PGAS Petrogress Inc (CE)

Note 1 – The Company and our Subsidiaries

History and Development of the Company

Petrogress, Inc. was incorporated on February 10, 2010 under the laws of the State of Florida as 800 Commerce, Inc. ("800 Commerce"). On February 29, 2016, 800 Commerce entered into an Agreement concerning the Exchange of Securities ("SEA") with Petrogres Co. Limited, a Marshall Islands corporation, and its sole shareholder and founder, Christos Traios. Under the terms of the SEA, 800 Commerce issued 136,000,000 shares of restricted Common Stock, representing approximately 85% of the post-transaction issued and outstanding shares, to Mr. Traios in exchange for 100% of the shares of Petrogres Co. Limited. 800 Commerce's acquisition of Petrogres Co. Limited effected a change in control and was accounted for as a "reverse acquisition" whereby Petrogres Co. Limited was the acquirer for financial statement purposes.

On March 9, 2016, our Board of Directors approved an amendment to our Articles of Incorporation to change the Company’s name to Petrogress, Inc. On March 15, 2016, Mr. Traios was appointed Chief Executive Officer. On November 16, 2016, Petrogress, Inc. filed Articles of Merger and Plan of Merger in Florida and Delaware to change the Company’s domicile by merging with and into a Delaware corporation formed solely for the purpose of effecting the reincorporation.

On July 9, 2018, the Company filed an amendment (the "Amendment") to the Company's Certificate of Incorporation with the Delaware Secretary of State to (a) effect a reverse stock split of the Company's Common Stock at a ratio of one-for-100, (b) reduce the number of authorized shares of Common Stock from 490,000,000 to 19,000,000 and (c) reduce the number of authorized shares of Preferred Stock from 10,000,000 to 1,000,000. The Amendment took effect on July 18, 2018. There was no change in the par value of the Company's Common Stock or Preferred Stock as a result of the Amendment.

We maintain our principal marketing and operating offices at 1, Akti Xaveriou, 18538 Piraeus, Greece. Our telephone number at that address is +30 (210) 459-9741 and our corporate address and registered agent in Delaware is 1013 Centre Road, Suite 403-A, Wilmington, DE 19805 - USA.

Business Overview

Petrogress operates as a holding company and we conduct business primarily through our wholly-owned subsidiaries: Petronav Carriers LLC . , which manages day-to-day operations of our affiliated tanker fleet; Petrogress Int’l LLC . , which engages in crude-oil purchase and sales and is the holding company of the subsidiaries that currently conducting business in Greece, Cyprus and Ghana.

Our business operates in the downstream and midstream sectors of the energy industry, where we acquire and supply crude oil, and engage in the refining and marketing of refined products and lubricants. As a supplier, we procure crude oil from our direct sources and deliver by our tankers fleet to buyers’ destinations. With service centers in East Mediterranean and West Africa, we believe that we are one of a limited number of independent physical suppliers that owns and operates a fleet of supplying vessels and conducts physical supply operations in multiple jurisdictions.

We provide our customers with services that require sophisticated logistical operations designed to meet their strict oil quality and delivery scheduling needs. We believe that our extensive experience and management systems allow us to meet our customers' specific requirements when they purchase and take delivery of crude oil, refined products and lubricants around the areas in which we operate. This, together with the capital-intensive nature of our industry and the limited available shuttle vessels in the areas of our operation, represent a significant barrier to entry for competitors. We have devoted our efforts to building a global brand and believe that our customers recognize our brand as representing high quality service and products at each of our locations. We also perform our technical ship operations in-house, which helps us maintain high levels of customer service.

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 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 expect to provide shelter and repairs facilities to our fleet and customers, and provide additional service and support to offshore oil rigs and platforms around the area of West Africa. Furthermore, we are in the market seeking to add more tankers ships to our fleet.

In addition to our operations described above, we commenced the marketing and distribution of lubricants under an exclusive a greement with Dana Lubricants Company (a company based in Dubai of UAE), which we market through our subsidiary 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 center in Ghana and other countries in West and Central Africa.

Sales and Marketing

Most of our marketing, sales, ship-management and other related functions are performed at our main office in Piraeus, Greece. We also market products and services through our offices in Ghana and Cyprus and through our representations in Nigeria. Our sales force interacts with our established customers and markets our oil sales and services to local distributors. We believe our level of customer service, years of experience in the industry, and reputation for reliability are significant factors in retaining our customers and attracting new customers. Our sales and marketing approach are designed to create awareness of the benefits and advantages of our sales and services. We are active in industry trade shows and other available public forums.

Description of Significant Subsidiaries

Petronav Carriers LLC . (“ PCL ”), was formed in Delaware in March 2016 for the purpose of managing the day-to-day operations of four vessels, which are used to transport petroleum products to various countries in West Africa. PCL manages our fleet from its business office at Piraeus, Greece.

Currently PCL owns our vessels through separate wholly-owned subsidiaries described below:

Petrogress Int’l LLC . (“ PIL ”), is a Delaware limited liability company, acquired by the Company in September 2017. PIL serves as a holding company for interests in various entities conducting business across the world, including Cyprus, the Middle East, and West Africa as an oil energy corporation.

In September 2017, PIL acquired 90% of the shares of Petrogres Africa Company Limited (“Petrogres Africa Co. Ltd”) from Christos Traios, our President, Chief Executive Officer. Petrogres Africa Co. Ltd holds a current Ghanaian Oil business permit, and is authorized to conduct local sales of oil products and operations of a shipping business from the Port of Tema in Greater Accra. Port facilities in Tema provide a service and operations hub for our tankers currently involved in West Africa and Nigerian oil trading and transport.  The Port of Tema also serves as a secondary hub for repair, supply and transport ship operators servicing Ghana’s Tano Basin offshore oil fields in the Gulf of Guinea. 

On April 1, 2019, Petrogress Int’l LLC. and Petrogres Co. Limited entered into a merger agreement pursuant to which Petrogres Co. Limited, a wholly owned subsidiary of Petrogress, merged with and into PIL, the surviving company. The merger became effective as of April 1, 2019.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The Company follows the accrual basis of accounting in accordance with generally accepted accounting principles (“GAAP”) and has elected a year-end of December 31.

All significant intercompany transactions and accounts have been eliminated.

These interim consolidated financial statements are unaudited; however, in the opinion of our management, these statements reflect all adjustments necessary for a fair statement of the results for the periods reported. All such adjustments are of a normal, recurring nature unless otherwise disclosed. These interim consolidated financial statements, including the notes, have been prepared in accordance with the rules of the SEC applicable to interim period financial statements and do not include all of the information and disclosures required by GAAP for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on April 12, 2019. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year or any future interim period.

Principles of consolidation

The consolidated financial statements include the consolidated accounts of the Company and our wholly-owned and majority-owned subsidiaries: Petrogress Int’l LLC., Petronav Carriers LLC., Petrogres Africa Co. Ltd. and PG Cypyard & Offshore Services Terminal Ltd.

Percentages Participation in subsidiaries

Non-controlling interests

Ownership interests in the Company’s subsidiaries held by parties other than the Company are presented separately from the Company’s equity on the Consolidated Balance Sheet. The amount of consolidated net income attributable to the Company and the non-controlling interests are both presented on the face of the Consolidated Statement of Income.

Emerging Growth Company

We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or “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 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.

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.

Net repayment (borrowing) of loans by equity affiliates consisted of the following gross amounts:

Note 4 – Summarized Financial Data – Petrogress, Inc.

Petrogress, Inc .

The management and operation of our business is performed directly and independently by each subsidiary. Assets, inventories, partnership interests, joint venture interests and contracts are held by the subsidiaries. Petrogress, Inc., the parent company, does not have revenues while it suffers all the necessary operating and general and administrative expenses in order to comply with the regulatory requirements of the SEC.

The summarized financial information for the Company and its consolidated subsidiaries as of June 30, 2019 and 2018 are presented in the below tables:

Petronav Carriers LLC

Petrogress, Inc. owns 100% of the equity interest in Petronav Carriers LLC, the company that serves as the manager and operator of our tanker fleet of four vessels wholly-owned by its four subsidiaries. Summarized financial information is presented in the following table:

* Cost and other expenses include the ransom paid as well as all expenses related to the hijacking of one of our vessels.

** 100% Net income attributable to Petrogress Inc.

Petrogress Int’l LLC

Petrogress, Inc. owns 100% of the equity interest in Petrogress Int’l LLC, the company which serves as a holding company for conducting business across the world through its affiliates and subsidiaries. Summarized financial information is presented in the following table:

* 100% Net income attributable to Petrogress, Inc.

* 90% Net income attributable to Petrogress Int’l LLC

Note 5 – Inventories

Crude oil, Gas oil and bunkers onboard our vessels are recorded at weighted average cost and carried at the lower of cost or net realizable value. Supplies and other items consist principally of items, spare-parts, consumable goods and equipment supplied to our vessel which are valued at weighted average cost and reviewed periodically for obsolescence or impairment when market conditions indicate.

Note 7 – Vessels and other fixed assets, net

We depreciate our vessels on a straight-line basis over the estimated useful life which is 10 years from the date of their transfer to the Company or its affiliate. Depreciation is calculated based on a vessel’s cost less the estimated residual value. The estimated useful lives of vessels and equipment are as follows:

Vessels and other fixed assets, net consisted of the following as of June 30, 2019 and December 31, 2018:

Depreciation for the six months ended June 30, 2019 and June 30, 2018, was $428,048 and $458,680, respectively.

Note 8 - Income Taxes

We file income tax returns in various jurisdictions, as appropriate and required. The Company was not subject to U.S. federal, state and local, as applicable, income tax examinations by regulatory taxing authorities for any period prior to January 1, 2012.

We account for income taxes in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 740-10, Income Taxes. We recognize 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. We record 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. We classify interest and penalties as a component of interest and other expenses. To date, we have not incurred any liability for unrecognized tax benefits, including assessments of penalties and/or interest.

We measure and record 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. Our tax years subsequent to 2011 remain subject to examination by federal and state tax jurisdictions.

Note 9 – Fair Value Measurements

Our financial instruments consist primarily of cash, accounts receivable, accounts payable and accrued expenses, and convertible debt.

The carrying amount of cash, accounts receivable, accounts payable and accrued expenses, and convertible debt, as applicable, approximates fair value due to the short-term nature of these items and/or the current interest rates payable in relation to current market conditions.

Interest rate risk is the risk that our earnings are subject to fluctuations in interest rates on either investments or on debt. We do not use derivative instruments to moderate exposure to interest rate risk, if any.

Financial risk is the risk that our earnings are subject to fluctuations in interest rates or foreign exchange rates. We do not use derivative instruments to moderate exposure to financial risk, if any.

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, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”). We also consider 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.

Note 10 – Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach to adopt these ASUs. On January 1, 2018, the Company adopted ASU 2014-09, using the full retrospective method, which requires reporting entities to apply the standard as of the earliest period presented in their financial statements. The Company completed its review of its material revenue streams and determined that the adoption of Topic 606 did not have a material impact on the Company’s consolidated statements of operations and consolidated balance sheets.

The Company recognizes revenue for crude oil sales and gas oil sales, its primary sources of revenue, at an amount that reflects the consideration that the Company expects to be entitled to receive in exchange for transferring goods or services to its customers. The Company's policy is to record revenue when, (a) control of the goods (crude oil, gas oil and other petrochemical products) is passed to its customers and (b) the vessels charter (voyages and long term) service is rendered to its independent charterers or Petrogress Int’l LLC.

Note 11 - Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivables. 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 June 30, 2019 and December 31, 2018, management is of the opinion that the Company had no significant concentrations of credit risk.

Note 12 – Officers compensations

During the six months ended June 30, 2019 and June 30, 2018, the Company had recorded officers’ compensation of $90,000 and $110,000, respectively. For the period ended June 30, 2019, $13,738 was paid and the remaining amount was accrued and included in “Amounts Due to Related Party” on the Consolidated Balance Sheets as of June 30, 2019.

Note 13 - 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 14 – Shareholders

As of June 30, 2019, we had 48 shareholders of record and 3,874,808 shares of common stock issued and outstanding, the large majority of which were located in the United States and held an aggregate of 475,574 shares of our common stock, representing approximately 12% of our outstanding shares of common stock. However, one of the U.S. shareholders of record is Cede & Co., a nominee of The Depository Trust Company, which held 336,911 shares of our common stock, as of June 30, 2019. Accordingly, we believe that the shares held by Cede & Co. include shares of common stock beneficially owned by both holders in the United States and non-U.S. beneficial owners. We are not aware of any arrangements the operation of which may at a subsequent date result in our change of control.

Note 15 - Related party transactions

As of April 24, 2019, Petrogress, Inc., Petrogress Int’l LLC and Christos P. Traios agreed on an amendment to the Securities Purchase Agreement dated effective as of September 30, 2017, pursuant to which the Company purchased its interest in Petrogres Africa Co. Ltd. The amendment adjusts the aggregate purchase price to $900,000, which is to be paid to Mr. Traios on or before October 23, 2019. In the event that the purchase price is not paid in full by the payment date, any outstanding and unpaid amount of the purchase price is convertible at the option of Mr. Traios, in whole or in part, into shares of Common Stock at a conversion price equal to 65% of the lowest trading price during the last 10 trading days. Notwithstanding the foregoing, the conversion rights are capped at 3,500,000 shares of Common Stock (as such number may be equitably adjusted for stock splits, stock dividends, rights offerings, combinations, recapitalization, reclassifications, extraordinary distributions and similar events by Petrogress).

Note 16 - Loan facility from related party

On October 31, 2018, Christos P. Traios, notified the Company that he was terminating the Revolving Line of Credit Agreement dated July 13, 2017 (the “Credit Agreement”) pursuant to which Mr. Traios provided a revolving line of credit in the principal amount of up to $1,000,000 to the Company. As such, no further advances have been made under the Credit Agreement and existing advances in principal amount of $148,900 under the Line of Credit Note have become due upon the maturity date, July 13, 2019; however, the maturity date has been extended to July 13, 2020.

The table below presents the amounts due to Christos Traios during the six months ended June 30, 2019:

The following is a summary of customers who accounted for more than ten percent (10%) of the Company’s accounts receivable for the periods ended June 30, 2019 and December 31, 2018:

None of the balances listed in the table above has become overdue as of August 8, 2019. Amounts indicated with an * denote amounts less than 10%.

Note 1 8 – Additional Information

On April 19, 2019 one of our vessels (MT APECUS) was attacked by hijackers while she was at Bonny (Nigeria) anchorage, and 6 of our crew members kidnapped, taken ashore and held hostage for over 50 days. During the time the crew members were held hostage, the Nigerian local authorities did not provide adequate assistance to secure their release and we were forced to negotiate with the pirates. After lengthy negotiations, we were able to reduce the ransom from $3 million to $350,000 which was paid to secure the release of the kidnapped crew members on June 26, 2019. Nevertheless, a member of the team we hired to negotiate the release of our crew members was also taken and remains a hostage of the pirates. We are in the process of attempting to secure the remaining team member’s release, and expect that additional expense and/or ransom obligations will need to be paid to do so. In addition, during the sea-piracy incident we ordered one of our sister fleet vessels to proceed to and remain in the area to provide support to the attacked vessel and her remaining crew. Both our ships were left idle in the area for the entire period until the release of the abducted seafarers. The ransom paid is reflected as an expense in the accompanied consolidated statement of operations within the line item “Other income / (expense), net”. However, the company reserves the right to claim for a reimbursement through insurance and also to proceed with legal steps against the Government of Nigeria for damages occurred due to what we believe to be significant unlawful actions taken by the Nigerian Navy.