10-Q 1 pfwi63016q.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2016

 

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

COMMISSION FILE NO. 000-30380

 

PETRONE WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   87-0652348
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

2200 N. Commerce Parkway, Weston, FL   33326
(Address of principal executive offices)   (Zip Code)

 

(855) 297-3876

(Registrant’s telephone number, including area code)

 

 

Former name, former address and former fiscal year, if changed since last report: Not applicable.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þYes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þYes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o Accelerated filer o
       

Non-accelerated filer

(Do not check if a smaller reporting company)

o Smaller reporting company þ

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

oYes þ No

 

As of September 29, 2016, the registrant had 22,899,897 shares of common stock, par value $.001 per share, issued and outstanding.

 

 

  

 

 

 1 

 

EXPLANATORY NOTE

 

 

This Quarterly Report on Form 10-Q of Petrone Worldwide, Inc. for the period ended June 30, 2016 reflects restated financials statements and other information as reported on the Quarterly Report of Petrone Worldwide, Inc. for the period ended June 30, 2015 originally filed on August 14, 2015 (the “Original Report”). In the Original Filing, we did not properly reflect certain transactions for revenues, costs of revenues and operating expenses in the proper period.

 

Please see Note 8 - Restatement contained in the Notes to Unaudited Consolidated Financial Statements appearing later in this Form 10-Q which further describes the effect of these restatements

 2 

 

 

PETRONE WORLDWIDE, INC.

FORM 10-Q

 

INDEX

 

  Page
Part I. Financial Information  
     
  Item 1. Financial Statements 4
     
  Consolidated Balance Sheets—June 30, 2016 and December 31, 2015(unaudited) 4
     
  Consolidated Statements of Operations–Three and Six Months Ended June 30, 2016 and 2015 (unaudited) 5
     
  Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015 (unaudited) 6
     
  Notes to Unaudited Consolidated Financial Statements
     
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
     
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
     
  Item 4. Controls and Procedures 22
     
Part II. Other Information  
     
  Item 1. Legal Proceedings 22
     
  Item 1A. Risk Factors 22
     
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
     
  Item 3. Defaults Upon Senior Securities 23
     
  Item 4. Mine Safety Disclosures 23
     
  Item 5. Other Information 23
     
  Item 6. Exhibits 23
     
Signatures 23

 

 

 

 

 

 

 

 

 

 

 

 

 

 3 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
       
   June 30,  December 31,
   2016  2015
       
ASSETS      
 CURRENT ASSETS:          
 Cash  $46,788   $208,064 
 Accounts receivable   16,977    —   
 Prepaid expenses and other current assets   29,897    131,046 
 Advances to supplier   109,134    11,262 
           
 Total Current Assets   202,796    350,372 
           
 TOTAL ASSETS  $202,796   $350,372 
           
 LIABILITIES AND STOCKHOLDERS' EQUITY          
           
 CURRENT LIABILITIES:          
 Convertible notes payable, net  $90,514   $129,187 
 Accounts payable   9,729    45,174 
 Accrued expenses   2,902    405 
 Due to related party   2,555    38,434 
 Derivative liability   4,950    73,236 
           
 Total Current Liabilities   110,650    286,436 
           
 Total Liabilities   110,650    286,436 
           
 Commitments (See Note 6)          
           
 STOCKHOLDERS' EQUITY:          
Preferred stock, $.001 par value, 10,000,000 shares authorized;          
 Series A preferred stock: $.001 par value; 1,000,000 shares authorized; 1,000,000 and 0 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively   1,000    —  
Common stock: $.001 par value, 100,000,000 shares authorized; 22,769,897 and 21,483,230 issued and outstanding at June 30, 2016 and December 31, 2015, respectively   22,770    21,483 
Additional paid-in capital   3,257,058    2,722,559 
Accumulated deficit   (3,188,682)   (2,680,106)
           
 Total Stockholders' Equity   92,146    63,936 
           
 Total Liabilities and Stockholders' Equity  $202,796   $350,372 
           
 See accompanying notes to unaudited consolidated financial statements.

 

 4 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
             
     For the Three Months Ended      For the Six Months Ended  
    June 30,     June 30,  
    2016    2015    2016    2015 
          (As Restated)           (As Restated)  
 REVENUES  $63,808   $574,596   $171,429   $1,349,090 
                     
 COST OF REVENUES   58,626    488,375    133,896    1,242,904 
                     
 GROSS PROFIT   5,182    86,221    37,533    106,186 
                     
 OPERATING EXPENSES:                    
 Compensation and related benefits   32,000    2,600    33,000    12,600 
 Consulting fees   64,574    28,526    144,340    36,248 
 Professional fees   33,388    21,524    98,804    29,709 
 Rent expense   13,059    13,504    35,216    48,623 
 General and administrative expenses   50,946    29,941    144,616    68,184 
                     
 Total Operating Expenses   193,967    96,095    455,976    195,364 
                     
 LOSS FROM OPERATIONS   (188,785)   (9,874)   (418,443)   (89,178)
                     
 OTHER EXPENSES:                    
    Interest expenses   (87,525)   (47)   (145,633)   (47)
    Gain on derivative liability   14,693    —      55,500    —   
                     
 Total Other Expense   (72,832)   (47)   (90,133)   (47)
                     
 NET LOSS  $(261,617)  $(9,921)  $(508,576)  $(89,225)
                     
 NET LOSS PER COMMON SHARE:                    
 Basic and diluted  $(0.01)  $(0.00)  $(0.02)  $(0.01)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
 Basic and diluted   22,733,853    15,643,535    22,485,739    15,459,938 
                     
 See accompanying notes to unaudited consolidated financial statements.

 

 5 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
       
    For the Six Months Ended
    June 30, 
    2016    2015 
         (As Restated) 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(508,576)  $(89,225)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization of debt discount to interest expense   92,971    —   
Stock-based compensation   117,149    36,248 
Gain on derivative liability   (55,500)   —   
Stock-based interest expense for debt modification   28,000    —   
Change in operating assets and liabilities:          
   Accounts receivable   (16,977)   (594)
Prepaid expenses and other current assets   —      8,262 
Advances to supplier   (97,872)   (9,764)
Accounts payable   (35,445)   (1,105)
Accrued expenses   2,497    (9,813)
Advances from customers   —      6,568 
           
NET CASH USED IN OPERATING ACTIVITIES   (473,753)   (59,423)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayment of related party advances   (35,879)   (983)
Repayment of convertible debt   (131,644)   —   
Proceeds from sale of common stock   480,000    5,000 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   312,477    4,017 
           
NET DECREASE IN CASH   (161,276)   (55,406)
           
CASH, beginning of period   208,064    77,827 
           
CASH, end of period  $46,788   $22,421 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for:          
Interest  $50,122   $—   
Income taxes  $—     $—   
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Reclassification of derivative liability to equity  $12,786   $—   
Unearned common stock issued for services  $—     $108,000 
Exchange of related party advances for accounts payable  $—     $800 
           
See accompanying notes to unaudited consolidated financial statements.

 6 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

 

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.

 

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.

 

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.

 

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 and six months ended June 30, 2016 and 2015 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 June 30, 2016 and 2015, 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, 2015 and footnotes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on September 9, 2016. The results of operations for the six months ended June 30, 2016 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, for the six months ended June 30, 2016, the Company had a net loss of $508,576 and net cash used in operations of $473,753. Additionally, the Company had an accumulated deficit, stockholders’ equity and working capital of $3,188,682, $92,146 and $92,146, respectively, at June 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 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. 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.

 7 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

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 six months ended June 30, 2016 and 2015 include 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

 

The Company adopted the guidance of Accounting Standards Codification (“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value 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.

 

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 June 30, 2016  At December 31, 2015
Description   Level 1    Level 2    Level 3    Level 1    Level 2    Level 3 
Derivative liability   —      —     $4,950    —      —     $73,236 

 

 

A roll forward of the level 3 valuation financial instruments is as follows:

 

 

     Derivative
Liability
  
Balance at December 31, 2015  $73,236 
   Reclassification of derivative liability to equity   (12,786)
   Change in fair value included in net loss   (55,500)
Balance at June 30, 2016  $4,950 
      

 

 

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.

 

 

 

 8 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Cash and cash equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.

 

Accounts receivable

 

The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense.

 

Advances to Supplier

 

Advances to supplier represent the advance payments for the purchase of product from supplier.

 

Impairment of long-lived assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

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 810-10-05-4 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.

 

Cost of sales

 

Cost of sales includes inventory costs, materials and supplies costs, and shipping and handling costs incurred.

 

Shipping and handling costs

 

For the six months ended June 30, 2016 and 2015, shipping and handling costs incurred for product shipped to customers are included in cost of sales and amounted to $27,750 and $126,018, respectively. Shipping and handling costs charged to customers are included in sales.

 

 

 

 

 9 

 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Advertising costs

 

All costs related to advertising of the Company’s products are expensed in the period incurred.

 

Income taxes

 

The Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

 

The Company follows the accounting guidance for uncertainty in income taxes using the provisions of Accounting Standards Codification (ASC) 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. As of June 30, 2016 and December 31, 2015, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. The Company recognizes interest and penalties related to uncertain income tax positions in other expense. The Company did not record such interest or penalties for the six months ended June 30, 2016 and 2015.

 

Stock-based compensation 

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if the Company has paid cash for such service.

 

Loss per share of common stock

 

ASC 260 “Earnings Per Share”, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Additionally, potentially dilutive common shares consist of common stock issuable upon conversion of convertible debt. These common stock equivalents may be dilutive in the future. 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 losses and consisted of the following:

 

   June 30,
2016
  June 30,
2015
     Convertible notes   449,523    30,612 
           

 

 

 

 

 10 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recent accounting pronouncements

 

In May 2014, the FASB issued an update ("ASU 2014-09") Revenue from Contracts with Customers.  ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires certain additional disclosures.  ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016.  The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.

 

In June 2014, the FASB issued an update (“ASU 2014-12”) to ASC Topic 718, Compensation – Stock Compensation.  ASU 2014-12 requires an entity to treat performance targets that can be met after the requisite service period of a share-based award has ended, as a performance condition that affects vesting.  ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.  The adoption of ASU 2014-12 did not have a material effect on the Company’s financial position, results of operations and cash flows.

 

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, that will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management will assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the issuance date. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date. The new standard defines substantial doubt and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. This standard is effective for public entities for annual periods ending after December 15, 2016. Earlier application of this standard is permitted. This standard is not expected to have a material effect on our financial position, results of operations and cash flows.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) (“ASU 2015-02”), to address financial reporting considerations for the evaluation as to the requirement to consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2015. This standard did not have a material effect on the Company’s financial position, results of operations and cash flows.

 

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), as part of the initiative to reduce complexity in accounting standards. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual periods beginning after December 15, 2015 and for interim periods within those fiscal years.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU simplifies the current guidance in ASC Topic 740, Income Taxes, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The Company does not expect the impact of ASU 2015-17 to be material to our consolidated financial statements. 

 

There are no other recently issued accounting standards that apply to us or that are expected to have a material impact on our results of operations, financial condition, or cash flows.

 

 

 

 

 

 

 

 11 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 3 – CONVERTIBLE NOTES

 

In 2013 and on July 1, 2014, the Company entered into two convertible promissory note agreements with individuals in the amount of $20,000 and $10,000, respectively. The notes were non-interest bearing, unsecured and were due on demand. The notes are 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 22, 2015, the Company entered into a debt purchase and assignment agreement with one of the debt holders whereby a convertible note in the principal amount of $10,000 became convertible at $.0025 per common share and the note was converted into 4,000,000 shares of the Company’s common stock. At June 30, 2016, one note remains due in the principal amount of $20,000.

 

On December 28, 2015, the Company entered into a secured convertible promissory note (the “Convertible Note”) with Firstfire Global Opportunities Fund LLC (the “Lender”), with a principal amount of $230,000, which amount is the $200,000 purchase price plus a 15% original issue discount equal to $30,000. Additionally, the lender deducted legal fees of $10,000 and the Company received net proceeds of $190,000. The unpaid principal and interest is secured by the Company’s common stock, bears interest computed at a rate of interest that is equal to 7.0% per annum, and is payable in monthly installments of $50,555 commencing April 28, 2016 through August 28, 2016. Any amount of principal or interest on this Convertible Note, which is not paid by the due dates, shall bear interest at the rate of 15% per annum from the due date until paid. During the six months ended June 30, 2016, the Company repaid Convertible Note principal of $131,644.

 

The Lender is entitled, at their option, at any time after the eighth month anniversary of this Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into the Company’s common stock. The conversion price shall equal $0.50 per share (the "Fixed Conversion Price") provided, however that from and after the occurrence of any event of default, as defined, the conversion price shall be the lower of: (i) the Fixed Conversion Price or (ii) 50% multiplied by the lowest sales price of the common stock in a public market during the ten consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion. In connection with the issuance of this Convertible Note, the Company determined that the terms of the Convertible Note include 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 option contained in the convertible instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives was determined using the Black- Scholes Option Pricing Model. On the initial measurement date, the fair values of the embedded conversion option derivative of $73,236 was recorded as a derivative liability and was allocated as a debt discount to the Convertible Note of $73,236. At December 28, 2015, the Company valued the embedded conversion option derivative liabilities resulting in no gain or loss from change in fair value of derivative liabilities. Additionally, in connection with this Convertible Note, in December 2015, the Company paid Lender debt issuance costs of $10,000 and issued 50,000 shares of its common stock. These common shares were valued at $0.225 per share based on recent sales of the Company’s stock and in December 2015, the Company recorded a debt discount of $10,725, which is the relative fair value of such shares.

 

At June 30, 2016, and December 31, 2015, the fair value of the derivative liabilities was estimated using the Black-scholes option-pricing model with the following assumptions:

 

   June 30,
2016
  December 31,
2015
Dividend rate   0    0 
Term (in years)   0.41  to 0.125 years    0.67 years 
Volatility   100.0%   100.0%
Risk-free interest rate   0.26% to 0.39%    0.66%

 

For the six months ended June 30, 2016 and 2015, amortization of debt discounts related to this convertible note amounted to $92,971 and $0, which has been included in interest expenses on the accompanying unaudited consolidated statements of operations, respectively. 

 

 

 

 12 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 3 – CONVERTIBLE NOTES (continued)

 

At June 30, 2016 and December 31, 2015, convertible promissory notes consisted of the following:

 

   June 30,
2016
  December 31,
2015
Principal amount  $118,356   $250,000 
Less: unamortized debt discount   (27,842)   (120,813)
Convertible notes payable, net  $90,514   $129,187 

 

NOTE 4 – 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 six months ended June 30, 2016 and 2015, due to related party activity consisted of the following:

 

   Six Months ended  
June 30,
2016
  Six Months ended  
June 30,
2015
Balance due to related party at beginning of period  $38,434   $8,051 
Working capital advances received   —      800 
Repayments made and conversions   (35,879)   (983)
Balance due to related party at end of period  $2,555   $7,868 

 

NOTE 5 - STOCKHOLDERS’ EQUITY

 

Preferred stock

 

The preferred stock may be issued in one or more series. The Company’s board of directors are authorized to issue 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, $.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) 50. 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 .

 

 

 13 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 5 - STOCKHOLDERS’ EQUITY (continued)

 

Common stock issued for services

 

On March 16, 2016, pursuant to a consulting agreement, the Company issued 16,667 shares of common stock to a consultant for investor relations services rendered. These shares were valued on the date of grant at $0.90 per share or $15,000 based on the fair value of services performed. In March 2016, in connection with the issuance of these shares, the Company recorded stock-based consulting expense of $15,000.

 

Additionally, for the six months ended June 30, 2016 and 2015, amortization of prepaid stock-based consulting fees amounted to $117,149 and $36,248, respectively.

 

Common shares issued in connection with debt addendum

 

On April 20, 2016 and June 6, 2016, the Company entered into agreements for the addendum of the Convertible Note (see Note 3) which waived all rights to enforce any event of default, which may have been triggered by the Company’s failure to file it reports with the SEC. In connection with these agreements, the Company issued 30,000 and 40,000 shares of common stock, respectively, for an aggregate of 70,000 shares of common stock. These shares were valued on the date of grant at $0.40 per share or $28,000 based on recent sales of the Company’s common stock.

 

Common stock issued for cash

 

On February 3, 2016, the Company sold 1,200,000 shares of its common stock at $0.40 per common share for cash of $200,000 and a subscription receivable of $280,000. The subscription receivable of $280,000 was collected in April 2016.

  

NOTE 6 – COMMITMENTS

 

International distribution agreement

 

 

On February 28, 2014, the Company entered into an International Distribution Agreement (the “International Distribution Agreement”) with its major supplier. Through June 30, 2016, the Company has complied with its minimum purchase commitments. Future minimum purchase amounts under the International Distribution Agreement at December 31, 2015 are as follows:

 

Years ending December 31,  Amount
 2016   $1,000,000 
 2017    1,500,000 
 2018    2,500,000 
 Total minimum purchase amounts   $5,000,000 

 

  

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 June 30, 2016 and December 31, 2015. The Company has not experienced any losses in such accounts through June 30, 2016.

 

Geographic concentrations of sales

 

For the six months ended June 30, 2016 and 2015, substantially all of the Company’s revenues was to customers located outside the United States. No other geographical area accounted for more than 10% of total sales during the six months ended June 30, 2016 and 2015.  

 

 14 

 

PETRONE WORLDWIDE, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016

 

NOTE 7 – CONCENTRATIONS (continued)

 

Customer concentrations

 

For the six months ended June 30, 2016, three customers accounted for approximately 46.2% of total sales (10.2%, 10.5% and 25.5%, respectively). For the six months ended June 30, 2015, five customers accounted for approximately 88.9% of total sales (22.9%, 14.3%, 23.0%, 13.8% and 14.9%, 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 six months ended June 30, 2016 and 2015, the Company purchased 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 – RESTATEMENT OF 2015 PERIODS

 

The Company’s unaudited consolidated financial statements have been restated for the three and six months ended June 30, 2015 to properly reflect certain transactions for revenues, costs of revenues and operating expenses in the proper period. The effect of correcting these errors in the Company’s unaudited consolidated financial statements for the three and six months ended June 30, 2015 are shown in the table as follows:

 

Consolidated Statement of operations  For the Six Months Ended
June 30, 2015 (Unaudited)
   As previously reported  Adjustments to Restate  As Restated
Revenues  $1,341,890   $7,200   $1,349,090 
Cost of revenues   1,185,340    57,564    1,242,904 
Gross profit   156,550    (50,364)   106,186 
Operating expenses   217,711    (22,347)   195,364 
Loss from operations   (61,161)   (28,017)   (89,178)
Other expenses   —      (47)   (47)
Net loss  $(61,161)  $(28,064)  $(89,225)
Net loss per common share  $(0.00)  $(0.00)  $(0.01)

 

Consolidated Statement of operations  For the Three Months Ended
June 30, 2015 (Unaudited)
   As previously reported  Adjustments to Restate  As Restated
Revenues  $557,348   $17,248   $574,596 
Cost of revenues   469,489    18,886    488,375 
Gross profit   87,859    (1,638)   86,221 
Operating expenses   105,600    (9,505)   96,095 
Loss from operations   (17,741)   7,867    (9,874)
Other expenses   —      (47)   (47)
Net loss  $(17,741)  $7,820   $(9,921)
Net loss per common share  $(0.00)  $(0.00)  $(0.00)

 

NOTE 9 - SUBSEQUENT EVENTS

 

On August 26, 2016, the Company entered into an agreement for the addendum of the Convertible Note (see Note 3) which waived all rights to enforce any event of default, which may have been triggered by the Company’s failure to file it reports with the SEC. In connection with this agreement, the Company issued 130,000 shares of common stock and paid a cash penalty of $5,000. These shares were valued on the date of grant at $0.40 per share or $52,000 based on recent sales of the Company’s common stock.

 

 15 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This quarterly report on Form 10-Q and other written and oral statements that we make from time to time contain such forward-looking statements that set out anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially are set forth in the “Risk Factors” section of our annual report on Form 10-K as filed with the SEC on September 9, 2016, as the same may be updated from time to time in documents that we file with the SEC.

 

We caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this quarterly report on Form 10-Q.

 

OVERVIEW

 

In 2015, we transitioned into an exclusive importer and distributor of commercial grade tableware products, decorative hotel room amenities, lavatory and bathroom fixtures and furniture, food and beverage service items, and trendy accessories for the Asian and the European marketplaces. Our exclusive brands include Front of the House and Room 360 by FOH.

Our founder, Victor Petrone, has spent over 20 years building a significant global network of buyers, comprised of hotels, resorts and restaurants, for premium, chic, environmentally conscious products and services. We have sales, marketing, and product development expertise primarily in the hospitality business in Europe and Asia. We currently sell and market products under our own proprietary name and we act as exclusive distributors primarily to companies to the hospitality trade. The brand portfolio consists of vendor-approved items for key foreign accounts, which include large hotel groups, such as Marriott Hotel Brands, The Four Seasons Hotel & Resorts, Hilton Worldwide, Hyatt Hotels & Resorts, Starwood Hotel & Resorts, and Fairmont Hotel & Resorts, and smaller hotel chains and upscale restaurants.

In the short term, management plans to raise funds through sales of our common stock for fulfillment (manufacturing, packaging and shipment), which will set the stage for future orders becoming self-funding. Then the next phase of our business plan will be to raise additional funds through common stock offerings to provide working capital to finance several acquisitions. We also intend to continue to strengthen our balance sheet by paying off debt through either exchange of equity for cancellation of debt obligations or the payment of debt obligations with cash.

When possible we have conserved our cash by paying employees, consultants, and independent contractors with our common stock.

 

RESULTS OF OPERATIONS

 

The following comparative analysis of results of operations are based primarily on the comparative financial statements, footnotes and related information for the periods identified below and should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report.  

 

 

 

 

 16 

 

 

Comparison of Results of Operations for the Three and Six Months Ended June 30, 2016 and 2015

 

Revenues.

 

For the three months ended June 30, 2016, total revenues amounted to $63,808 as compared to $574,596 for the three months ended June 30, 2015, a decrease of $510,788 or 88.9%. For the six months ended June 30, 2016, total revenues amounted to $171,429 as compared to $1,349,090 for the six months ended June 30, 2015, a decrease of $1,177,661 or 87.3%. We began selling products consisting of tableware products, decorative hotel room amenities, lavatory and bathroom fixtures and furniture, food and beverage service items, and trendy accessories in January 2015. For the three and six months ended June 30, 2016 and 2015, total revenues consisted of the following:

 

   Three Months ended June 30,  Six Months ended June 30,
   2016  2015  2016  2015
Revenues:                    
Products  $50,619   $567,763   $150,069   $1,248,416 
Shipping   13,189    6,833    21,360    100,674 
Total revenues  $63,808   $574,596   $171,429   $1,349,090 
                     

 

During the six months ended June 30, 2015, we generated significant revenues from five customers that accounted for approximately 88.9% of total revenues (22.9%, 14.3%, 23.0%, 13.8% and 14.9%, respectively). During the six months ended June 30, 2016, three customers accounted for approximately 46.2% of total sales (10.2%, 10.5% and 25.5%, respectively). We did not have such large orders during the six months ended June 30, 2016.

 

Cost of revenues.

 

Cost of revenues includes cost of product and shipping and handling costs. For the three months ended June 30, 2016, cost of revenues amounted to $58,626 as compared to $488,375 for the three months ended June 30, 2015, a decrease of $429,749 or 88.0%. For the six months ended June 30, 2016, cost of revenues amounted to $133,896 as compared to $1,242,904 for the six months ended June 30, 2015, a decrease of $1,109,008 or 89.2%. For the three and six months ended June 30, 2016 and 2015, total cost of revenues consisted of the following:

 

   Three Months ended June 30,  Six Months ended June 30,
   2016  2015  2016  2015
Cost of revenues:            
Products  $45,460   $482,188   $106,146   $1,116,886 
Shipping   13,166    6,187    27,750    126,018 
Total cost of revenues  $58,626   $488,375   $133,896   $1,242,904 
                     

Gross profit and gross margin.

 

For the three months ended June 30, 2016, gross profit amounted to $5,182 or 8.1% as compared to $86,221 or 15.0% for the three months ended June 30, 2015. For the six months ended June 30, 2016, gross profit amounted to $37,533 or 21.9% as compared to $106,186 or 7.9% for the six months ended June 30, 2015. For the six months ended June 30, 2016, the increase in gross margin percentage was attributable to an increase in operational and pricing efficiencies. Gross margin percentages can fluctuate from period to periods depending on the mix of product sold. We expect gross profits to increase in future periods as revenues increase and as we develop additional operational and pricing efficiencies.

 

Operating expenses.

 

For the three months ended June 30, 2016, operating expenses amounted to $193,967 as compared to $96,095 for the three months ended June 30, 2015, an increase of $97,872 or 101.8%. For the six months ended June 30, 2016, operating expenses amounted to $455,976 as compared to $195,364 for the six months ended June 30, 2015, an increase of $260,612 or 133.4%.

 

 

 

 

 

 17 

 

 

For the three and six months ended June 30, 2016 and 2015, operating expenses consisted of the following:  

 

   Three Months ended June 30,  Six Months ended June 30,
   2016  2015  2016  2015
Compensation and related benefits  $32,000   $2,600   $33,000   $12,600 
Consulting fees   64,574    28,526    144,340    36,248 
Professional fees   33,388    21,524    98,804    29,709 
Rent expense   13,059    13,504    35,216    48,623 
General and administrative expenses   50,946    29,941    144,616    68,184 
Total operating expenses  $193,967   $96,095   $455,976   $195,364 
                     

 

 

  · For the three and six months ended June 30, 2016, compensation and related benefit expensed increased by $29,400 or 1,130.8%, and $20,400 or 161.9% as compared to the three and six months ended June 30, 2015. The increase was attributable to an increase in compensation paid to our chief executive officer. We expect compensation and related benefit expense to increase in the future as we increase our operations.
     
  · For the three and six months ended June 30, 2016, consulting fees increased by $36,048 or 126.4%, and $108,092 or 298.2%, as compared to the three and six months ended June 30, 2015, respectively. Consulting fees consists of stock-based consulting fees for business development services. The increases were attributable to the amortization of prepaid consulting fees during the 2016 period for stock issued in 2015.  
       
  · For the three and six months ended June 30, 2016, professional fees increased by $11,864 or 55.1%, and $69,095 or 232.6% as compared to the three and six months ended June 30, 2015, respectively. These increases were attributable to an increase in accounting fees of $12,025 and $55,025 related to the re-audit of our 2015 and 2014 financial statements and to the hiring of additional accounting assistance, an increase in legal fees of $125 and $11,790, and an (decrease) increase in other professional fees $(286) and $2,280, respectively.    
       
  · For the three and six months ended June 30, 2016, rent expense fees decreased by $445 or 3.3%, and $13,407 or 27.6%, as compared to the three and six months ended June 30, 2015, respectively. These decreases was attributable to a decrease in rent incurred for warehouse expenses of $0 and $25,800, offset by an (decrease) increase in rent expense for office space located in the United Kingdom and United States of $(445) and $12,393, respectively.  
       
  · For the three and six months ended June 30, 2016, general and administrative expenses increased by $21,005 or 70.1%, and $76,432 or 112.1% as compared to the three and six months ended June 30, 2015, respectively. These increases were primarily attributable to an increase in computer and internet expense of $3,574 and $46,012 incurred for the upgrade of the our website and logistics capabilities, an increase in travel expenses of $23,956 and $28,260, and a (decrease) increase in other general and administrative expenses of $(6,525) and $2,160, respectively.  

 

 

Loss from operations.

 

Because of the factors described above, for the three months ended June 30, 2016, loss from operations amounted to $188,785 as compared to a loss from operations of $9,874 for the three months ended June 30, 2015, an increase of $178,911 or 1,811.9% and for the six months ended June 30, 2016, loss from operations amounted to $418,443 as compared to a loss from operations of $89,178 for the six months ended June 30, 2015, an increase of $329,265 or 369.2%.

 

Other expenses.

 

Other expenses includes interest expense and a gain on derivative liability. For the three months ended June 30, 2016, total other expense amounted to $72,832 as compared to $47 for the three months ended June 30, 2015, an increase of $72,785. For the six months ended June 30, 2016, total other expense amounted to $90,133 as compared to $47 for the six months ended June 30, 2015, an increase of $90,086. For the three and six months ended June 30, 2016, we incurred interest expense of $87,525 and $145,633, respectively, which includes $41,040 and $52,662, respectively, related to interest bearing debt, and amortization of debt issuance costs of $46,485 and $92,971, respectively. Additionally, the three and six months ended June 30, 2016, we recorded a gain on the change of fair value of derivative liability of $14,693 and $55,500, respectively.   

 

 

 18 

 

 

Net loss.

 

As a result of the foregoing, for the three months ended June 30, 2016, net loss amounted to $261,617 or $(0.01) per common share as compared to a net loss of $9,921 or $(0.00) per common share for the three months ended June 30, 2015, an increase of $251,696, and for the six months ended June 30, 2016, net loss amounted to $508,576 or $(0.02) per common share as compared to a net loss of $89,225 or $(0.01) per common share for the six months ended June 30, 2015, an increase of $419,351.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had working capital of $92,146 and $46,788 of cash as of June 30, 2016 and working capital of $63,936 and $208,064 of cash as of December 31, 2015.

 

The following table sets forth a summary of changes in our working capital from December 31, 2015 to June 30, 2016: 

 

         December 31, 2015
to June 30, 2016
   June 30, 2016  December 31, 2015  Change  Percentage
Change
Working capital:                    
Total current assets  $202,796   $350,372   $(147,576)   (42.1)%
Total current liabilities   110,650    286,436    175,786    61.4%
Working capital:  $92,146   $63,936   $28,210    44.1%

 

The increase in working capital was primarily attributable to:

 

·an increase in accounts receivable of $16,977,
·an increase in advances to supplier of $97,872,
·an increase in accrued expenses of $2,497.

 

Offset by:

·a decrease in cash of $161,276 as discussed below,
·a decrease in prepaid expenses of $117,149 related to the amortization of prepaid consulting fees, and,
·a decrease in convertible notes of $38,673,
·a decrease in accounts payable of $35,445,
·a decrease in due to related party of $35,879, and,
·a decrease in derivative liability of $68,286.

 

Net cash flow used in operating activities was $473,753 for the six months ended June 30, 2016 as compared to net cash used in operating activities of $59,423 for the six months ended June 30, 2015, an increase of $414,330.

 

 

  · Net cash flow used in operating activities for the six months ended June 30, 2016 primarily reflected a net loss of $508,576 and the add-back of non-cash items consisting of amortization of debt discount to interest expense of $92,971, stock-based compensation expense of $117,149, stock-based interest expense for debt addendum of $28,000, and a gain on derivative liability of $55,500, and changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of $16,977, an increase in advances to supplier of $97,872, and a decrease in accounts payable of $35,445.
     
  · Net cash flow used in operating activities for the six months ended June 30, 2015 primarily reflected a net loss of $89,225 and the add-back of non-cash items consisting of stock-based compensation expense of $36,248, and net changes in operating assets and liabilities of $6,446.

 

 

 

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Net cash provided by financing activities was $312,477 for the six months ended June 30, 2016 as compared to net cash provided by financing activities $4,017 for the six months ended June 30, 2015. During the six months ended June 30, 2016, we received net proceeds from the sale of common stock of $480,000 and we repaid related party advances of $35,879 and repaid convertible debt of $131,644. During the six months ended June 30, 2015, we received net proceeds from the sale of common stock of $5,000 and we paid related party advances of $983.

 

Future Liquidity and Capital Needs.

 

Our principal future uses of cash are for working capital requirements, including marketing and travel expenses, legal and other professional fees incurred in connection with our SEC filing requirements, and reduction of accrued liabilities and debt. These uses will depend on numerous factors including our revenues, and our ability to control costs. We have historically financed our working capital needs primarily through internally generated funds, from the sale of common stock and from debt financings. We collect cash from our customers based on our sales to them and their respective payment terms. We expect to require additional funds through public or private debt or equity financings to be able to increase marketing for our products and to fully execute our business plan. If we are unable to raise the capital we need, we may need to reduce the scope of our business in order to continue our operations. 

 

Recent Financings

 

On December 28, 2015, we entered into a secured convertible promissory note (the “Convertible Note”) with Firstfire Global Opportunities Fund LLC (the “Lender”), with a principal amount of $230,000, which amount is the $200,000 purchase price plus a 15% original issue discount equal to $30,000. Additionally, the lender deducted legal fees of $10,000 and the Company received net proceeds of $190,000. The unpaid principal and interest is secured by our common stock, bears interest computed at a rate of interest, which is equal to 7.0% per annum, and is payable in monthly installments of $50,555 commencing April 28, 2016 through August 28, 2016. Any amount of principal or interest on this Convertible Note, which is not paid by the due dates, shall bear interest at the rate of 15% per annum from the due date until paid. During the six months ended June 30, 2016, we repaid Convertible Note principal of $131,644.

 

The Lender is entitled, at their option, at any time after the eighth monthly anniversary of this Convertible Note, to convert all or any lesser portion of the outstanding principal amount and accrued but unpaid interest into our common stock. The conversion price shall equal $0.50 per share (the "Fixed Conversion Price") provided, however that from and after the occurrence of any event of default, as defined, the conversion price shall be the lower of: (i) the Fixed Conversion Price or (ii) 50% multiplied by the lowest sales price of the common stock in a public market during the ten consecutive Trading Day period immediately preceding the Trading Day that the Company receives a notice of conversion. In connection with the issuance of this Convertible Note, we determined that the terms of the Convertible Note include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by us 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 option contained in the convertible instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. Additionally, in connection with this Convertible Note, we paid Lender debt issuance costs of $10,000 and issued 50,000 shares of its common stock. These common shares were valued at $0.225 per share based on recent sales of our stock and we recorded a debt discount of $10,725, which is the relative fair value of such shares.

 

On February 3, 2016, the Company sold 1,200,000 shares of its common stock at $0.40 per common share for cash of $200,000 and a subscription receivable of $280,000. The subscription receivable of $280,000 was collected in April 2016.

 

CRITICAL ACCOUNTING POLICIES

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the consolidated financial statements. 

 

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Derivative liabilities

 

We have certain financial instruments that are embedded derivatives associated with capital raises. We evaluate 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 810-10-05-4 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 us, 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, we recognize 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. Our standard terms are ex works, with title transferring to our customer at our suppliers loading dock or upon embarkation with risk of loss being assumed by the customer at the shipping point. We have 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 net revenue.

 

Stock-based compensation  

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Common stock awards issued to consultants represent common stock granted to non-employees in exchange for services at fair value. The measurement dates for such awards are set at the dates that the contracts are entered into, as the awards are non-forfeitable and vest immediately. The measurement date fair value is then recognized over the service period as if we had paid cash for such service. 

 

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

The following tables summarize our contractual obligations as of June 30, 2016, and the effect these obligations are expected to have on our liquidity and cash flows in future periods. 

 

    Payments Due by Period  
Contractual obligations:   Total     Less than 1
year
    1-3 years     3-5 years     5 + years  
Convertible notes payable   118,356     118,356     -     -     -  
Operating lease     10,945       10,945       -       -       -  
Total   $ 129,301     $ 129,301     $ -     $ -     $ -  

 

 

 

 

 

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Off-Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer/Principal Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2016. Based on such evaluation, we have concluded that, as of such date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer/Principal Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

As of the date of this quarterly report, management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us.  

 

Item 1A. Risk Factors

 

Not required of smaller reporting companies

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On April 20, 2016 and June 6, 2016, we entered into agreements for the addendum of the Convertible Note with Firstfire Global Opportunities Fund LLC (see Note 3) which waived all rights to enforce any event of default, which may have been triggered by our failure to file it reports with the SEC. In connection with these agreements, we issued 30,000 and 40,000 shares of common stock, respectively, for an aggregate of 70,000 shares of common stock. These shares were valued on the date of grant at $0.40 per share or $28,000 based on recent sales of our common stock.

 

These shares were issued in a private transaction to one consultant in reliance on Rule 506 of Regulation D promulgated under the Securities Act.

 

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Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.   Description
31.1*   Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
     
31.2*   Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
     
32.1*   Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema
101.CAL*   XBRL Taxonomy Extension Calculation
101.DEF*   XBRL Taxonomy Extension Definition
101.LAB*   XBRL Taxonomy Extension Labels
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith.

  

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Petrone Worldwide, Inc.

(Registrant)

   
Date: September 30, 2016 /s/ Victor Petrone
  Victor Petrone
  Chief Executive Officer and President
  (principal executive officer)
   
Date: September 30, 2016 /s/ Victor Petrone
 

Victor Petrone

Chief Financial Officer

(principal financial officer and principal accounting officer)

 

 

 

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