NOTES
TO FINANCIAL STATEMENTS
Note
1 -
Organization
Petrogress,
Inc. (the "Company" or "Petrogress") was originally formed in the State of Florida under the name 800 Commerce, Inc. ("800 Commerce")
on February 10, 2010. The Company was founded for the purpose of marketing credit card processing services on behalf of merchant
payment processing service providers.
On
February 29, 2016, 800 Commerce entered into a Securities Exchange Agreement (the "SEA") with an unrelated third party, Petrogres
Co. Limited ("Petrogres"), a Marshall Islands corporation, and its sole shareholder. The Company acquired 100% of Petrogres and
its affiliated companies. As consideration for the acquisition of Petrogres, the Company issued 136,000,000 shares of its common
stock, in restricted form, representing 85% of the issued and outstanding shares of the Company's common stock at closing of the
transaction. The SEA has been accounted for as a reverse acquisition and recapitalization of the Company whereby Petrogres is
deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The
accompanying consolidated financial statements are in substance those of Petrogres and its subsidiaries, with the assets and liabilities,
and revenues and expenses, of the Company being included effective from the date of stock exchange transaction. The
Company is deemed to be a continuation of the business of Petrogres and its subsidiaries. Accordingly, the financial
position, results of operations, and cash flows of the Petrogres (accounting acquirer) for all periods presented as if the recapitalization
had occurred at the beginning of the earliest period presented and the operations of the accounting acquiree from the date of
stock exchange transaction.
As
part of the transaction, the sole shareholder and CEO of Petrogres, Christos Traios, was appointed to the Board of Directors 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 and 10,000,000 shares of preferred stock, par value $0.001.
On
March 9, 2016, the Company's Board approved an amendment to the Company's Articles of Incorporation to change the name of the
Corporation to Petrogress, Inc.
Petrogres
and its' subsidiaries business operations includes purchasing, at the scene of mining and extraction, crude oil product to be
loaded onto company ships for transport of product either directly to customers or to independent processing refineries, with
the company acting internationally as it has been in business for seven (7) years.
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, 2016 and December 31, 2015, the Company had no significant concentrations of credit risk.
Inventory
The
Company's inventory, which consists primarily of crude oil purchases on the vessel in transport, is valued at the lower of cost
or market using the mark-to-market method of valuation.
Marketable
Securities
The
Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on
the quoted market prices of the securities with unrealized gains and losses, net of deferred income taxes, reported as accumulated
other comprehensive income (loss), a separate component of stockholders' equity. Realized gains and losses on available-for-sale
securities are included in net earnings in the period earned or incurred.
Property
and Equipment
Fixed
assets consisted of the following as of March 31, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Vessels
|
|
$
|
9,732,340
|
|
|
$
|
9,550,000
|
|
Furniture and equipment
|
|
|
88,117
|
|
|
|
85,000
|
|
|
|
|
9,820,457
|
|
|
|
9,635,000
|
|
Less: accumulated depreciation
|
|
|
(3,659,221
|
)
|
|
|
(3,491,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,161,236
|
|
|
$
|
6,144,000
|
|
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 $165,907 and $165,875 was recorded for the three months ended March 31, 2016 and 2015, respectively.
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
Fair
value measurements are determined under a three-level hierarchy for fair value measurements that prioritizes the inputs to valuation
techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained
from sources independent of the reporting entity ("observable inputs") and the reporting entity's own assumptions about market
participant assumptions developed based on the best information available in the circumstances ("unobservable inputs"). Fair value
is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the "exit price") in an orderly
transaction between market participants at the measurement date. In determining fair value, the Company primarily uses prices
and other relevant information generated by market transactions involving identical or comparable assets ("market approach").
The Company also considers the impact of a significant decrease in volume and level of activity for an asset or liability when
compared with normal activity to identify transactions that are not orderly.
The
highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement.
The three
hierarchy levels are defined as follows:
Level 1 — Quoted
prices in active markets that is unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 — Quoted
prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in
active markets or financial instruments for which significant inputs are observable, either directly or indirectly;
Level 3 — Prices
or valuations that require inputs that are both significant to the fair value measurement and unobservable.
Credit
risk adjustments are applied to reflect the Company's own credit risk when valuing all liabilities measured at fair value. The
methodology is consistent with that applied in developing counterparty credit risk adjustments, but incorporates the Company's
own credit risk as observed in the credit default swap market.
The
Company's financial instruments consist primarily of cash, accounts receivable, inventory, marketable securities, accounts payable
and accrued expenses and convertible debt. The carrying amount of the Company's accounts payable approximate fair value to their
short term. Marketable securities are adjusted to fair value each balance sheet date, based on quoted prices; which are considered
level 1 inputs (see Note 6). As of March 31, 2016 the Company's marketable securities were $1,860. The Company's derivative liability
is valued using the level 3 inputs (see Note 7). The estimated fair value is not necessarily indicative of the amounts the Company
would realize in a current market exchange or from future earnings or cash flows.
The
following table represents the Company's financial instruments that are measured at fair value on a recurring basis as of March
31, 2016 for each fair value hierarchy level:
March
31, 2016
|
|
Derivative
Liability
|
|
|
Marketable
Securities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Level I
|
|
$
|
—
|
|
|
$
|
1,860
|
|
|
$
|
1,860
|
|
Level II
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level III
|
|
$
|
152,050
|
|
|
$
|
—
|
|
|
$
|
152,050
|
|
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 net 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, 2016 includes the Company's outstanding convertible
debt that is convertible into approximately 6,018,760 shares of common stock.
Accounting
for Stock-based Compensation
The
Company accounts for stock awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees.
The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity
instruments is reached, or (2) the date at which the counterparty's performance is complete. Stock awards granted to non-employees
are valued at their respective measurement dates based on the trading price of the Company's common stock and recognized as expense
during the period in which services are provided.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those
estimates.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, Income Taxes. The Company recognizes deferred tax assets and
liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization.
The Company records a valuation allowance related to a deferred tax asset when it is more likely than not that some portion of
the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates of the date of enactment.
ASC
740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements
and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure
and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, the
Company has not been assessed, nor has the Company paid, any interest or penalties.
The
Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to be recognized. The Company's tax years subsequent to 2010 remain
subject to examination by federal and state tax jurisdictions.
Comprehensive
Income
The
Company has adopted ASC Topic 220, "Comprehensive Income." This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during
a period from non-owner sources. Items included in the Company's comprehensive loss consist of unrealized losses on available-for-sale
securities.
Note
3 —
Recent Accounting Pronouncements
Accounting
standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the financial statements upon adoption.
Note
4 —
Sales Concentration and Concentration of Credit Risk
S
ales
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, 2016 and 2015 and the accounts receivable balance as of March 31, 2016:
Customer
|
|
|
Sales
% Three Months
Ended March 31, 2016
|
|
|
Sales
% Three Months
Ended March 31, 2015
|
|
|
Accounts
Receivable
Balance as of
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
|
26.4
|
%
|
|
|
40.8
|
%
|
|
$
|
659,524
|
|
|
B
|
|
|
|
40.7
|
%
|
|
|
19.2
|
%
|
|
|
590,863
|
|
|
C
|
|
|
|
—
|
|
|
|
15.8
|
%
|
|
|
266,000
|
|
|
D
|
|
|
|
15.5
|
%
|
|
|
—
|
|
|
|
324,397
|
|
|
E
|
|
|
|
9.6
|
%
|
|
|
—
|
|
|
|
251,349
|
|
|
F
|
|
|
|
7.8
|
%
|
|
|
24.1
|
%
|
|
|
137,000
|
|
Note
5 —
Marketable Securities
The
Company's marketable securities consist solely of 600,000 shares of Agritek Holdings, Inc.'s ("Agritek") common stock, issued
to the Company in connection with the Company's formation in 2010. 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.
The fair value of the Company's holdings in Agritek's common stock totaled $1,860 as of March 31, 2016.
The
following summarizes the carrying value of marketable securities as of March 31, 2016:
|
|
|
|
Historical cost
|
|
$
|
114,000
|
|
Unrealized loss
included in accumulated other comprehensive gain (loss)
|
|
|
(112,140
|
)
|
Net carrying
value
|
|
$
|
1,860
|
|
Note
6 —
Convertible Notes Payable
Effective
with the SEA, Petrogres 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 are due September 9, 2016.
The
Company determined that the conversion feature of the Mammoth Notes represent an embedded derivative since the Notes are convertible
into a variable number of shares upon conversion. Accordingly, the Mammoth Notes were not considered to be conventional debt under
EITF 00-19 and the embedded conversion feature was bifurcated from the debt host and accounted for as a derivative liability.
Accordingly, the fair value of these derivative instruments being recorded as a liability on the consolidated balance sheet with
the corresponding amount recorded as a discount to each Note. Such discount is being amortized from the date of issuance to the
maturity dates of the Notes. The change in the fair value of the liability for derivative contracts are recorded in other income
or expenses in the consolidated statements of operations at the end of each quarter, with the offset to the derivative liability
on the balance sheet. The embedded feature included in the Mammoth Notes resulted in a debt discount of $48,975 on the date the
Mammoth Notes were assumed and a derivative liability of $300,321.
A
summary of the derivative liability balance of the Mammoth Notes as of March 31, 2016 is as follows:
|
|
2016
|
|
|
|
|
|
Balance assumed
|
|
$
|
300,321
|
|
Reduction for conversion
|
|
|
(48,523
|
)
|
Fair Value Change
|
|
|
(99,746
|
)
|
Ending Balance
|
|
$
|
152,052
|
|
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, 2016:
|
|
|
Assumption
date
|
|
|
Remeasurement
date
|
|
|
|
|
|
|
|
|
|
|
Expected
dividends
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
Expected
volatility
|
|
|
|
363
|
%
|
|
|
363
|
%
|
|
Expected
term
|
|
|
|
6.3
months
|
|
|
|
5.3
months
|
|
|
Risk
free interest
|
|
|
|
.49
|
%
|
|
|
.37
|
%
|
A
summary of the convertible notes payable balance as of March 31, 2016 is as follows:
|
|
2016
|
|
|
|
|
|
Assumed Balance
|
|
$
|
69,619
|
|
Conversion of convertible notes
|
|
|
(2,700
|
)
|
Discount
|
|
|
(39,373
|
)
|
Ending Balance
|
|
$
|
27,546
|
|
Note
7 —
Related Party Transactions
Management
Fees
For
the three months ended March 31, 2016 and 2015, the Company recorded expenses to its' officers the following amounts, included
in Salaries and Management Fees in the statements of operations, included herein:
|
|
Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Chief Executive Officer
|
|
$
|
—
|
|
|
$
|
—
|
|
CFO
|
|
|
4,000
|
|
|
|
—
|
|
Total
|
|
$
|
4,000
|
|
|
$
|
—
|
|
Prior
to the SEA, Petrogres paid a dividend of $1.8 million to its sole shareholder.
Note
8 —
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.
Note
9 —
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 March 31, 2016.
Note
10 —
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.
Note
11 —
Subsequent Events
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.