Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Petrogress, Inc. operates as a holding company and conducts its business through its wholly-owned subsidiaries:
Petronav Carriers LLC
.
, which manages day-to-day operations of its beneficially-owned affiliated tanker fleet; and
Petrogress Int’l LLC
.
, which is a holding company for subsidiaries currently conducting business in Greece, Cyprus and Ghana.
Business Environment and Outlook
Petrogress, Inc. is an oil energy and sea transportation company with business activities in the following countries: Greece, Cyprus and Ghana. Our earnings currently depend primarily on the profitability of our crude oil sales. The biggest factor affecting the results of operations is the price and supply of crude oil. The price of crude oil has fallen significantly since mid-year 2018. The downturn in the price of crude oil has impacted the company's results of operations, cash flows, leverage, capital and exploratory investment program and production outlook. A sustained lower price environment could result in the impairment or write-off of specific assets in future periods. We have reacted to the downturn by effecting reductions in operating expenses, pacing and re-focusing of capital and exploratory expenditures. We anticipate that crude oil prices will increase in the future, as continued growth in demand and a reduction in supply growth should bring global markets into balance. However, the timing or sustainability of any such increase in prices is unknown. In the Company's downstream business, crude oil is the largest cost component of refined products. Nevertheless, it is our objective to deliver competitive results and shareholder value in any business environment.
Our midstream segment relies and depends on our crude oil sales contracts to keep our vessels employed. We rely primarily on the revenues generated from our business of physical supply of crude oil and marketing of refined products to our end customers.
The effective tax rate for our business is volatile. This is due to the level of earnings or losses during a particular period and whether they arise in higher or lower tax rate jurisdictions. As a result, a decline or increase in the effective tax rate in one period may not be indicative of expected results in future periods.
A principal focus of our strategy is to grow by expanding our business. Our future growth depends, in part, on our ability to obtain financing for our existing and new operations and business lines. In recent years, global financial markets have experienced volatility following contraction, deleveraging and reduced liquidity in the global credit markets. In addition, a number of major financial institutions have experienced serious financial difficulties and, in some cases, have entered into bankruptcy proceedings or are subject to regulatory enforcement actions. These difficulties have been compounded by a general decline in the willingness by banks and other financial institutions to extend credit and may adversely affect the financial institutions that may provide us with credit to support our working capital requirements. These economic factors may have a material adverse effect on our ability to expand our business.
The company closely monitors developments in the financial and credit markets, the level of worldwide economic activity, and the implications for the company of movements in prices for crude oil and refined products. Management takes these developments into account in the conduct of daily operations and for business planning.
The following are descriptions of our recent initiatives undertaken in each of our key business segments:
Upstream
:
The Company through its affiliate in Ghana is under negotiations to conclude a Petroleum Agreement with Ghana National Petroleum Company (GNPC) for a long-term lease of the Salt-Pond oil field and to take over management of the oil rig-platform known as “Mr. Louie” and to conduct necessary repairs and maintenance to facilitate oil production in the area.
Downstream
:
On February 28, 2018, our wholly owned subsidiary, Petrogres Co. Limited entered into the Platon Partnership Agreement creating an equal partnership between Petrogres Co. Limited and Platon Gas Oil Ghana Limited (“PGO”), an unrelated third party which owns an oil refinery and serves as a refiner of crude oil and various petroleum products based in Ghana. The Platon Partnership Agreement is intended to be renewed by both Petrogres Co. Limited and PGO on an annual basis and pursuant its terms. Petrogres Co. Limited will feed and supply the crude oil for storage, refinement, marketing and distribution in Ghana jointly with PGO. The storage capacity under the Platon Partnership Agreement is 24,000 tons and the monthly processing capacity of the refinery is 10,000 tons. Petrogres Co. Limited and PGO both plans to invest additional funds to upgrade the processing monthly capacity into refined products of Gas Oil, Naphtha, and fuel in view of the high local demand. Under the Platon Partnership Agreement, all expenses of the partnership operations are shared by both Petrogres Co. Limited and PGO. After deducting the operating expenses, the net profits from the sale of the petroleum products are split evenly between Petrogres Co. Limited and PGO. As of the date the Platon Partnership Agreement was executed, PGL ceased other sales of crude to third customers in West Africa.
Midstream
:
We seek to expand our midstream operations in other international ocean routes by adding to our fleet larger and younger tanker vessels. We are monitoring the vessel market for opportunities while we are also working to secure the necessary funding for expansion. Our business strategy is based in part upon the expansion of our business to new, or within existing, markets. In order to fund future vessel acquisitions, expansion into new and existing markets and products, increased working capital levels, or capital expenditures, we will be required to use cash from operations, incur borrowings or raise capital through the sale of debt or equity securities in the public or private markets.
Other Business
On March 6, 2019, we entered into an Exclusive Distribution Agreement with Dana Lubricants Factory LLC. (“Dana Lubes”), a United Arab Emirates based lubricant oil manufacturer, pursuant to which, Petrogress Int’l LLC. is designated as the exclusive agent for distribution of products manufactured and branded by Dana Lubes throughout western Africa.
Throughout our history, we have expanded our business capabilities through strategic alliances, select business and vessel acquisitions, and the establishment of new service centers. In February 2019, we commenced negotiations with the government of Ghana to lease a free zone land in Takoradi port to build a tanks farm with storage capacity of 100,000 cubic meters. We are also negotiating the lease of Ada shipyard where we can provide shelter and repair facilities for our fleet and third-party customers, and provide additional service and support to offshore oil rigs and platforms around the area of West Africa.
In addition to our operations described above, we commenced the marketing and distribution of lubricants under the exclusivity Agreement with Dana Lubricants Company (a company based in Dubai – UAE), which we market through our subsidiary in Ghana Petrogres Africa Co. Ltd. We view this business as complementary to our downstream operations. We plan to expand the distribution of lubricants throughout our service centers and other countries in West and Central Africa.
Results of Operations
Comparison of Three Months Ended June 30, 2019 and 2018
Total revenues for the three months ended June 30, 2019, decreased by $1,857,890 or approximately 82%. The decrease in sales revenue for the three months ended June 30, 2019 resulted primarily because of reduced production of crude oil by our suppliers due to low prices and in addition, due to the fact that two of our vessels remained inoperative for a substantial period since the hijacking incident as described in Note 18 in our Notes to Consolidated Financial Statements included in this Report. However, inventories as at June 30, 2019 and 2018 were $981,063 and $182,108, respectively, an increase of $798,955 or approximately 438%. The following table summarizes revenues derived during the three months ended June 30, 2019 and 2018 from our business activities.
Key Financial Results
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues from crude oil sales
|
|
$
|
-
|
|
|
$
|
1,698,900
|
|
Revenues from gas oil sales
|
|
|
300,000
|
|
|
|
406,500
|
|
Revenues from freights and hires
|
|
|
104,000
|
|
|
|
-
|
|
Other Revenues
|
|
|
-
|
|
|
|
156,490
|
|
Total Revenues
|
|
$
|
404,000
|
|
|
$
|
2,261,890
|
|
Directly related to our sales activity and volumes, we experienced the following cost of sales amounts for the three months ended June 30, 2019 and 2018:
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Crude oil purchase cost
|
|
$
|
-
|
|
|
$
|
896,994
|
|
Gas oil purchase cost
|
|
|
240,000
|
|
|
|
294,000
|
|
Lubricants purchase cost
|
|
|
41,202
|
|
|
|
-
|
|
Shipping expenses
|
|
|
-
|
|
|
|
91,530
|
|
Total cost of goods sold
|
|
$
|
281,202
|
|
|
$
|
1,282,524
|
|
General and administrative expenses for the three months ended June 30, 2019 and 2018 were $126,487 and $149,077, respectively.
For the three months ended June 30, 2019, the Company experienced net loss of $1,015,239 compared to net income of $237,262 for the three months ended June 30, 2018.
Comparison of Six Months Ended June 30, 2019 and 2018
Total revenues for the six months ended June 30, 2019, decreased by $2,300,476 or approximately 48%.
Key Financial Results
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues from crude oil sales
|
|
$
|
1,917,178
|
|
|
$
|
3,872,164
|
|
Revenues from gas oil sales
|
|
|
300,000
|
|
|
|
738,500
|
|
Revenues from freights and hires
|
|
|
298,500
|
|
|
|
-
|
|
Other Revenues
|
|
|
11,000
|
|
|
|
216,490
|
|
Total
Revenues
|
|
$
|
2,526,678
|
|
|
$
|
4,827,154
|
|
Directly related to our sales activity and volumes, we experienced the following cost of sales amounts for the six months ended June 30, 2019 and 2018:
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Crude oil purchase cost
|
|
$
|
1,165,752
|
|
|
$
|
2,263,215
|
|
Gas oil purchase cost
|
|
|
240,000
|
|
|
|
294,000
|
|
Lubricants purchase cost
|
|
|
41,202
|
|
|
|
-
|
|
Shipping expenses
|
|
|
-
|
|
|
|
131,846
|
|
Total
cost of goods sold
|
|
$
|
1,446,954
|
|
|
$
|
2,689,061
|
|
General and administrative expenses for the six months ended June 30, 2019 and 2018 were $318,514 and $426,891, respectively.
For the six months ended June 30, 2019, the Company experienced net loss of $869,980 compared to net income of $351,106 for the six months ended June 30, 2018.
Accounts Receivable, net
The amount shown as accounts receivables, net at each balance sheet date includes estimated recoveries from customers and charterers for sales of oil products, hires, freight and demurrage billings, net of allowance for doubtful accounts. Accounts receivable involve risk, including the credit risk of non-payment by the customer. Accounts receivable are considered past due based on contractual and invoice terms. An estimate is made of the allowance for doubtful accounts based on a review of all outstanding amounts at each period, and an allowance is made for any accounts which management believes are not recoverable. The determination of bad debt allowances constitutes a significant estimate.
As of June 30, 2019 and December 31, 2018, allowances for doubtful accounts were $344,466 and $344,466, respectively.
Organization costs
We have adopted the provisions required by the Start-Up Activities topic of the FASB ASC whereby all costs incurred with the incorporation and reorganization of the Company were charged to operations as incurred.
Earnings Per Share
The Company reports earnings 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.
As of June 30, 2019 and June 30, 2018, the basic weighted average number of shares of Common Stock of the Company was 3,842,916 and 3,373,163, respectively. Since the Company has a net loss for both periods there is no dilutive effect for those specific periods.
As of June 30, 2019, and June 30, 2018, the Company has 85,944 and 85,944 shares of Common Stock, respectively, which could be deemed to be dilutive and are excluded from the calculation since their effect would be antidilutive.
Accounting for Equity-based Payments
We account for stock awards issued to non-employees in accordance with ASC 505-50,
Equity-Based Payments to Non-Employees
, including ASU 2018/17 amendments. 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 our common stock and recognized as expense during the period in which services are provided.
Comprehensive Income
We 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 Comprehensive loss consist of cancellation of available-for-sale securities and foreign currency translation adjustments.
Effects of Recent Accounting Pronouncements
not yet adopted
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). This standard affects the accounting for equity instruments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”. This update was issued to clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issued. The update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years beginning after June 15, 2019. We adopted this guidance effective January 1, 2019, as required. We do not expect this guidance to have a significant impact on how we measure financial instruments. We are evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(“ASU 2016-02”). In January 2018, the FASB issued ASU 2018-01, which provides additional implementation guidance on the previously issued ASU 2016-02. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The management of the Company has evaluated the impact on the consolidated financial statements which was found to be immaterial.
In January 2017, the FASB issued ASU 2017-01, “
Business Combinations
(Topic 805): Clarifying the Definition of a Business.” These amendments clarify the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments should be applied prospectively as of the beginning of the period of adoption. We do not consider early adoption and are also assessing the impact that this standard will have on our consolidated financial statements.
Off Balance Sheet Arrangements
As of June 30, 2019, we did not have any material off-balance sheet arrangements.
Liquidity and Capital Resources
At June 30, 2019 and December 31, 2018, the Company had cash and cash equivalents of $659,387 and $661,010, with corresponding working capital of $5,277,626 and $5,570,494, respectively.
Our need for capital resources is driven by our expansion plans, ongoing maintenance and improvement of our vessels, support of our operational expenses, corporate overhead and expenses associated with SEC regulatory compliance. Petrogress, Inc. depends on its subsidiaries incomes, inasmuch as the Company's principal sources of cash are net cash provided from operating subsidiaries activities, which includes the sale and shipment of petroleum products, and cash contributed to the Company by Christos Traios, our President, Chief Executive Officer and controlling stockholder.
Management continues to seek the necessary financing for the expansion of Company's operations. Additional funding is expected to be generated through equity financing from the sale of common stock and/or the issuance of debt. If the Company is successful in completing equity financing, existing stockholders will experience dilution of their interest in our Company. However, the Management cannot provide investors with any assurance that the Company will be able to raise sufficient funding from the sale of our common stock or a debt finance on acceptable terms to fund our plans to expand the Company's operations.
Critical Accounting Policies
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in the notes accompanying our consolidated financial statements included with this report. While all of these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates.
Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our results of operations, financial position or liquidity for the periods presented in this report.