Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Key Financial Results
Third quarter of 2020 compared to the Third quarter of 2019
Earnings by product sales
|
|
Nine months ended September 30,
|
|
Net sales volumes per product
|
|
2020
|
|
|
2019
|
|
Crude Oil Sales
|
|
$
|
749,200
|
|
|
$
|
6,901,443
|
|
Gas Oil Sales
|
|
|
622,000
|
|
|
|
1,128,000
|
|
Lubricants Sales
|
|
|
143,501
|
|
|
|
-
|
|
Hires & Freights Sales
|
|
|
993,483
|
|
|
|
542,500
|
|
Other Revenues / Discounts
|
|
|
46,778
|
|
|
|
11,000
|
|
Totals
|
|
$
|
2,554,962
|
|
|
$
|
8,582,943
|
|
Net loss attributable to Petrogress for the third quarter of 2020 was $(2,618,340) ($(0.27) per share), compared to a net loss of $(1,087,763) ($(0.28) per share) for the third quarter of 2019.
Refer to the “Results of Operations” section beginning on page 13 for a discussion of our financial results.
Executive Overview
Petrogress, Inc., is based in Delaware and 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, and provides management of crude oil purchases and sales; the company also provides sea-transportation services as an independent maritime entity, operating and managing its own tanker fleet, or chartering on long terms. The company is headquartered from Piraeus – Greece. The company maintain its 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 Environment and Outlook
Petrogress, is an oil energy and sea transportation company with business activities in the following countries: Greece, Cyprus, Egypt, Nigeria and Ghana.
Earnings of the company depend mostly on the profitability of its crude oil business segment. The most significant factor affecting the results of operations is the price of crude oil, which is determined in global markets outside of the company’s control. The price of crude oil has fallen significantly since mid-year 2019. 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. Similarly, impairments or write-offs have occurred, and may occur in the future, as a result of managerial decisions not to progress certain projects in the company’s portfolio. We have reacted to the downturn by effecting reductions in operating expenses, pacing and re-focusing of capital and exploratory expenditures. We estimate that oil prices will remain on low levels for the rest of the year which shall continue affecting our operations and cash flow. In addition, the sea-transpiration impacted hardly due to global low demand of oil products.
Response to Market Conditions and COVID-19 During the third quarter of 2020, travel restrictions and other constraints on economic activity were implemented in many locations around the world to limit the spread of the COVID-19 virus. Lower commodity prices negatively impacted the company’s third quarter 2020 financial and operating results. While demand and commodity prices have shown signs of recovery, they are not back to pre-pandemic levels, and financial results will likely continue to be challenged in future quarters. Due to the rapidly changing of environment, there continues to be uncertainty and unpredictability around the extent to which the COVID-19 pandemic will impact our results, which could be material.
Refer to the “Cautionary Statements Relevant to Forward-Looking Information” on Page 2 and to “Risk Factors” in Part II, Item 1A, on page 17-18 for a discussion of some of the inherent risks that could materially impact the company’s results of operations or financial condition.
Operating sectors
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. 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.
Other Businesses
Effected as on November 2019, the company concluded the negotiations to lease three Gas refilling stations in the Mainland of South Greece. The procedures for the obtaining the operating licenses from the local authorities are in progress, simultaneously with the preparation of gas stations designs and drawings in order to commence the modernization and renovation under our brand names. We estimate to complete and have them ready for operations within nine months’ time. The gas Stations shall be operated by our Hellenic branch in Greece and we expect to be ready by June 2020.
Our key business segments
The following are descriptions of our recent initiatives undertaken in each of our key business segments:
Upstream; Earnings for the upstream segment are closely aligned with industry prices for crude oil. Crude oil prices are subject to external factors over which the company has no control, including product demand connected with global economic conditions, industry production and inventory levels, technology advancements, production quotas or other actions imposed by the Organization of Petroleum Exporting Countries (OPEC) or other producers, actions of regulators, weather-related damage and disruptions, competing fuel prices, natural and human causes beyond the company's control such as the COVID-19 pandemic, and regional supply interruptions. The company is actively managing its schedule of work, contracting, procurement, and supply chain activities to effectively manage costs, ensure supply chain resiliency and continuity, and support operational goals. The spot markets for many services and materials are softening in response to the economic impact of the COVID-19 pandemic, including the drastic reductions in demand for petroleum products, including gasoline and fuel, among others, and in crude oil prices, which have resulted in significant reductions in economic activity and associated spending in the energy sector. Commodity prices have fallen below break-even levels in many regions.
Downstream: As on February 2018, our Partnership agreement with Platon Ghana Oil Refinery (PGOR) -an unrelated third party- is still ongoing and renewed on an annual basis and pursuant its terms Petrogress will feed and supply the crude oil for storage, refinement, marketing and distribution in Ghana jointly with PGOR. The storage capacity under the Partnership Agreement is 24,000 tons and the monthly processing capacity of the refinery is 10,000 tons. Petrogress and Platon 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 Petrogress and Platon. After deducting the operating/processing expenses, the net profits from the sale of the products are split evenly between Petrogres and Platon. As of the date the Platon Partnership Agreement was executed, Petrogress ceased other sales of crude to third customers in West Africa. During the year the company expanded its operations to other sectors, engaging into gas-stations operator and lubricants distributor. The company’s most significant marketing areas are the West Coast of Africa and East Mediterranean where Petrogress affiliates have significant ownership interests, representations and partnership agreements, in these areas.
Midstream; The outbreak of COVID-19 pandemic occurred the ceased of our entire fleet operations and employments which resulted the complete elimination of freight and hire incomes, while the fleet expenses remained on the same levels during and March, April and May 2020. Nevertheless, we believe the shipping industry will be rectified and return to the normal levels, therefore we still 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 expand our operations, 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.
Results of Operations
The following section presents the results of operations and variances on a before-tax basis for the company’s business operations, as well as for “All Other.”
Our operating revenues are driven primarily of the commodities trading sales and our tankers fleet employment days during which our vessels are generating revenues, while our financial results are subject to a number of sectors and reflects to the following factors:
Cost of commodities; is the cost we purchase the oil products -mainly the crude oil- and such cost is based either on Brent Index prices or Fixed price, the quality and quantity of the product.
Commodities Operating Expenses; relates to products surveys before and after the shipment, bunkers supplied to the employment vessel, cargoes surveys, loading/unloading expenses, agency and representative services.
Shipping & Logistic Expenses; includes the sea freight and mobilization cost, the performed loading and discharging of the product, and any expenses occurred during the shipping time from the loading point up to unloading facilities.
Vessels Operating Expenses; includes crew wages and bonuses, their medical support and travelling, maintenance and repairs to the vessels hull and their machineries, expenses for supplies of spare-parts and consumable stores, paints, lubricants, fresh water, bunkers, agency services, etc.
General and Administrative Expenses; relates to our directors, officers and managers salaries and compensations, shore staff wages, employee’s federal insurance, offices lease and utilities, telecommunications, travelling and representations of our officers, our agency fees we pay to our branch’s offices in Greece, Cyprus, Ghana and Nigeria.
Corporate Expenses; are all company’s expenses and includes, our executive’s compensations, attorney’s fee, Auditors and accountant fees, Consultant’s and P/R fees, Transfer agents of our stock, miscellaneous.
Other factors may affect our Results of Operations; In addition to the said expenses there are factors beyond of our control which may affect seriously our operations results. Inasmuch as we trade also West Africa, which is considered as high risky area, we are expose in a serious amount of risks, such as piracies and hijacks, civil wars, stolen of properties, economy distress, and credit risks.
EBITDA and Adjustment; EBITDA represents net income before expenses, taxes and depreciation. Adjusted EBITDA represents net income before expense, taxes, taxes, depreciation and amortization of dry-docking.
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Operating Earnings / (losses)
|
|
$
|
(3,107,281
|
)
|
|
$
|
(543,209
|
)
|
Operating losses of during the third quarter of 2020 amount to $(3,107,281), compared to operating losses of $(543,209) for the same period in 2019. The increase was primarily due to lower crude oil sales prices and the cease of operations as of September 30, 2020.
Consolidated Statement of Income
Sales of products provided in the below table:
|
|
Nine months Ended
September 30,
|
|
Net sales volumes per product
|
|
2020
|
|
|
2019
|
|
Crude Oil Sales
|
|
$
|
749,200
|
|
|
$
|
6,901,443
|
|
Gas Oil Sales
|
|
|
622,000
|
|
|
|
1,128,000
|
|
Lubricants Sales
|
|
|
143,501
|
|
|
|
-
|
|
Hires & Freights Sales
|
|
|
993,483
|
|
|
|
542,500
|
|
Other Revenues/Discounts
|
|
|
46,778
|
|
|
|
11,000
|
|
Totals
|
|
$
|
2,554,962
|
|
|
$
|
8,582,943
|
|
Cost of Goods Sold provided in the below table:
|
|
Nine months Ended
September 30,
|
|
Cost of goods sold
|
|
2020
|
|
|
2019
|
|
Crude Oil purchased costs
|
|
$
|
(1,250,000
|
)
|
|
$
|
(5,931,221
|
)
|
Gas Oil purchased costs
|
|
|
(520,000
|
)
|
|
|
(810,000
|
)
|
Lubricants purchased costs
|
|
|
(129,000
|
)
|
|
|
-
|
|
Totals
|
|
$
|
(1,899,000
|
)
|
|
$
|
(6,741,221
|
)
|
●
|
Sales: Total operating sales for the nine months ended September 30, 2020 and 2019, were $2,554,962 and $8,582,943, respectively, a decrease of $6,027,981 or approximately 71%.
|
●
|
Cost of goods sold: For the nine months ended September 30, 2020 and 2019, cost of goods sold was $1,899,000 and $6,741,221, respectively, a decrease of $4,842,221 or approximately 72%.
|
●
|
Corporate expenses: Corporate expenses mainly include the expenses incurred by Petrogress, Inc. Our Corporate expenses for the nine months ended September 30, 2020 and 2019 were $790,797 and $230,463, respectively, an increase of $560,334 or approximately 244%.
|
●
|
General and administrative expenses: For the nine months ended September 30, 2020, General and administrative expenses increased to $2,456,502 compared to $1,476,540 for the nine months ended September 30, 2019, an increase of $979,962 or approximately 67%.
|
●
|
Net income / (loss) attributable PGI: For the nine months ended September 30, 2020, the Company had a net loss of $2,618,340 while for the nine months ended September 30, 2019, the Company had a net loss of $1,091,357, an increase of $1,526,983 or approximately 140%.
|
●
|
EBITDA: For the nine months ended September 30, 2020, EBITDA amounted to $(3,107,281) compared to $(543,209) for the nine months ended September 30, 2019.
|
Consolidated results of Operation (after eliminations)
|
|
Nine months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Total Operating Revenues
|
|
$
|
2,554,962
|
|
|
$
|
8,582,943
|
|
Total Operating Expenses & Cost of Goods Sold*
|
|
$
|
(5,662,243
|
)
|
|
$
|
(9,126,152
|
)
|
* Operating expenses includes, corporate expenses, shipping & logistic, commodities purchase cost, fleet expenses, General and Administrative expenses, and Depreciation expense;
Summarized Financial Data – Subsidiaries
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.
Petrogress Int’l LLC. (PIL)
Petrogress Int’l LLC. (PIL), performs most of the trading of the oil products. PIL, is 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:
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Sales and other operating revenues
|
|
$
|
1,514,701
|
|
|
$
|
8,647,152
|
|
Cost and other expenses
|
|
|
(2,180,948
|
)
|
|
|
(7,621,775
|
)
|
Net income / (loss) attributable to PIL*
|
|
$
|
(666,247
|
)
|
|
$
|
1,025,377
|
|
________
* 100% Net income / (loss) attributable to Petrogress, Inc.
Petronav Carriers LLC. (PCL)
Petronav Carriers LLC., (PCL) is the company that serves as the manager and operator of our tanker fleet of four vessels wholly owned by its five subsidiaries. PCL operates and charter the tankers fleet to PIL and third-party charterers.
Summarized financial information is presented in the following table:
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Sales and other operating revenues
|
|
$
|
1,040,261
|
|
|
$
|
847,333
|
|
Cost and other expenses
|
|
|
(2,512,025
|
)
|
|
|
(2,180,448
|
)
|
Net income / (loss) attributable to PCL *
|
|
$
|
(1,471,764
|
)
|
|
$
|
(1,333,115
|
)
|
________
* 100% Net income / (loss) attributable to Petrogress, Inc.
Petrogress Hellas Branch (PGH)
Petrogress Hellas (PGH) is the branch of PIL in Greece and operates-monitoring and managed the entire day-to-day activities of the company’s subsidiaries. Through PGH, PIL has commenced the Gas-Fueling Stations in Greece.
Summarized financial information is presented in the following table:
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Sales and other operating revenues
|
|
$
|
112,500
|
|
|
$
|
72,000
|
|
Cost and other expenses
|
|
|
(155,038
|
)
|
|
|
(104,985
|
)
|
Net income / (loss) attributable to Petrogress Int’l LLC.*
|
|
$
|
(42,538
|
)
|
|
$
|
(32,985
|
)
|
_______
100% Net income / (loss) attributable to Petrogress Int’l LLC.
Petrogress, Inc. (PGI)
Petrogress, Inc. (PGI) is the parent holding company of the group and doesn’t make any revenues from operations while it suffers all the necessary operating and general and administrative expenses in order to comply with the regulatory requirements of SEC. The following table presents the results of equity interest PGI has into the subsidiaries:
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Sales and other operating revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
Corporate, Administrative and other expenses
|
|
|
(437,791
|
)
|
|
|
(670,676
|
)
|
Net income / (loss) attributable to Petrogress, Inc.*
|
|
$
|
(437,791
|
)
|
|
$
|
(670,676
|
)
|
_______
Net income / (loss) attributable from ownership interest of the subsidiaries.
Revenue Concentrations
The following table is a summary of customers who accounted for more than ten percent (10%) of the Company’s revenues for the nine months ended September 30, 2020 and 2019:
Customer
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
A
|
|
|
29
|
%
|
|
|
*
|
|
B
|
|
|
15
|
%
|
|
|
*
|
|
C
|
|
|
10
|
%
|
|
|
*
|
|
Summary of customers who accounted for more than ten percent (10%) of the Company’s accounts receivable for the periods ended September 30, 2020 and December 31, 2019 is showing on the below table:
Customer
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
A
|
|
|
32
|
%
|
|
|
55
|
%
|
B
|
|
|
28
|
%
|
|
|
*
|
|
C
|
|
|
13
|
%
|
|
|
*
|
|
Liquidity & Capital Resources
Our main sources of liquidity are cash and cash equivalents, accounts receivable and internally generated cash flow from operations. At September 30, 2020, we had a working capital of $2,209,901 consisting of $235,005 in cash and cash equivalents, $1,492,595 in accounts receivable, $310,145 in claims receivable, $1,424,436 in inventories, and $2,289,861 in prepaid expenses and other current assets.
For the nine months ended September 30, 2020, net cash provided by operating activities was $794,469 compared to $773,752 of net cash used in for the same period in 2019.
Assets included in the calculation of the Company’s working capital have decreased by $1,461,081 mainly from the decrease in accounts receivable which have decreased by $518,835. This decrease has been financed mainly by our net income and the increase of our liabilities included in working capital, namely the decrease in Convertible promissory notes and Derivative liabilities which have decreased by $59,148 and $809,877 respectively, during the nine months ended September 30, 2020.
The company’s future debt level is dependent primarily on results of operations, cash that may be generated from asset dispositions, the capital program, lending commitments to affiliates, and shareholder contributions. 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 the expenses we suffer in order to comply with the regulatory requirements of SEC. Specifically, Petrogress, Inc., the parent company, does not have revenues while it suffers all the necessary operating and general and administrative expenses to comply with the regulatory requirements of the SEC.
Cash and Cash Equivalents; The following table presents sources and uses of cash and cash equivalents:
|
|
Nine months Ended September 30,
|
|
Sources of cash and cash equivalents
|
|
2020
|
|
|
2019
|
|
Operating activities
|
|
$
|
794,469
|
|
|
$
|
(773,752
|
)
|
Borrowing
|
|
|
-
|
|
|
|
658,012
|
|
Others
|
|
|
(932,824
|
)
|
|
|
(109,935
|
)
|
Total sources of cash and cash equivalents
|
|
$
|
(138,355
|
)
|
|
$
|
(225,675
|
)
|
Management seeks to secure the necessary financing for the expansion of Company’s operations. The company needs to raise a reasonable finance in order to expand its operations, increase the oil sales and support its projects-operations.