company issued 800,000 shares of its common stock.
On April 19, 2017 and amended on May 4, 2017, the Company consummated
a transaction with Auctus Fund, LLC. (“Auctus”), whereby, upon the terms and subject to the conditions of a securities
purchase agreement (the “Auctus Securities Purchase Agreement”), the Company issued a convertible promissory note in
the principal amount of $235,000 (the “Auctus Note”) to Auctus. The Company received proceeds of $217,250 in cash from
Auctus which is net of offering costs of $17,750. The Auctus Note bears interest at the rate of 10% per annum and is due on January
12, 2018. The Company may redeem they Auctus Note upon not more than three days written notice, for an amount (the “Redemption
Price”) equal to: (i) if the Redemption Date is 120 days or less from the date of issuance of the Auctus Note, 135% of the
sum of the Principal Amount so redeemed plus accrued interest, if any; and (ii) if the Redemption Date is greater than or equal
to 121 days from the date of issuance of the respective convertible debenture and less than or equal to 240 days from the date
of After the expiration of 240 days, The Company shall have no right of prepayment. Any amount of principal or interest that is
due under the Auctus Note, which is not paid by the maturity date, will bear interest at the rate of 24% per annum until the Auctus
Note is satisfied in full. Auctus is entitled to, at any time or from time to time, convert the Auctus Note into shares of the
Company’s common stock, at a conversion price per share equal to fifty five percent (55%) of the lowest traded price or closing
bid price of the Company’s common stock for the twenty five (25) trading days immediately preceding the date of the date
of conversion, upon the terms and subject to the conditions of the Auctus Note. In connection with the issuance of the Auctus Note,
the Company issued 1,509,829 shares of its common stock to Auctus as a commitment fee. These common shares were valued at $0.04
per share based on the quoted trading price of the Company’s common stock on the note date, In connection with the issuance
of these shares, the Company recorded a debt discount of $60,393 which will be amortized into interest expense over the term on
the note. The Auctus Note contains representations, warranties, events of default, beneficial ownership limitations, and other
provisions that are customary of similar instruments. The Company determined that the terms of the Auctus Note contains terms that
included a down-round provision under which the conversion price and exercise price could be affected by future equity offerings
undertaken by the Company or contain terms that are not fixed monetary amounts at inception. Accordingly, under the provisions
of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded
conversion options contained in the convertible instruments are accounted for as derivative liabilities at the date of issuance
and are adjusted to fair value through earnings at each reporting date.