PART I.
ITEM 1. BUSINESS
Introduction
Pangaea Logistics Solutions Ltd. and its subsidiaries (collectively, “Pangaea” or the “Company”) is a provider of seaborne drybulk transportation services. Pangaea utilizes its logistics expertise to service a broad base of industrial customers who require the transportation of a wide variety of drybulk cargoes, including grains, coal, iron ore, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone. The Company addresses the transportation needs of its customers by undertaking a comprehensive set of services and activities, including cargo loading, cargo discharge, vessel chartering, voyage planning, and technical vessel management. In 2016, the Company participated in the development and expansion of a major port on the United States' east coast and has delivered approximately 1.1 million tons of construction material to the port since entering the contract.
Business
The Company utilizes its logistics expertise to service a broad base of industrial customers who require the transportation of a wide variety of drybulk cargoes, including grains, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone. The Company derives substantially all of its revenue from contracts of affreightment, also known as COAs, voyage charters, and time charters. In particular, the Company has historically focused on fixing cargo for transportation on backhaul routes. Backhaul routes or ballast legs, position vessels for cargo discharge in loading areas. Backhaul routes allow us to reduce ballast days and instead earn revenues at times and on routes that are typically traveled without paying cargo.
COAs are contracts to transport multiple shipments of cargo during the term of the contract between specified load and discharge ports, at a fixed or variable price per metric ton of cargo. Voyage revenues represent revenues earned by the Company, principally from providing transportation services under voyage charters. A voyage charter involves the carriage of a specific amount and type of cargo on a load port to discharge port basis, subject to various cargo handling terms. Charter revenues relate to a time charter arrangement under which the Company is paid to provide transportation services on a per day basis for a specified period of time. A majority of the Company’s revenue is from COAs and voyage charters, as our focus is on providing transportation services for our customers. The Company’s COAs typically extend for a period of one to five years, although some extend for longer periods. A time charter may vary from a single trip to longer-term charters, whenever we determine such use to be in our commercial interest. The length of a voyage depends on the number of load and discharge ports, the time spent in such ports and the distance between the ports. Revenues from time charters are earned and recognized on a straight-line basis over the term of the charter, as the vessel operates under the charter. Revenue is not earned when vessels are offhire.
The Company uses a mix of owned and chartered-in motor vessels ("m/v") to transport approximately 20 million tons of cargo to more than 200 ports around the world, averaging approximately 40 vessels in service daily during
2016
. The majority of our fleet is chartered-in on short-term charters of less than 9 months. The Company believes that these shorter-term charters afford us more flexibility to match our variable costs to our customers’ service requirements, allowing us to respond to changes in market demand and limiting our exposure to changes in prevailing charter rates. In addition to the Company’s chartered-in fleet, we currently have ownership interests in 16 dry bulk carriers and have two vessels chartered in on five-year bareboat charters. These vessels are and will be used to serve the Company’s customers’ cargo transportation needs. The Company believes that a combination of owned and chartered-in vessels helps it to more efficiently match its customer demand than it could with an entirely owned fleet or an entirely chartered-in fleet.
The Company’s Ice-Class 1A vessels are technically managed by a third-party manager with extensive expertise managing these vessel types and with ice pilotage. The technical management of the remainder of the Company’s owned fleet and the bareboat charter ships is performed in-house. The technical management for the Company’s chartered-in vessels is performed by each respective ship owner.
Active risk management is an important part of our business model. The Company believes its active risk management allows it to reduce the sensitivity of its revenues to market fluctuations and helps it to secure its long-term profitability and lower volatility of earnings. We manage our market risk by chartering in vessels for periods of less than 9 months on average and through a portfolio approach based upon owned vessels, chartered-in vessels, COAs, voyage charters, and time charters. The Company tries to identify routes and ports for efficient bunkering to minimize its fuel expense. The Company also seeks to hedge a portion of its exposure to changes in the price of marine fuels, or bunkers, through fuel swaps; and to fluctuating future freight rates through forward freight agreements. We have also entered into interest rate agreements to fix a portion of our interest rate exposure.
Business Strategy
The Company’s principal business objectives are to profitably grow its business and increase shareholder value. The Company expects to achieve these objectives through the following strategies:
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Focus on increasing strategic COAs.
The Company intends to increase its COA business, in particular, COAs for cargo discharge in traditional loading areas, by leveraging its relationships with existing customers and attracting new customers. The Company believes that its dedication to solving its customer’s transportation problems, and its reputation and experience in carrying a wide range of cargoes and transiting less common routes and ports, increases its likelihood of securing strategic COAs.
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Expand capacity and flexibility by increasing its owned fleet.
The Company is continually looking to acquire additional high-quality vessels suited for its business strategy, the needs of its customers and growth opportunities the Company identifies. The Company believes that its experience as a reliable and serious counterparty in the purchase and sale market for second-hand vessels positions it as a candidate for acquisition of high quality vessels. The Company currently controls (owns or has an ownership interest in) a fleet of 16 bulk carriers. This current fleet includes four Ice-Class 1A Panamax newbuildings and two Ice-Class 1C Ultramax newbuildings which were delivered between September 2014 and January 2017. The Company also controls two additional Ice-Class 1A Panamax bulk carriers, two Panamax bulk carriers, four Supramax bulk carriers, two Handymax Ice-Class 1A bulk carriers and two Supramax bulk carriers through bareboat charters.
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Increase backhaul focus and fleet efficiency.
The Company continues to focus on backhaul cargoes, including backhaul cargoes associated with COAs, to reduce ballast days and increase expected earnings for well-positioned vessels. In addition, the Company intends to continue to charter in vessels for periods of less than nine months, on average, to permit it to match its variable costs to demand. The Company believes that increased vessel utilization and positioning efficiency will enhance its profitability.
Competitive Strengths
The Company believes that it possesses a number of competitive strengths in its industry, including:
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Expertise in niche markets and routes.
The Company has developed expertise and a major presence in selected niche markets and less commoditized routes, especially the Baltic Sea in winter, the Northern Sea Route between Europe and Asia in summer, and the trade route between Jamaica and the United States, as well as selected ports, particularly in Newfoundland and Baffin Island. The Company believes that there is less competition to carry “minor,” as compared to traditional “major,” bulk cargoes, and, similarly, that there is less competition on less commoditized routes. The Company believes that its experience in carrying a wide range of cargoes and transiting less common routes and ports increases its likelihood of securing higher rates and margins than those available for more commoditized cargoes and routes. The Company believes it operates assets well suited to certain of these routes, including its Japanese built Ice-Class 1A Panamax and Ice-Class 1C Utramax vessels and its Korean built Ice-Class 1A Handymax vessels. The majority of its fleet is chartered in and the Company selects these vessels to match the cargo and port characteristics of their nominated voyages. The Company has experience operating in all regularly operating dry bulk loading and discharge ports globally.
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Enhanced vessel utilization and profitability through strategic backhaul and triangulation methods.
The Company enhances vessel utilization and profitability through selecting COAs and other contracts to carry cargo on what would normally be backhaul or ballast legs. In contrast to the typical practice of incurring charter hire and bunker costs to position an empty vessel in a port or area where cargo is normally loaded, the Company instead actively works with its customers to secure cargoes for discharge in loading areas. This practice allows the Company to position vessels for loading at lower costs than it would bear if it positioned such vessels by traveling unladen or if the Company chartered in vessels in a loading area. The Company believes that this focus on backhaul cargoes permits them to benefit from ballast bonuses that are paid to position vessels for fronthaul cargoes or, alternatively, to earn a premium for delivering ships that are in position for fronthaul cargoes.
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Strong relationships with major industrial customers.
The Company has developed strong commercial relationships with a number of major industrial customers. These customer relationships are based upon the Company’s reputation and specific history of service to these customers. The Company believes that these relationships help it generate recurring business with such customers which, in some cases, are formalized through contracts for repeat business (COAs). The Company also believes that these relationships can help create new opportunities. Although many of these relationships have extended over a period of years, there is no assurance that such relationships or business will continue in the future.
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Repeat customers, measured as having shipping days in three or more years of the trailing four years, represented nearly 47% of its total shipping days for the trailing four year period ended
December 31, 2016
and 59% of its total shipping days for the trailing four year period ended
December 31, 2015
. In addition, the Company believes that its familiarity with local regulations and market conditions at its routinely serviced ports, particularly in Newfoundland and Jamaica, provides it with a strong competitive advantage and allows it to attract new customers and secure recurring business.
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Strong Alignment and Transparency.
The Company observes that many publicly traded shipping companies rely on service providers affiliated with senior management or dominant shareholders for fundamental activities. Beyond the operational benefits to its customers of integrated commercial and technical management, the Company believes that its shareholders are benefited by its strategy of performing many of those activities in-house. Related to these efforts to maximize alignment of interest, the Company believes that the associated transparency of ownership and authority will be attractive to current and prospective shareholders. Consistent with the foregoing, the Company’s only related party transactions with senior management are principal and interest obligations for cash loaned to the Company by management, on terms approved by the independent members of the Board of Directors.
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Experienced management team.
The day-to-day operations of a transportation logistics services company requires close coordination among customers, land-based transportation providers and port authorities around the world. Its efficient operation depends on the experience and expertise of management at all levels, from vessel acquisition and financing strategy to oversight of vessel technical operations and cargo loading and discharge. The Company has a management team of senior executive officers and key employees with extensive experience and relationships in the commercial, technical, and financial areas of the drybulk shipping industry.
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Risk-management discipline.
The Company believes its risk management strategy allows it to reduce the sensitivity of its earnings to market changes and lower the risk of losses. The Company manages its risks primarily through short-term charter-in agreements of less than nine months, on average, through the use of forward freight agreements ("FFAs") and fuel hedges, and through modest leverage. The Company believes that shorter-term charters permit it to adjust its variable costs to match demand more rapidly than if it chartered in those vessels for longer periods. The Company may choose to manage the risks of higher rates for certain future voyages by purchasing and selling FFAs to limit the impact of changes in chartering rates. Similarly, the Company may choose to manage the risks of increasing fuel costs through bunker hedging transactions in order to limit the impact of changes in fuel prices on voyage results. Finally, the Company believes that its expected income related to COAs is sufficient to satisfy obligations related to its owned fleet.
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Management
The Company’s management team consists of senior executive officers and key employees with decades of experience in the commercial, technical, management and financial areas of the logistics and shipping industries. The Company’s co-founder and Chief Executive Officer, Edward Coll, has over 37 years of experience in the drybulk shipping industry. Other members of its management team and key employees, Anthony Laura, Mark Filanowski, Claus Boggild, Mads Boye Petersen, Peter Koken, Robert Seward, Fotis Doussopoulos, and Gianni Del Signore, also have extensive experience in the shipping industry. The Company believes its management team is well respected in the drybulk sector of the shipping industry and, over the years, has developed strong commercial relationships with industrial customers and lenders. The Company believes that the experience, reputation and background of its management team will continue to be key factors in its success.
The Company provides logistics transportation services and commercially manages its fleet primarily from offices in Newport, Rhode Island, Copenhagen, Denmark and Singapore. Logistics services and commercial management include identifying cargo for transportation, voyage planning, managing relationships, identifying vessels to charter in, and operating such vessels.
The Company’s Ice-Class 1A panamax vessels are technically managed by a third-party manager with extensive expertise managing these vessel types and with ice pilotage. The technical management of the remainder of the Company’s owned and bareboat chartered fleet is performed in-house. The Company’s technical management personnel have experience in the complexities of oceangoing vessel operations, including the supervision of maintenance, repairs, improvements, drydocking and crewing. The technical management for the Company’s chartered-in vessels is performed by each respective ship owner.
Operations and Assets
The Company is a service business and its customers use its services because they believe the Company adds and creates value for them. To add value, the Company works with its customers to provide a range of logistics services beyond the traditional loading, carriage and discharge of cargoes. For example, the Company works with certain customers to review their contractual delivery terms and conditions, permitting those customers to reduce costs and risks while accelerating payments. As another
example, one of its customers is heavily dependent upon a port that was insufficiently supported by port pilots for the approach to port. To permit a large expansion of its services for this client, the Company formed a separate pilots association to increase the number of available pilots and improve access to the port. As a result of efforts such as these, in some cases the Company is the de facto transportation department for certain clients.
The Company’s core offering is the safe, reliable, and timely loading, carriage, and discharge of cargoes for customers. This offering requires identifying customers, agreeing on the terms of service, selecting a vessel to undertake the voyage, working with port personnel to load and discharge cargo, and documenting the transfers of title upon loading or discharge of the cargo. As a result, the Company spends significant time and resources to identify and retain customers and source potential cargoes in its areas of operation. To further expand its customer base and potential cargoes, the Company has developed expertise in servicing ports and routes subject to severe ice conditions, including the Baltic Sea and the Northern Sea Route. The Company’s subsidiary, Nordic Bulk Carriers A/S (“NBC”), is an adviser to the European Commission on Arctic maritime issues.
To support its services, the Company operates a fleet of 16 owned or partially owned vessels. As of
March 23, 2017
, these vessels are described in the table below:
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Vessel Name
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Type
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DWT
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Year Built
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Yard
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Type of
Employment
Charter
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m/v Bulk Endurance
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Ultramax (Ice Class 1C)
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59,450
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2017
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Oshima Shipbuilding
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PBC(2)
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m/v Bulk Destiny
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Ultramax (Ice Class 1C)
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59,450
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2017
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Oshima Shipbuilding
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PBC(2)
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m/v Nordic Oasis
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Panamax (Ice Class 1A)
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76,180
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2016
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Oshima Shipbuilding
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NBC(1)
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m/v Nordic Olympic
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Panamax (Ice Class 1A)
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76,180
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2015
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Oshima Shipbuilding
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NBC(1)
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m/v Nordic Odin
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Panamax (Ice Class 1A)
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76,180
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2015
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Oshima Shipbuilding
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NBC(1)
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m/v Nordic Oshima
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Panamax (Ice Class 1A)
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76,180
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2014
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Oshima Shipbuilding
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NBC(1)
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m/v Nordic Orion
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Panamax (Ice Class 1A)
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75,603
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2011
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Oshima Shipbuilding
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NBC(1)
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m/v Nordic Odyssey
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Panamax (Ice Class 1A)
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75,603
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2010
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Oshima Shipbuilding
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NBC(1)
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m/v Bulk Trident
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Supramax
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52,514
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2006
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Tsuneishi Heavy Industries (Cebu)
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PBC(2)
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m/v Bulk Newport
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Supramax
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52,587
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2003
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Shin Kurushima Toyohashi
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PBC(2)
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m/v Bulk Beothuk
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Supramax
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50,992
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2002
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Oshima Shipbuilding
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PBC(2)
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m/v Bulk Juliana
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Supramax
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52,510
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2001
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Shin Kurushima Toyohashi
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PBC(2)
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m/v Bulk Power
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Supramax
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56,940
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2010
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COSCO (Zhoushan) Shipyard Co., Ltd.
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PBC(2)
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m/v Bulk Progress
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Supramax
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56,943
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2010
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COSCO (Zhoushan) Shipyard Co., Ltd.
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PBC(2)
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m/v Bulk Pangaea
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Panamax
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70,165
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1996
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Sumitomo Shipbuilding
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PBC(2)
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m/v Bulk Patriot
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Panamax
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73,700
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1999
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Sumitomo Shipbuilding
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PBC(2)
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m/v Nordic Bothnia
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Handymax (Ice Class 1A)
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43,706
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1995
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Daewoo
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NBC(1)
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m/v Nordic Barents
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Handymax (Ice Class 1A)
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43,702
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1995
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Daewoo
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NBC(1)
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(1)
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This vessel is time-chartered to NBC, a wholly-owned subsidiary of Nordic Bulk Holding ApS (“NBH”).
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(2)
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This vessel is operated by the Company's wholly-owned subsidiary, Phoenix Bulk Carriers (BVI) Ltd. (“PBC”).
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The Company owns its vessels through separate wholly-owned subsidiaries and through joint venture entities with other owners, which the Company consolidates as variable interest entities in its consolidated financial statements.
The Company owns one-third of Nordic Bulk Holding Company Ltd., (“NBHC”), a corporation that was duly organized under the laws of Bermuda in October 2012. Bulk Orion Ltd. (“Bulk Orion”), Bulk Odyssey Ltd. (“Bulk Odyssey”), Bulk Nordic Oshima Ltd. (“Bulk Oshima”), Bulk Nordic Olympic Ltd. (“Bulk Olympic”), Bulk Nordic Odin Ltd. (“Bulk Odin”) and Bulk Nordic Oasis Ltd. (“Bulk Oasis”) are companies that were organized under the laws of Bermuda for the purpose of owning Ice Class 1A Panamax vessels and are all owned by NBHC. The m/v Nordic Orion (“Orion”), the m/v Nordic Odyssey (“Odyssey”), the m/v Nordic Oshima (“Oshima”), the m/v Nordic Olympic (“Olympic”), the m/v Nordic Odin (“Odin”) and the m/v Nordic Oasis (“Oasis”) are owned by these entities. All of these vessels are chartered to NBC at fixed rates and also have a profit share arrangement.
In 2016, the Company owned 50% of Nordic Bulk Ventures Holding Company Ltd., (“BVH”), a corporation that was duly organized under the laws of Bermuda. BVH was established in August 2013 for the purpose of owning Bulk Nordic Five Ltd. (“Five”) and Bulk Nordic Six Ltd. (“Six”). Five and Six are corporations that were duly organized under the laws of Bermuda in November 2013 for the purpose of owning ultramax newbuildings delivered in January 2017. The m/v Bulk Endurance ("Endurance") and the m/v Bulk Destiny (“Destiny”) are owned by these entities and are chartered to PBC at fixed rates. In January 2017, the Company purchased its joint venture partner's 50% interest in BVH, giving the Company full control of both vessels.
In addition to its owned fleet, the Company operates chartered-in Panamax, Supramax, Handymax and Handysize drybulk carriers. On average, the Company has owned or employed a fleet of approximately 35 – 50 vessels at any one time. In 2016, the Company owned interests in 14 vessels and chartered in an additional 197 for one or more voyages. In 2015, the Company owned interests in an average of 14 vessels and chartered in an additional 196 for one or more voyages. The Company generally charters in third-party vessels for periods of less than nine months and, in most cases, less than six months. Chartered-in contracts are negotiated through brokers, who are paid commission on a percentage basis. The Company believes that shorter-term charters afford it flexibility to match its variable costs to its customers’ service requirements. The Company also believes that this combination of owned and chartered-in vessels helps it to more efficiently match its customer demand than the Company could with only owned vessels or an entirely chartered-in fleet. The Company does not charter-in any vessels under speculative arrangements.
Corporate Structure
The Company is a holding company incorporated under the laws of Bermuda as an exempted company on April 29, 2014. Bulk Partners, a wholly owned subsidiary of the Company, is also a holding company that was incorporated under the laws of Bermuda as an exempted company on June 17, 2008, by three individuals who are collectively referred to as the Founders.
The Company owns its vessels through separate wholly-owned subsidiaries and through joint venture entities, incorporated in Bermuda and Denmark, which the Company consolidates as variable interest entities. Certain of its wholly-owned subsidiaries, organized in Bermuda, British Virgin Islands, Panama, and Delaware, provide it with vessel management services and administrative support.
The Company’s principal executives operate from the offices of Phoenix Bulk Carriers (US) LLC, which is located at 109 Long Wharf, Newport, Rhode Island 02840.The phone number at that address is (401) 846-7790. The Company also has offices in Copenhagen, Denmark, Athens, Greece and Singapore. The Company’s corporate website address is
http://www.pangaeals.com
.
As of December 31, 2016, the Company’s consolidated subsidiaries are as follows:
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Company Name
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Country of Organization
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Proportion of
Ownership Interest
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Phoenix Bulk Carriers (BVI) Limited (“PBC”)
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British Virgin Islands
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100
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%
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(A)
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Phoenix Bulk Management Bermuda Limited
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Bermuda
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100
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%
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(B)
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Americas Bulk Transport (BVI) Limited
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British Virgin Islands
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100
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%
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(C)
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Bulk Ocean Shipping (Bermuda) Ltd.
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Bermuda
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100
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%
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(D)
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Phoenix Bulk Carriers (US) LLC
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Delaware
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100
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%
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(E)
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Allseas Logistics Bermuda Ltd.
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Bermuda
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100
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%
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(F)
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Bulk Patriot Ltd. (“Bulk Patriot”)
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Bermuda
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100
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%
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(G)
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Bulk Juliana Ltd. (“Bulk Juliana”)
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Bermuda
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100
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%
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(G)
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Bulk Trident Ltd. (“Bulk Trident”)
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Bermuda
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100
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%
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(G)
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Bulk Atlantic Ltd. (“Bulk Beothuk”)
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Bermuda
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100
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%
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(G)
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Nordic Bulk Barents Ltd. (“Bulk Barents”)
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Bermuda
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100
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%
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(G)
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Nordic Bulk Bothnia Ltd. (“Bulk Bothnia”)
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Bermuda
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100
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%
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(G)
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Nordic Bulk Carriers A/S (“NBC”)
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Denmark
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100
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%
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(H)
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Nordic Bulk Holding ApS (“NBH”)
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Denmark
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100
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%
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(H)
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109 Long Wharf LLC (“Long Wharf”)
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Delaware
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100
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%
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(I)
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Bulk Nordic Odyssey Ltd. (“Bulk Odyssey”)
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Bermuda
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33
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%
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(G)
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Bulk Nordic Orion Ltd. (“Bulk Orion”)
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Bermuda
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33
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%
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(G)
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Bulk Nordic Oshima Ltd. (“Bulk Oshima”)
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Bermuda
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33
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%
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(G)
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Bulk Nordic Odin Ltd. (“Bulk Odin”)
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Bermuda
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33
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%
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(G)
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Bulk Nordic Olympic Ltd. (“Bulk Olympic”)
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Bermuda
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33
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%
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(G)
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Bulk Nordic Oasis Ltd. (“Bulk Oasis”)
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Bermuda
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33
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%
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(G)
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Nordic Bulk Holding Company Ltd. (“NBHC”)
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Bermuda
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33
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%
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(J)
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Bulk Nordic Five Ltd. (“Five”)
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Bermuda
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50
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%
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(G)
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Bulk Nordic Six Ltd. (“Six”)
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Bermuda
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50
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%
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(G)
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Nordic Bulk Ventures Holding Company Ltd. (“BVH”)
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Bermuda
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50
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%
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(K)
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(A)
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The primary purpose of this corporation is to manage and operate ocean going vessels.
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(B)
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The primary purpose of this entity is to perform certain administrative management functions that have been assigned by PBC.
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(C)
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The primary purpose of this corporation is to provide logistics services to customers by chartering, managing and operating ships.
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(D)
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The primary purpose of this corporation is to manage the fuel procurement of the chartered vessels.
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(E)
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The primary purpose of this corporation is to act as the U.S. administrative agent for the Company.
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(F)
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The primary purpose of this corporation is to act as the treasury agent for the Company.
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(G)
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The primary purpose of these entities is owning bulk carriers. The Company owns 100% of Five and Six as of January 23, 2017.
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(H)
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The primary purpose of NBC is to provide logistics services to customers by chartering, managing and operating ships. NBH is the holding company of NBC.
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(I)
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Long Wharf is a limited liability company duly organized under the laws of Delaware for the purpose of holding real estate located in Newport, Rhode Island.
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(J)
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The primary purpose of this entity is to own bulk carriers through wholly-owned subsidiaries. The Company’s interest in Odyssey, Orion, Oshima, Olympic, Odin and Oasis is through its interest in NBHC.
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(K)
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The primary purpose of this entity is owning bulk carriers through wholly-owned subsidiaries. The Company’s interest in Five and Six is through its interest in BVH. The Company owns 100% of Five, Six and BVH as of January 23, 2017.
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Crewing and Employees
Each of its vessels is crewed with 23-25 independently contracted officers and crew members and, on certain vessels, directly contracted officers. Its technical managers are responsible for locating, contracting and retaining qualified officers for its vessels. The crewing agencies handle each crew member’s training, travel and payroll, and ensure that all the crew members on its vessels have the qualifications and licenses required to comply with international regulations and shipping conventions. The Company
typically has more crew members on board than are required by the country of the vessel’s flag in order to allow for the performance of routine maintenance duties.
As of
March 23, 2017
, the Company employed 62 shore-based personnel and had approximately 384 independently contracted seagoing personnel on its owned vessels. The shore-based personnel are employed in the United States, Athens, Copenhagen and Singapore.
Competition
The Company operates in markets that are highly competitive and based primarily on supply and demand for ocean transport of drybulk commodities. The Company competes for COAs on the basis of service, price, route history, size, age and condition of the vessel and for charters on the basis of service, price, vessel availability, size, age and condition of the vessel, as well as on its reputation as an owner and operator. The Company principally competes with owners and operators of Panamax, Supramax, Ultramax and Handymax bulk carriers.
Seasonality
Demand for vessel capacity has historically exhibited seasonal variations and, as a result, fluctuations in charter rates. This seasonality may result in quarter-to-quarter volatility in its operating results. The dry bulk carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities.
Permits and Authorizations
The Company is required by various governmental and quasi-governmental agencies to obtain certain permits and certificates with respect to its vessels. The kinds of permits and certificates required depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the vessel’s crew and the age of the vessel. The Company has been able to obtain all permits and certificates currently required to permit its vessels to operate. Additional laws and regulations, environmental or otherwise, may be adopted which could limit its ability to do business or increase the cost of doing business.
Environmental and Other Regulations
Government regulation significantly affects the ownership and operation of the Company's vessels. The Company is subject to international conventions and treaties, national, state and local laws and regulations in force in the countries in which its vessels may operate or are registered. These regulations relate to safety, health and environmental protection including the storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws, regulations and other requirements entails significant expense, including vessel modifications and implementation of certain operating procedures.
A variety of government and private entities subject the Company’s vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (such as the U.S. Coast Guard, harbor master or equivalent), classification societies, flag state administrations (countries of registry), charterers and terminal operators. Certain of these entities require them to obtain permits, certificates or approvals for the operation of its vessels. Failure to maintain necessary permits, certificates or approvals could require it to incur substantial costs or temporarily suspend the operation of one or more of its vessels.
The Company believes that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the dry bulk shipping industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. The Company is required to maintain operating standards for all of its vessels that emphasize operational safety, quality maintenance, continuous training of its officers and crews and compliance with United States and international regulations. The Company believes that the operation of its vessels is in substantial compliance with applicable environmental laws and regulations and that its vessels have all material permits, certificates or other approvals necessary for the conduct of its operations as of the date of this Form 10-K. However, because such laws and regulations are frequently changed and may impose increasingly strict requirements, the Company cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of its vessels. In addition, a future serious marine incident that results in significant oil pollution or otherwise causes significant adverse environmental impact could result in additional legislation or regulation that could negatively affect the Company’s profitability.
The laws and regulations discussed below may not constitute a comprehensive list of all such laws and regulations that are applicable to the operation of its vessels.
International Maritime Organization
The United Nations’ International Maritime Organization, or the IMO, has adopted the International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto (collectively referred to as MARPOL 73/78 and herein as “MARPOL”). MARPOL entered into force on October 2, 1983. It has been adopted by over 150 nations, including many of the jurisdictions in which the Company's vessels operate. MARPOL sets forth pollution-prevention requirements applicable to drybulk carriers, among other vessels, and is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances carried, in bulk, in liquid or packaged form, respectively; and Annexes IV and V relate to sewage and garbage management, respectively. Annex VI, separately adopted by the IMO in September of 1997, relates to air emissions.
Air Emissions
In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective May 2005, Annex VI sets limits on nitrogen oxide emissions from ships whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000. It also prohibits “deliberate emissions” of “ozone depleting substances,” defined to include certain halons and chlorofluorocarbons. Deliberate emissions are not limited to times when the ship is at sea; they can for example include discharges occurring in the course of the ship’s repair and maintenance. Emissions of “volatile organic compounds” from certain tankers, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls (PCBs)) are also prohibited. Annex VI also includes a global cap on the sulfur content of fuel oil (see below).
The IMO’s Marine Environment Protection Committee, or MEPC, adopted amendments to Annex VI on October 10, 2008, which amendments were entered into force on July 1, 2010. The Amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulphur contained in any fuel oil used onboard ships. As of January 1, 2012, the Amended Annex VI required that fuel oil contain no more than 3.50% sulfur (from the current cap of 4.50%). By January 1, 2020, sulfur content must not exceed 0.50%, subject to a feasibility review to be completed no later than 2018.
Beginning January 1, 2015, ships operating within an emission control area ("ECA") were not permitted to use fuel with sulfur content in excess of 0.1% (from 1.0%). Amended Annex VI establishes procedures for designating new ECAs. Currently, the Baltic Sea and the North Sea have been so designated. Effective August 1, 2012, certain coastal areas of North America were designated ECAs, and effective January 1, 2014, applicable areas of the United States Caribbean Sea adjacent to Puerto Rico and the U.S. Virgin Islands were designated ECAs. Ocean-going vessels in these areas are subject to stringent emissions controls, which may cause the Company to incur additional costs. If other ECAs are approved by the IMO or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the U.S. Environmental Protection Agency (the "EPA"), or the states where the Company operates, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of operations.
As of January 1, 2013, MARPOL made certain measures relating to energy efficiency for ships mandatory. It makes the Energy Efficiency Design Index, or EEDI, applicable to new ships and the Ship Energy Efficiency Management Plan, or SEEMP, applicable to all ships.
Amended Annex VI also establishes tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation.
Safety Management System Requirements
The IMO also adopted the International Convention for the Safety of Life at Sea, or SOLAS, and the International Convention on Load Lines, or the LL Convention, which impose a variety of standards that regulate the design and operational features of ships. The IMO periodically revises the SOLAS and LL Convention standards. May 2012 SOLAS amendments entered into force as of January 1, 2014.
The operation of the Company’s ships is also affected by the requirements set forth in Chapter IX of SOLAS, which sets forth the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires ship owners and ship managers to develop and maintain an extensive Safety Management System ("SMS"), that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation
and describing procedures for dealing with emergencies. The Company relies upon the safety management system that the Company and its technical managers have developed for compliance with the ISM Code. The failure of a ship owner to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. As of the date of this filing, each of its vessels is ISM code-certified.
The ISM Code requires that vessel operators obtain a safety management certificate, or SMC, for each vessel they operate. This certificate evidences compliance by a vessel’s operators with the ISM Code requirements for an SMS. No vessel can obtain an SMC under the ISM Code unless its manager has been awarded a document of compliance, or DOC, issued in most instances by the vessel's flag state. The Company’s appointed ship managers have obtained documents of compliance for their offices and safety management certificates for all of its vessels for which the certificates are required by the IMO. The document of compliance, or the DOC, and ship management certificate, or the SMC, are renewed as required.
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations might have on the Company’s operations.
Pollution Control and Liability Requirements
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. For example, the IMO adopted the International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM Convention's implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention will enter into force on September 8, 2017.
Upon entry into force of the BWM Convention, mid-ocean ballast exchange would be mandatory for its vessels. The cost of compliance could increase for ocean carriers, and these costs may be material. The Company’s vessels would be required to be equipped with a ballast water treatment system that meets mandatory concentration limits not later than the first intermediate or renewal survey, whichever occurs first, after the anniversary date of delivery of the vessel in 2014, for vessels with ballast water capacity of 1500 – 5000 cubic meters, or after such date in 2016, for vessels with ballast water capacity of greater than 5000 cubic meters. If mid-ocean ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers. Although the Company does not believe the costs of compliance with mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall impact of such a requirement on its operations. The cost of ballast water treatment systems is expected to be material, however, the Company's newer fleet of Ice-Class vessels were equipped with these systems when delivered.
The IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, to impose strict liability on ship owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur.
In March 2006, the IMO amended Annex I to MARPOL, including a new regulation relating to oil fuel tank protection, which became effective August 1, 2007. The new regulation applies to various ships delivered on or after August 1, 2010. It includes requirements for the protected location of the fuel tanks, performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance, inspection and engineering standards.
Noncompliance with the ISM Code or other IMO regulations may subject the Company to increased liability, lead to decreases in available insurance coverage for affected vessels or result in the denial of access to, or detention in, some ports. As of the date of this report, each of the Company’s vessels is ISM Code certified. However, there can be no assurance that such certificate will be maintained.
International Code for Ships Operating in Polar Waters
The IMO in November 2014 adopted the International Code for Ships Operating in Polar Waters (the “Polar Code”), and related amendments to the International Convention for the Safety of Life at Sea (“SOLAS”) to make it mandatory.
The date of entry into force of the SOLAS amendments is January 1, 2017, under the tacit acceptance procedure. It will apply to new ships constructed after that date. Ships constructed before January 1, 2017 will be required to meet the relevant requirements of the Polar Code by the first intermediate or renewal survey, whichever occurs first, after January 1, 2018.
The Polar Code will be mandatory under both SOLAS and MARPOL because it contains both safety and environment related provisions. In October 2014, IMO’s Marine Environment Protection Committee (“MEPC”) approved the necessary draft amendments to make the environmental provisions in the Polar Code mandatory under MARPOL. The MEPC adopted the Polar Code and associated MARPOL amendments in May 2015, with an entry-into-force date to be aligned with the SOLAS amendments.
The U.S. Oil Pollution Act of 1990 and Comprehensive Environmental Response, Compensation and Liability Act
The Oil Pollution Act of 1990, ("OPA"), established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all “owners and operators” whose vessels trade with the United States, its territories and possessions or whose vessels operate in United States waters, which includes the United States’ territorial sea and its 200 nautical mile exclusive economic zone around the United States. The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person owning, operating or chartering by demise, the vessel. Both OPA and CERCLA impact the Company’s operations.
Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:
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injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
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injury to, or economic losses resulting from, the destruction of real and personal property;
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net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;
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loss of subsistence use of natural resources that are injured, destroyed or lost;
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lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
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net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.
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OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs. Effective December 31, 2015, the U.S. Coast Guard adjusted the limits of OPA liability for non-tank vessels (e.g. drybulk) to the greater of $1,100 per gross ton or $939,800 (subject to periodic adjustment for inflation). These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party’s gross negligence or willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsibility party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damages for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.
OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee.
Incidents such as the 2010
Deepwater Horizon
oil spill in the Gulf of Mexico may result in additional regulatory initiatives or statutes, including the raising of liability caps under OPA (which were raised on December 31, 2015). Compliance with any new requirements of OPA may substantially impact the Company’s cost of operations or require it to incur additional expenses to comply with any new regulatory initiatives or statutes. Additional legislation or regulations applicable to the operation of its vessels that may be implemented in the future could adversely affect its business.
The Company currently maintains pollution liability coverage insurance in the amount of $1.0 billion per incident for each of the Company’s vessels. If the damages from a catastrophic spill were to exceed the Company’s insurance coverage it could have an adverse effect on its business and results of operation.
OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA and some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing regulations defining vessel owners’ responsibilities under these laws. The Company intends to comply with all applicable state regulations in the ports where its vessels call. The Company believes that it is in substantial compliance with all applicable existing state requirements. In addition, the Company intends to comply with all future applicable state regulations in the ports where its vessels call.
Other Environmental Initiatives
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages, and complements the remedies available under OPA and CERCLA. Furthermore, many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.
The EPA regulates the discharge of ballast water and other substances in U.S. waters under the CWA. EPA regulations require vessels 79 feet in length or longer (other than commercial fishing and recreational vessels) to comply with a Vessel General Permit (the "VGP"), authorizing ballast water discharges and other discharges incidental to the operation of vessels. The VGP imposes technology and water-quality based effluent limits for certain types of discharges and establishes specific inspection, monitoring, recordkeeping and reporting requirements to ensure the effluent limits are met. On March 28, 2013, the EPA re-issued the VGP for another five years, which took effect December 19, 2013. The 2013 VGP contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in US waters, more stringent requirements for exhaust gas scrubbers and the use of environmentally acceptable lubricants.
U.S. Coast Guard regulations adopted under the U.S. National Invasive Species Act, or NISA, also impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters. As of June 21, 2012, the U.S. Coast Guard implemented revised regulations on ballast water management by establishing standards on the allowable concentration of living organisms in ballast water discharged from ships in U.S. waters. The revised ballast water standards are consistent with those adopted by the IMO in 2004. Compliance with the EPA and the U.S. Coast Guard regulations requires the installation of a U.S. Coast Guard approved ballast water management system by the first scheduled drydocking after January 1, 2016. On September 10, 2015, the U.S Coast Guard issued new guidance that simplifies and clarifies the process by which vessels can seek extensions to come into compliance with the standards.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges, individually or in the aggregate, result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. Member States were required to enact laws or regulations to comply with the directive by the end of 2010. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger.
The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by type, age, and flag as well as the number of times the ship has been detained. The European Union also adopted and then extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply.
With effect from January 1, 2010, Directive 2005/33/EC of the European Parliament and of the Council of July 6, 2005, amending Directive 1999/32/EC came into force. The objective of the directive is to reduce emission of sulfur dioxide and particulate matter caused by the combustion of certain petroleum derived fuels.
The directive imposes limits on the sulfur content of such fuels as a condition of their use within a Member State territory. The maximum sulfur content for marine fuels used by inland waterway vessels and ships at berth in ports in EU countries after January 1, 2010, is 0.1% by mass. As of January 1, 2015, all vessels operating within ECAs, worldwide must comply with 0.1% sulfur requirements. Currently, the only grade of fuel meeting 0.1% sulfur content requirement is low sulfur marine gas oil, or LSMGO. As of July 1, 2010, the reduction of applicable sulfur content limits in the North Sea, the Baltic Sea and the English Channel Sulfur Control Areas is 0.1%. The Company does not expect that it will be required to modify any of its vessels to meet any of the foregoing low sulfur fuel requirements. On July 15, 2011, the European Commission also adopted a proposal for an amendment to Directive 1999/32/EC which would align requirements with those imposed by the revised MARPOL Annex VI which introduced stricter sulfur limits.
Greenhouse Gas Regulation
In July 2011, MEPC adopted two new sets of mandatory requirements to address greenhouse gas emissions from ships, which entered into force in January 2013. Currently operating ships are required to have a Ship Energy Efficiency Management Plan ("SEEMP") on board, and minimum energy efficiency levels per capacity mile, outlined in the Energy Efficiency Design Index ("EEDI"), apply to new ships. These requirements could cause the Company to incur additional compliance costs. The European Union has indicated that it intends to propose an expansion of the existing European Union emissions trading scheme to include emissions of greenhouse gases from marine vessels, and in January 2012 the European Commission launched a public consultation on possible measures to reduce greenhouse gas emissions from ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and safety and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, such regulation of vessels is foreseeable, and the EPA has in recent years received petitions from the California Attorney General and various environmental groups seeking such regulation. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other countries where the Company operates, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require the Company to make significant financial expenditures which the Company cannot predict with certainty at this time.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001 in the United States, there have been a variety of initiatives intended to enhance vessel security such as the Maritime Transportation Security Act of 2002, or MTSA. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which are regulated by the U.S. Environmental Protection Agency, or the EPA.
Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new Chapter V became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and mandates compliance with the International Ship and Port Facilities Security Code, or the ISPS Code. The ISPS Code is designed to enhance the security of ports and ships against terrorism. To trade internationally, a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel’s flag state. Among the various requirements are:
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on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status;
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on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;
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the development of vessel security plans;
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ship identification number to be permanently marked on a vessel’s hull;
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a continuous synopsis record kept onboard showing a vessel’s history including the name of the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship’s identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and
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compliance with flag state security certification requirements.
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Ships operating without a valid certificate may be detained at port until it obtains an ISSC, or it may be expelled from port, or refused entry at port.
Furthermore, additional security measures could be required in the future which could have a significant financial impact on the Company. The U.S. Coast Guard regulations, intended to be aligned with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid ISSC that attests to the vessel's compliance with SOLAS security requirements and the ISPS Code.
The Company intends to implement the various security measures addressed by MTSA, SOLAS and the ISPS Code, and the Company intends that its fleet will comply with applicable security requirements. The Company has implemented the various security measures addressed by the MTSA, SOLAS and the ISPS Code.
International Labor Organization
The International Labor Organization (ILO) is a specialized agency of the UN with headquarters in Geneva, Switzerland. The ILO has adopted the Maritime Labor Convention 2006, or MLC 2006. A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 entered into force on August 20, 2013, at which time all of the Company’s vessels were in full compliance with its requirements.
Inspection by Classification Societies
Every oceangoing vessel must be “classed” by a classification society. The classification society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel's country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
The classification society also undertakes, as requested, other surveys that may be required by the vessel's flag state. These surveys are subject to agreements made with the vessel owner and/or to the regulations of the country concerned.
For maintenance of the class certification, annual, intermediate and special surveys of hull and machinery, including the electrical plant, and any special equipment, are required to be performed as follows:
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Annual Surveys:
For seagoing ships, annual surveys are conducted within three months, before or after each anniversary of the class period indicated in the certificate.
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Intermediate Surveys:
Extended surveys are referred to as intermediate surveys and are typically conducted two and one-half years after commissioning, and two and one-half years after each class renewal. Intermediate surveys are to be carried out at or between the occasion of the second or third annual survey.
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Class Renewal Surveys:
Class renewal surveys, also known as special surveys, are carried out at the intervals indicated by the character of classification for the hull. At the special survey, the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. If the steel thickness is found to be less than class requirements, the classification society would prescribe steel renewals which require drydocking of the vessel. The classification society may grant a one-year grace period for completion of the special survey. Substantial costs may be incurred for steel renewal in order to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or
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five years, depending on whether a grace period was granted, a shipowner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey cycle, in which case every part of the vessel would be surveyed on a continuous five-year cycle. This process is referred to as continuous class renewal.
All areas subject to survey, as defined by the classification society, are required to be surveyed at least once per class period unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years.
Most vessels undergo regulatory inspection of the underwater parts every 30 to 36 months. If any defects are found, the classification surveyor will issue a recommendation which must be rectified by the ship owner within prescribed time limits.
The Company expects to perform one special survey in 2017 at an aggregate total cost of approximately $0.8 million. The Company expects to perform two intermediate surveys in 2017 at an aggregate total cost of approximately $1.5 million. The Company estimates that offhire related to the surveys and related repair work is ten to twenty days, depending on the size and condition of the vessel.
Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society which is a member of the International Association of Classification Societies. All of the Company’s vessels are certified by Det Norske Veritas, Nippon Kaiji Kiokai or Bureau Veritas. All new and second-hand vessels that the Company purchases must be certified prior to delivery under its standard purchase contracts, referred to as the memorandum of agreement. Certification of second-hand vessels must be verified by a Class Maintenance Certificate issued within 72 hours prior to delivery. If the vessel is not certified on the date of closing, the Company has the option to cancel the agreement on the basis of Seller’s default, and not take delivery of the vessel.
Risk of Loss and Insurance
General
The operation of any dry bulk vessel includes risks such as mechanical failure, collision, property loss, cargo loss or damage, and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is an inherent possibility of marine disaster, including oil spills (e.g. fuel oil) and other environmental incidents, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability for certain oil pollution accidents upon owners, operators and demise charterers of vessels trading in the United States exclusive economic zone, has made liability insurance more expensive for ship owners and operators trading in the U.S. market.
The Company maintains hull and machinery insurance, war risks insurance, protection and indemnity cover and freight, demurrage and defense cover for its owned fleet at amounts it believe address the normal risks of its operations. The Company may not be able to maintain this level of coverage throughout a vessel’s useful life. Furthermore, while the Company believes that its current insurance coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that the Company will always be able to obtain adequate insurance coverage at reasonable rates.
Hull & Machinery and War Risks Insurance
The Company maintains marine hull and machinery and war risks insurances, which cover the risk of actual or constructive total loss, for all of its vessels. Vessels are insured for their fair market value, at a minimum, with a deductible of $100,000 per vessel per incident.
Protection and Indemnity Insurance
Protection and indemnity insurance is a form of mutual indemnity insurance provided by mutual protection and indemnity associations, or P&I Associations, which insure the Company’s third party liabilities in connection with its shipping activities. This includes third-party liability and other related expenses resulting from the injury, illness or death of crew, passengers and other third parties, the loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Subject to the “capping” discussed below, the Company’s coverage, except for pollution, is unlimited.
The Company’s current protection and indemnity insurance coverage for pollution is $1.0 billion per vessel per incident. The thirteen P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. As a member of a P&I Association, which is
a member of the International Group, the Company is subject to calls payable to the associations based on the group’s claim records as well as the claim records of all other members of the individual associations and members of the pool of P&I Associations comprising the International Group.
Amendments to the Convention on Limitation of Liability for Maritime Claims, or LLMC, went into effect on June 8, 2015. The amendments alter the limits of liability for loss of life or personal injury claims and property claims against ship-owners.
Exchange Controls
The Company is an exempted company organized under the Bermuda Companies Act. The Bermuda Companies Act differs in some material respects from laws generally applicable to United States companies and their stockholders. However, a general permission issued by the Bermuda Monetary Authority, ("BMA"), results in the Company’s common shares being freely transferable among persons who are residents and non-residents of Bermuda. Each shareholder, whether a resident or non-resident of Bermuda, is entitled to one vote for each share of stock held by the shareholder.
The Company's common shares are listed on NASDAQ under the symbol "PANL".
Although the Company is incorporated in Bermuda, the Company is classified as a non-resident of Bermuda for exchange control purposes by the BMA. Other than transferring Bermuda Dollars out of Bermuda, there are no restrictions on its ability to transfer funds into and out of Bermuda or to pay dividends in currency other than Bermuda Dollars to U.S. residents (or other non-residents of Bermuda) who are holders of its common shares.
In accordance with Bermuda law, share certificates may be issued only in the names of corporations, individuals or legal persons. In the case of an applicant acting in a special capacity (for example, as an executor or trustee), certificates may, at the request of the applicant, record the capacity in which the applicant is acting. Notwithstanding the recording of any such special capacity, the Company is not bound to investigate or incur any responsibility in respect of the proper administration of any such estate or trust.
The Company will take no notice of any trust applicable to any of its shares or other securities whether or not the Company had notice of such trust.
INDUSTRY AND MARKET CONDITIONS
Market Overview
Ocean going vessels represent the most efficient and often the only means of transporting large volumes of dry cargo over long distances. Dry bulk cargo includes both major and lesser commodities such as coal, iron ore, grain, bauxite, cement clinker, and limestone. Dry bulk trade is influenced by the underlying demand for the dry bulk commodities which in turn is influenced by the global economic activity.
The world’s fleet of vessels dedicated to carrying dry bulk cargoes is traditionally divided into six major categories, based on a vessel’s cargo carrying capacity. These categories are: Handysize, Supramax, Panamax, Post Panamax, Capesize and Very Large Ore Carrier. In recent years, the Ultramax bulk carrier fleet has doubled in size, but is still generally included in the Supramax category. Certain routes and geographies are less accessible to certain vessel sizes. For example, Panamax and Supramax vessels are the main dry bulk vessel types deployed in the Baltic due to draft restrictions. Similarly, the main dry bulk vessel size deployed on the Northern Sea Route (NSR) along the coast of Russia is Panamax.
Dry bulk vessels are employed through a number of different chartering options. The most common are time charters, spot charters, and voyage charters. Historically, charter rates have been volatile as they are driven by the underlying balance between vessel supply and demand. Since 2011, rates have generally been low as a result of the excess of dry bulk carrier supply over the demand for dry bulk vessels. Ice class vessels, when operating in ice-bound areas, usually command a rate premium to conventional trades.
Dry Bulk Shipping — the Main Participants
In the dry bulk shipping industry there are multiple functions, with individual parties carrying out one or more of such functions. In general, the principal functions within dry bulk shipping are as follows:
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Ship Owner or Registered Owner — Generally, this is an entity retaining the legal title of ownership over a vessel.
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Ship Operator — Generally, this is an entity seeking to generate profit either through the chartering of ships (owned or chartered-in) to others, or from the transportation of cargoes. Entities focusing on the transportation of cargoes may engage in chartering of ships to other entities, but those companies focusing on chartering ships to other entities rarely act to carry cargoes for customers.
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Shipmanager/Commercial Manager — This is an entity designated to be responsible for the day to day commercial management of the ship and the best contact for the ship regarding commercial matters, including post fixture responsibilities, such as laytime, demurrage, insurance and charter clauses. These companies undertake the activities of ship operators but, unlike a ship operator, they do not own or charter-in the vessels at their own risk.
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Technical Manager — This is an entity specifically responsible for the technical operation and technical superintendence of a ship. This company may also be responsible for hiring, training and supervising ship officers and crew, and for all aspects of the day to day operation of the fleet, including repair work, spare parts inventory, re-engineering, surveys and dry-docking.
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Cargo Owner — This is normally a producer (e.g., a miner), consumer (e.g., a steel mill) or trading house who requires transportation of cargo by a cargo focused ship operator.
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The Freight Market
Dry bulk vessels are employed in the market through a number of different chartering options. The general terms typically found in these types of contracts are described below.
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Time Charter.
A charter under which the vessel owner or operator is paid charterhire on a per-day basis for a specified period of time. Typically, the shipowner receives semi-monthly charterhire payments on a U.S. dollar-per-day basis and is responsible for providing the crew and paying vessel operating expenses, while the charterer is responsible for paying the voyage expenses and additional voyage insurance. The ship owner is also responsible for the vessel’s intermediate and special survey (heavy mandatory maintenance) costs. Under time charters, including trip time charters, the charterer pays all voyage expenses including port, canal and bunker (fuel) costs.
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Trip Charter.
A time charter for a trip to carry a specific cargo from a load port to a discharge port at a set daily rate.
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Voyage Charter
. A charter to carry a specific amount and type of cargo on a load-port to discharge-port basis, subject to various cargo handling terms. Most of these charters are of a single voyage nature, as trading patterns do not encourage round trip voyage trading. The ship operator receives payment based on a price per ton of cargo loaded on board the vessel. The ship operator is responsible for the payment of all voyage expenses, as well as the costs of owning or hiring the vessel.
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Spot Charter.
A spot charter generally refers to a voyage charter or a trip charter, which generally last from 10 days to three months.
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Contract of Affreightment.
A contract of affreightment, or COA, relates to the carriage of multiple cargoes over the same route and enables the service provider to nominate different vessels to perform the individual voyages. Essentially, it constitutes a series of voyage charters to carry a specified amount of cargo during the term of the CoA, which usually spans a number of months or years. Freight normally is agreed on a U.S. dollar-per-ton carried basis with bunker cost escalation or de-escalation adjustments.
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Bareboat Charter.
A bareboat charter involves the use of a vessel, usually over longer periods of time (several years). In this case, all voyage expenses and vessel operating expenses, including maintenance, crewing and insurance, are for paid by the charterer. The owner of the vessel receives monthly charterhire payments on a U.S. dollar per day basis and is responsible only for the payment of capital costs related to the vessel. A bareboat charter is also known as a “demise charter” or a “time charter by demise.”
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Charter Rates
As noted above, the bulk carrier market operates at two levels — period and spot. The former sees the charter commitment and income stream fixed over a period. The latter sees ships regularly open for new business and so most frequently exposed to the immediate volatility of market sentiment.
In the time charter market, rates vary depending on the length of the charter period and vessel specific factors such as age, speed, size and fuel consumption. In the voyage charter market, rates are influenced by cargo size, commodity, port dues and canal transit fees, as well as delivery and redelivery regions. In general, a larger cargo size is quoted at a lower rate per ton than a smaller cargo size. Routes with costly ports or canals generally command higher rates. Voyages loading from a port where vessels usually discharge cargo, or discharging at a port where vessels usually load cargo, are generally quoted at lower rates. These voyages are known as “backhaul” voyages.
In some cases charters will include an additional payment known as a ballast bonus. A ballast bonus is a lump sum payment made to a shipowner or operator (by the charterer) as compensation for delivering a ship in a particular loading region of the world. For a ship to enter a loading region, an empty (ballast) leg may be required because there are no inbound cargoes. Normally the charterer will pay for this leg. The ballast bonus should reflect the cost of the empty ballast in terms of time and fuel. A typical fixture that involves a ballast bonus might be expressed as “freight hire of $10,000 per day, plus a ballast bonus of $100,000 lump sum”.
Within the dry bulk shipping industry, the freight rate indices issued by the Baltic Exchange in London are the references most likely to be monitored. These references are based on actual charter hire rates under charters entered into by market participants as well as daily assessments provided to the Baltic Exchange by a panel of major shipbrokers. The Baltic Exchange, an independent organization comprised of shipbrokers, shipping companies and other shipping players, provides daily independent shipping market information and has created freight rate indices reflecting the average freight rates for the major bulk vessel trading routes. These indices include the Baltic Panamax Index, or BPI, the index with the longest history and, more recently, the Baltic Capesize Index, or BCI.
Dry Bulk Trades Requiring Ice Class Tonnage
Ice class vessels are required to serve ports accessed by routes crossing seasonal or year-round ice-covered oceans, lakes, seas or rivers. Ice class vessels are mainly deployed in the Baltic Sea, the Northern Sea Route (NSR) and the Great Lakes/St. Lawrence Seaway. These regions have experienced strong trade growth in dry bulk cargoes, driven in particular by increased mining activities supported by strong commodity demand in Asia, decreased level of ice, and technology advancement in shipping. However, the NSR experienced a steep drop in tons of cargo transported between Asia and Europe during 2014 and 2015, as low fuel prices made the NSR less attractive. Cargo traffic to and from Russian ports is expected to increase in the coming years, mainly representing supplies and cargo for new industrial projects.
ITEM 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. You should consider carefully the material risks described below, which we believe represent the material risks related to our business and our securities, together with the other information contained in this Form 10-K, before making a decision to invest in our securities. This Form 10-K also contains forward-looking statements that involve risks and uncertainties. In connection with such forward looking statements, you should also carefully review the cautionary statements referred to under “Special Note Regarding Forward Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below.
Risks Relating to the Company’s Industry
The cyclical and volatile nature of the seaborne drybulk transportation industry may lead to decreases in charter and freight rates, which may have an adverse effect on the Company’s revenues, earnings and profitability and its ability to comply with its loan covenants. The market experienced a strong fourth quarter due to higher commodity prices and negative fleet growth, but 2017 is projected to be weak given the overcapacity in tonnage.
The seaborne drybulk transportation industry is cyclical and volatile, and the lengthy downturn in the drybulk charter market has severely affected the entire drybulk shipping industry. There can be no assurance that drybulk charter rates will increase and rates could decline. The volatility of charter and freight rates has been due to various factors, including lower crude oil prices,
slow economic growth of China, a strong U.S. Dollar and the associated weakening of other world currencies. Concurrently, with these factors, vessel supply continued to increase.
Although our operating fleet is primarily chartered-in on a short term basis and though lower charter rates result in lower charter hire costs, low charter and freight rates in the drybulk market could have an adverse effect on our vessel values and earnings on our owned fleet, and similarly, could affect our cash flows, liquidity and ability to comply with the financial covenants in our loan agreements. In addition, the decline in the drybulk carrier market has had and may continue to have additional adverse consequences for the drybulk shipping industry, including an absence of financing for vessels. Accordingly, the value of our common shares could be substantially reduced.
Because we employ our vessels under a mix of voyage charters and time charters and contracts of affreightment (COA’s), which typically extend for varying lengths of time of from one month to ten years, we are exposed to changes in market rates for drybulk carriers and such changes may affect our earnings and the value of our owned drybulk carriers at any given time. A COA relates to the carriage of multiple cargoes over the same route and enables the COA holder to nominate different vessels to perform individual voyages. We may not be able to successfully employ our vessels in the future or renew existing contracts at rates sufficient to allow us to meet our obligations. We are also exposed to volatility in the market rates we pay to charter-in vessels. Fluctuations in charter and freight rates result from changes in the supply of and demand for vessel capacity and changes in the demand for seaborne carriage of commodities. Because the factors affecting the supply of and demand for vessels are outside of our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.
Factors that influence demand for vessel capacity include:
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supply of and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;
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changes in the exploration or production of energy resources, commodities, semi-finished and finished consumer and industrial products;
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the location of regional and global exploration, production and manufacturing facilities;
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the location of consuming regions for energy resources, commodities, semi-finished and finished consumer and industrial products;
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the globalization of production and manufacturing;
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global and regional economic and political conditions, including armed conflicts, terrorist activities, embargoes and strikes;
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natural disasters and other disruptions in international trade;
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developments in international trade;
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changes in seaborne and other transportation patterns, including the distance cargo is transported by sea;
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environmental and other regulatory developments;
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currency exchange rates;
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bunker (fuel) prices; and
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The factors that influence the supply of vessel capacity include:
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the number of newbuilding deliveries;
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port and canal congestion;
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the scrapping rate of older vessels;
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the number of vessels that are out of service.
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In addition to the prevailing and anticipated charter and freight rates, factors that affect the rate of newbuilding, scrapping and laying-up include newbuilding prices, secondhand vessel values in relation to scrap prices, costs of bunker fuels and other operating costs, costs associated with classification society surveys, normal maintenance and insurance coverage, the efficiency and age profile of the existing drybulk fleet in the market and government and industry regulation of maritime transportation practices, particularly environmental protection laws and regulations. These factors influencing the supply of and demand for shipping capacity are outside of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.
We anticipate that the future demand for our drybulk carriers and our transportation services will be dependent upon economic growth in world economies and its associated industrial production, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier fleet and the sources and supply of drybulk cargoes to be transported by sea. Although the newbuilding orderbook is currently lower than expected, demolition dropped in the second half of 2016, which may cause the capacity of the global drybulk carrier fleet to increase. Adverse economic, political, social or other developments could also have a material adverse effect on our business and operating results.
An over-supply of drybulk carrier capacity may prolong rate weakness or depress the current charter and freight rates further and, in turn, adversely affect our profitability.
The market supply of drybulk carriers has been increasing as a result of the delivery of numerous newbuilding orders over the last few years. Newbuildings have been delivered in significant numbers since the beginning of 2006 and vessel supply growth has been outpacing vessel demand growth, causing downward pressure on charter rates. Until the new supply is fully absorbed by the market, charter rates may continue to be under pressure due to vessel supply in the near to medium term. Although the Company typically enters into back-haul COAs to offset the large uncompensated cost of positioning vessels for front–haul voyages, if market conditions persist or worsen, upon the expiration or termination of our COAs, we may only be able to re-employ our vessels at reduced or unprofitable rates, or we may not be able to employ our vessels at all. The occurrence of these events could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.
The market values of our owned vessels may decrease, which could limit the amount of funds that we can borrow or cause us to breach certain covenants in our credit facilities and we may incur impairment or a loss if we sell vessels following a decline in their market value.
The fair market values of our owned vessels have generally experienced high volatility, and you should expect the market values of our vessels to fluctuate depending on a number of factors including:
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prevailing level of charter and freight rates;
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general economic and market conditions affecting the shipping industry;
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types and sizes of vessels;
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supply of and demand for vessels;
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other modes of transportation;
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governmental and other regulations; and
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technological advances.
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In addition, as vessels grow older, they generally decline in value. If the market values of our owned vessels decrease, we may not be in compliance with certain covenants in our credit facilities secured by mortgages on our drybulk vessels unless we provide additional collateral or prepay a portion of the loan to a level where we are again in compliance with our loan covenants. At various times during 2016, we were not in compliance with certain covenants contained in our debt agreements and therefore obtained
waivers from the facility agents. Please read “
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Borrowing Activities
.”
In addition, if we sell one or more of our vessels at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our consolidated financial statements, the sale proceeds may be less than the vessel’s carrying value on our consolidated financial statements, resulting in a loss and a reduction in earnings.
The carrying amounts of vessels held and used by us are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the asset group level which represents the lowest level for which identifiable cash flows are largely independent of other groups of assets. The asset groups are defined by vessel size and classification.
At December 31, 2016 and 2015, we identified a potential impairment indicator by reference to industry-wide estimated market values of all vessels of the same size range and age. As a result, we evaluated each asset group for impairment by estimating the total undiscounted cash flows expected to result from the use of the asset group and its eventual disposal. At December 31, 2016, the estimated undiscounted future cash flows were higher than the carrying amount of the vessels in the Company's fleet and as such, no loss on impairment was recognized.
At December 31, 2015, the carrying amount of the m/v Nordic Barents and the m/v Nordic Bothnia
were determined to be higher than their estimated undiscounted future cash flows due to the decline in market rates expected to be earned for the remaining estimated useful life of the vessels. As a result, a loss on impairment of approximately $5.4 million is included in the consolidated statements of operations for the year ended December 31, 2015.
The Company has relied on financial support from its founders and investors through related party loans, which may not be available to the Company in the future.
From time to time, we have obtained loans from our founders, Edward Coll, Anthony Laura, and Lagoa Investments, an entity beneficially owned by Claus Boggild, to meet vessel purchase, newbuilding deposit, and other obligations of the Company. These loans have been historically available to the Company on an as needed basis, and payable as cash flow reasonably permitted. These loans may not be available to the Company in the future. We may seek to refinance such related party loans with the net proceeds of future debt and equity offerings, but we cannot be sure that we will be able to do so on acceptable terms. If we are not able to find additional sources of financing on acceptable terms, we may have to dedicate a larger portion of our cash flow from operations to pay the principal and interest of these loans and facilities than we would if we were able to refinance on superior terms. Even if we are able to borrow money from such parties, such borrowing could create a conflict of interest of management to the extent they also act as lenders to the Company.
The current state of the global financial markets and current economic conditions may adversely impact our ability to obtain additional financing on acceptable terms and otherwise negatively impact our business.
Global financial markets and economic conditions have been, and continue to be, volatile. In recent years, operating businesses in the global economy have faced tightening credit, weakening demand for goods and services, deteriorating international liquidity conditions, and declining markets. There has been a general decline in the willingness of banks and other financial institutions to extend credit, particularly in the shipping industry. As the shipping industry is highly dependent on the availability of credit to finance and expand operations, it has been negatively affected by this decline.
Also, as a result of concerns about the stability of financial markets generally, and the solvency of counterparties specifically, the cost of obtaining money from the credit markets may increase if lenders increase interest rates, enact tighter lending standards, refuse to refinance existing debt at all or on terms similar to current debt, and reduce, or cease to provide funding to borrowers. Due to these factors, additional financing may not be available if needed and to the extent required, on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, we may be unable to expand or meet our obligations as they come due or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.
Our revenues are subject to seasonal fluctuations, which could affect our operating results and our ability to pay dividends, if any, in the future.
We operate our drybulk vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charter and freight rates. This seasonality may result in quarter-to-quarter volatility in our operating results, which could affect our ability to pay dividends, if any, in the future. The drybulk carrier market is typically stronger in the fall and winter months due to demand increases arising from agricultural harvest and increased coal demand in preparation for winter in the Northern Hemisphere. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. This seasonality may adversely affect our operating results and our ability to pay dividends, if any, in the future.
Risks associated with operating ocean-going vessels could affect our business and reputation, which could adversely affect our revenues and price of our common shares.
The operation of ocean-going vessels carries inherent risks. These risks include the possibility of:
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environmental accidents;
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cargo and property losses or damage;
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business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather conditions; and
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The involvement of our vessels in an environmental disaster may harm our reputation as a safe and reliable vessel owner and operator. Any of these circumstances or events could increase our costs or lower our revenues.
The operation of drybulk carriers entails certain unique operational risks.
The operation of certain ship types, such as drybulk carriers, has certain unique risks. With a drybulk carrier, the cargo itself and its interaction with the ship can be a risk factor. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes out of the hold), and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during unloading procedures may be more susceptible to breach at sea. Furthermore, any defects or flaws in the design of a drybulk carrier may contribute to vessel damage. Hull breaches in drybulk carriers may lead to the flooding of the vessels holds. If a drybulk carrier suffers flooding in its holds, the bulk cargo may become so dense and waterlogged that its pressure may buckle the vessel's bulkheads, leading to the loss of the vessel. If we are unable to adequately maintain our vessels, we may be unable to prevent these events. Any of these circumstances or events could negatively impact our business, financial condition, results of operations and our ability to pay dividends, if any, in the future. In addition, the loss of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.
Our vessels may call on ports located in countries that are subject to restrictions imposed by the U.S. or other governments, which could adversely affect our reputation and the market for our common shares.
On our charterers' instructions, notwithstanding contractual restrictions agreed with us, our vessels may call on ports or operate in countries subject to sanctions and embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism, such as Iran, Sudan and Syria. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, which amended the Iranian Transactions and Sanctions Regulations, ("ITSR"). Among other things, CISADA introduced limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. In 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or attempting to violate, or causing a violation of any sanction in effect against Iran or facilitating any deceptive transactions for or on behalf of any person subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions evader and will be banned from all contacts with the United States, including conducting business in U.S. dollars. Also in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the
Iran Threat Reduction Act, which created new sanctions and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensified existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran's petroleum or petrochemical sector. On January 16, 2015, the United States lifted the nuclear-related secondary sanctions, however, such sanctions generally are directed toward non-U.S. persons for specified conduct involving Iran that occurs entirely outside of U.S. jurisdiction.
During 2014, several Executive Orders were signed which authorize and subsequently expand sanctions on individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine, or for stealing the assets of the Ukrainian people. These sanctions put in place restrictions on the travel of certain individuals and officials. Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from financial transactions subject to U.S. jurisdiction, and exclusion of that person's vessels from U.S. ports for up to two years. In 2015, an Executive Order was issued against seven officials from Venezuela which blocks access to their assets and the use of U.S. financial systems. Declaring any country a threat to national security is the first step in starting a U.S. sanctions program.
Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into permissible charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in permissible operations associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their governments. Investor perception of the value of our common shares may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
We are subject to international safety regulations and the failure to comply with these regulations may subject us to increased liability, may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain ports.
The operation of our vessels is affected by the requirements set forth in the United Nations’ International Maritime Organization’s International Management Code for the Safe Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code requires ship owners and ship managers to develop and maintain an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation for dealing with emergencies. The failure of a shipowner to comply with the ISM Code may subject it to increased liability, may invalidate existing insurance or decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports. Each of the vessels owned or operated by the Company is ISM Code-certified.
In addition, vessel classification societies impose significant safety and other requirements on our vessels. In complying with current and future environmental requirements, vessel owners and operators may incur significant additional costs for maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government regulation of vessels, particularly in the areas of safety and environmental protection requirements, can be expected to become stricter in the future and may require us to incur significant capital expenditures to keep our vessels in compliance.
We are subject to complex laws and regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business.
Our operations are subject to numerous laws and regulations in the form of international conventions and treaties, national, state and local laws and national and international regulations in force in the jurisdictions in which our vessels operate or are registered, which can significantly affect the ownership cost and operation of our vessels. These requirements include, but are not limited to, European Union Regulations, the International Convention for the Prevention of Pollution from Ships of 1975, the International Maritime Organization, or IMO, International Convention for the Prevention of Marine Pollution of 1973, the IMO International Convention for the Safety of Life at Sea of 1974, the International Convention on Load Lines of 1966, the U.S. Oil Pollution Act of 1990, or OPA, the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Air Act, U.S. Clean Water Act, the U.S. Marine Transportation Security Act of 2002 and the International Code for Ships Operating in Polar Waters.
Compliance with such laws, regulations and standards, where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful lives of our vessels. We may also incur additional costs in order to
comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions including greenhouse gases, the management of ballast waters, maintenance and inspection, development and implementation of emergency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents. These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition. A failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault.
We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition and our ability to pay dividends.
In order to comply with new ballast water treatment requirements, we may have to install expensive ballast water treatment systems and modify our vessels to accommodate such systems.
The International Convention for the Control and Management of Ships’ Ballast Water and Sediments (the “BWM Convention”), adopted by the UN International Maritime Organization in February 2004, calls for the prevention, reduction or elimination of the transfer of harmful aquatic organisms and pathogens through the control and management of ships' ballast water and sediments. The BWM Convention will enter into force on September 8, 2017. In order to comply with these living organism limits, vessel owners may have to install expensive ballast water treatment systems or make port facility disposal arrangements and modify existing vessels to accommodate those systems. To date, many of these systems are unproven and not yet certified for use by any government. Adoption of the BWM Convention standards could have an adverse material impact on our business, financial condition and results of operations depending on the available ballast water treatment systems and the extent to which existing vessels must be modified to accommodate such systems.
Increased inspection procedures and tighter import and export controls could increase costs and disrupt our business.
International shipping is subject to various security and customs inspections and related procedures in countries of origin, destination and trans-shipment points. Inspection procedures may result in the seizure of the contents of our vessels, delays in the loading, offloading or delivery of our vessels and the levying of customs duties, fines or other penalties against us.
It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments may have a material adverse effect on our business, financial condition and results of operations.
Maritime claimants could arrest one or more of our vessels, which could interrupt our cash flow.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a claimant may seek to obtain security for its claim by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant's maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could attempt to assert “sister ship” liability against a vessel in our fleet for claims relating to another of our vessels.
Governments could requisition our vessels during a period of war or emergency, resulting in a loss of earnings.
A government could requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment would be uncertain. Government requisition of one or more of our vessels may negatively impact our revenues and reduce the amount of dividends, if any, in the future.
Changes in fuel prices may adversely affect profits.
Fuel, or bunkers, is typically the largest expense in our shipping operations for our vessels. Changes in the price of fuel may adversely affect our profitability. When we operate vessels under COAs or voyage charters, we are responsible for all voyage costs, including bunkers. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become much more expensive in the future, which may reduce our profitability. We continually monitor the market volatility associated with bunker prices and seek to hedge our exposure to changes in the price of marine fuels with our bunker hedging program. Increasing fuel prices resulted in mark to market adjustments of open fuel swaps in the last three quarters of 2016 and in the fourth quarter of 2015. Please see “
The Company’s Management and Discussion Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures about Market Risks — Fuel Swap Contracts
.”
In the highly competitive international shipping industry, we may not be able to compete successfully for time-charter vessels or for vessel employment with new entrants or established companies with greater resources and, as a result, we may be unable to employ our vessels profitably or to charter-in vessels at reasonable rates.
We charter-in and employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily from other vessel owners and operators, some of whom have substantially greater resources than we do. Competition for seaborne transportation of drybulk cargo by sea is intense and depends on the charter or freight rate and on the location, size, age, condition and acceptability of the vessel and its operators. Due to the highly fragmented market, competitors with greater resources are able to operate larger fleets and may be able to offer lower charter or freight rates and higher quality vessels than we are able to offer. If we are unable to successfully compete with other drybulk shipping operators, we may be unable to retain customers or attract new customers, which would have an adverse impact on our results of operations.
Labor interruptions could disrupt our business.
Our vessels are manned by masters, officers and crews that are contracted by our technical managers. If not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder our operations from being carried out normally and could have a material adverse effect on our business, financial condition, results of operations and cash flows, and on our ability to pay dividends.
Acts of piracy on ocean-going vessels have had and may continue to have an adverse effect on our industry.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean, Indonesia, the Gulf of Guinea off the Coast of Nigeria and the Gulf of Aden off the coast of Somalia. Although the frequency of sea piracy continued to decrease during 2016, sea piracy incidents continue to occur, predominantly in Indonesia, in and around the Singapore Strait and the Gulf of Guinea. Dry bulk vessels and small tankers are particularly vulnerable to such attacks. If these piracy attacks result in regions in which our vessels are deployed being characterized as “war risk” zones by insurers, or Joint War Committee “listed areas,” premiums payable for such coverage could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including costs to employ onboard security guards, could increase in such circumstances. Furthermore, the obligations for charter hire payments and determination of on-hire days is unclear with respect to piracy. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, any detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.
Political instability, terrorist attacks and international hostilities can affect the seaborne transportation industry, which could adversely affect our business.
We conduct most of our operations outside of the United States, and our business, results of operations, cash flows, financial condition and ability to pay dividends, if any, in the future may be adversely affected by changing economic, political and government conditions in the countries and regions where our vessels are employed or registered. Moreover, we operate in a sector of the economy that is likely to be adversely impacted by the effects of political conflicts, including the current political instability in the Middle East, Ukraine, North Africa, North Korea and other geographic countries and areas, terrorist or other attacks, war or international hostilities. Terrorist attacks and the continuing response of the United States and others to these attacks, as well as the threat of future terrorist attacks around the world, continues to cause uncertainty in the world's financial markets and may affect our business, operating results and financial condition. Continuing conflicts and recent developments in the Middle East,
Ukraine and North Africa, and the presence of U.S. or other armed forces in Iraq, Afghanistan and various other regions, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in many regions around the world. Any of these occurrences could have a material adverse impact on our operating results, revenues and costs.
Our insurance may not be adequate to cover our losses that may result from our operations due to the inherent operational risks of the seaborne transportation industry.
We carry insurance to protect us against most of the accident-related risks involved in the conduct of our business, including marine hull and machinery insurance, protection and indemnity insurance, which include pollution risks, crew insurance and war risks insurance. However, we may not be adequately insured to cover all of our potential losses, which could have a material adverse effect on us. Additionally, our insurers may refuse to pay particular claims, and our insurance may be voidable by the insurers if we take, or fail to take, certain action, such as failing to maintain certification of our vessels with the applicable maritime regulatory organizations. Any significant uninsured or under-insured loss or liability could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to pay dividends. In addition, we may not be able to obtain adequate insurance coverage at reasonable rates in the future during adverse insurance market conditions.
In addition, we do not carry loss-of-hire insurance, which covers the loss of revenues during extended vessel off-hire periods, such as those that occur during an unscheduled drydocking due to damage to the vessel from accidents. Accordingly, any loss of a vessel or extended vessel off-hire, due to an accident or otherwise, could have a material adverse effect on our business, financial condition, results of operations and our ability to pay dividends.
Risks Relating to Our Company
Our business strategy includes chartering-in vessels, and we may not be able to charter-in suitable vessels.
Our business strategy depends, in large part, on our ability to charter-in vessels. If we are not able to find suitable vessels to charter-in, or to charter-in vessels at what we deem to be a reasonable rate, we may not be able to operate profitably or perform our contractual obligations. As a result, we may need to adjust our business strategy, and we may experience material adverse effects on our business, financial condition and results of operations. In addition, if we charter in a vessel and shipping rates were to subsequently decrease or we were unable to secure employment for that vessel, our obligation under the charter to pay above-market rates may adversely affect our financial condition and results of operations.
We depend upon a few significant customers for a large part of our revenues and cash flow, and the loss of one or more of these customers could adversely affect our financial performance.
We expect to derive a significant part of our revenue and cash flow from a relatively small number of repeat customers. For the year ended
December 31, 2016
, our top two customers accounted for approximately 12% and 11% of our revenues. For the fiscal year ended December 31,
2015
, one customer accounted for 13% of our revenues. If one or more of our significant customers is unable to perform under one or more charters or COAs with us and we are not able to find a replacement charter or COA, or if a customer exercises certain rights to terminate the charter or COA, we could suffer a loss of revenues that could materially adversely affect our business, financial condition, results of operations and cash available for distribution as dividends to our shareholders.
We could lose a customer or the benefits of a charter or COA if, among other things:
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the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise; or
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the customer terminates the charter because we do not perform in accordance with such charter and do not cure such failures within a specified period.
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If we lose a key customer, we may be unable to obtain replacement charters or COAs on comparable terms or at all. The loss of any of our customers, COAs, charters or vessels, or a decline in payments under our agreements, could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends to our shareholders.
On February 8, 2016, the party to one of the Company’s COAs filed for Chapter 11 bankruptcy protection. The entity was subsequently acquired by a new entity that has agreed to honor the COA under its existing terms. This customer accounted for 11% of total revenue in 2016 and 13% of total revenue in 2015. The contract employs two owned vessels and one time-chartered vessel on a continuous basis and extends through 2020.
We are a holding company, and depend on the ability of our subsidiaries, through which we operate our business, to distribute funds to us in order to satisfy our financial obligations or to make dividend payments.
We are a holding company, and our subsidiaries conduct all of our operations and own all of our operating assets. The equity interests in our vessel-owning subsidiaries represent a significant portion of our operating assets. As a result, our ability to satisfy our financial obligations and to pay dividends to our shareholders depends on the ability of our subsidiaries to generate profits available for distribution to us and, to the extent that they are unable to generate profits, we will be unable to pay dividends to our shareholders.
We are subject to certain risks with counterparties on contracts and the failure of such counterparties to meet their obligations could cause us to suffer losses or otherwise adversely affect our business and ability to comply with covenants in our loan agreements.
We enter into various contracts that are material to the operation of our business, including COAs, time charters and voyage charters under which we employ our vessels, and charter agreements under which we charter-in vessels. We also enter into loan agreements and hedging agreements, such as interest rate swap agreements, bunker swap agreements, and forward freight agreements, or FFAs. Such agreements subject us to counterparty risks. The ability and willingness of each of our counterparties to perform its obligations under a contract with us will depend on a number of factors that are beyond our control, including, among other things, general economic conditions, the condition of the drybulk shipping industry, the overall financial condition of our counterparty, prevailing prices for drybulk cargoes, rates received for specific types of vessels and voyages, and various expenses. In addition, in depressed market conditions, our customers may no longer need us to carry a cargo that is currently under contract or may be able to obtain carriage at a lower rate. If our customers fail to meet their obligations to us or attempt to renegotiate our agreements, it may be difficult to secure suitable substitute employment for the vessel, and any new charter arrangements we secure may be at lower rates or, if our counterparties fail to deliver a vessel we have agreed to charter-in, or if a counterparty otherwise fails to honor its obligations to us under a contract, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations, cash flows, ability to pay dividends to holders of our common shares in the amounts anticipated or at all and compliance with covenants in our secured loan agreements.
Additionally, we are subject to certain risks as a result of using our vessels as collateral. If we are in breach of financial covenants contained in our loan agreements, we may not be successful in obtaining waivers and amendments. If our indebtedness is accelerated, it may be difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose on their liens. Please see “—
We may be unable to comply with covenants in our credit facilities or any future financial obligations that impose operating and financial restrictions on us
.”
We may be unable to comply with covenants in our credit facilities or any future financial obligations that impose operating and financial restrictions on us.
Our credit facilities, which are secured by mortgages on our vessels, impose certain operating and financial restrictions on us, mainly to ensure that the market value of the mortgaged vessel under the applicable credit facility does not fall below a certain percentage of the outstanding amount of the loan, which we refer to as the collateral maintenance or loan to value ratio. In addition, certain of our credit facilities include other financial covenants, which require us to, among other things, maintain:
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a consolidated leverage ratio of not more than 200%;
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a consolidated debt service coverage ratio of not less than 120%;
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Minimum consolidated net worth of $45 million plus, with respect to any vessel purchased or leased by the Guarantor or its subsidiaries, for so long as such vessels are legally or economically owned, 25% of the purchase price or (finance) lease amount of such vessels;
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consolidated minimum liquidity of not less than $16 million plus $1 million for each additional vessel we acquire
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In general, the operating restrictions that are contained in our credit facilities may prohibit or otherwise limit our ability to, among other things:
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effect changes in management of our vessels;
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sell or dispose of any of our assets, including our vessels;
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declare and pay dividends;
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incur additional indebtedness;
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mortgage our vessels; and
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incur and pay management fees or commissions.
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Non-compliance with any of our financial covenants or operating restrictions contained in our credit facilities may constitute an event of default under our credit facilities, which, unless cured within the grace period set forth under the applicable credit facility, if applicable, or waived or modified by our lenders, provides our lenders with the right to, among other things, require us to post additional collateral, enhance our equity and liquidity, increase our interest payments, pay down our indebtedness to a level where we are in compliance, sell vessels in our fleet, reclassify our indebtedness as current liabilities, accelerate our indebtedness, or foreclose their liens on our vessels and the other assets securing the credit facilities, which would impair our ability to continue to conduct our business.
As of December 31, 2015, we were in not in compliance with certain covenants contained in our debt agreements and had to obtain waivers from the facility agents. Please read “
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Borrowing Activities
.”
Furthermore, certain of our credit facilities contain a cross-default provision that may be triggered by a default under one of our other credit facilities. A cross-default provision means that a default on one loan would result in a default on certain other loans. Because of the presence of cross-default provisions in certain of our credit facilities, the refusal of any one lender under our credit facilities to grant or extend a waiver could result in certain of our indebtedness being accelerated. If our secured indebtedness is accelerated in full or in part, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels and other assets securing our credit facilities if our lenders foreclose their liens, which would adversely affect our ability to conduct our business.
Moreover, in connection with any waivers of or amendments to our credit facilities that we may obtain, our lenders may impose additional operating and financial restrictions on us or modify the terms of our existing credit facilities. These restrictions may further restrict our ability to, among other things, pay dividends, make capital expenditures or incur additional indebtedness, including through the issuance of guarantees. In addition, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness. For more information, please read “
Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Borrowing Activities
.”
We may be unable to effectively manage our growth strategy.
One of our principal business strategies is to continue to expand capacity and flexibility by increasing our owned fleet as we secure additional demand for our services. Our growth strategy will depend upon a number of factors, some of which may not be within our control. These factors include our ability to:
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enter into new contracts for the transportation of cargoes;
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locate and acquire suitable vessels for acquisitions at attractive prices;
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obtain required financing for our existing and new operations;
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integrate any acquired vessels successfully with our existing operations, including obtaining any approvals and qualifications necessary to operate vessels that we acquire;
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enhance our customer base;
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hire, train and retain qualified personnel and crew to manage and operate our growing business and fleet;
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identify additional new markets; and
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improve our operating, financial and accounting systems and controls.
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We may undertake future financings to finance our growth. Our failure to effectively identify, purchase, develop and integrate any vessels could adversely affect our business, financial condition and results of operations. The number of employees that perform services for us and our current operating and financial systems may not be adequate as we implement our plan to expand the size of our fleet, and we may not be able to effectively hire more employees or adequately improve those systems. Finally, acquisitions may require additional equity issuances or debt issuances (with amortization payments), both of which could lower our available cash. If any such events occur, our financial condition may be adversely affected.
Growing any business presents numerous risks such as difficulty in obtaining additional qualified personnel and managing relationships with customers and suppliers. The expansion of our fleet may impose significant additional responsibilities on our management and staff, and may necessitate that we increase the number of personnel. We cannot give any assurance that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth.
Investment in Forward Freight Agreements and other derivative instruments could result in losses.
We manage our market exposure using forward freight agreements, or FFAs, and other derivative instruments, such as bunker hedging contracts and interest rate swap agreements. FFAs are cash-settled derivative contracts based on future freight delivery rates and other derivative instruments. FFAs may be used to hedge exposure to the charter markets by providing for the purchase or sale of a contracted charter rate along a specified route or combination of routes and over a specified period of time. Upon settlement, if the contracted charter rate is less than the settlement rate, the seller of the FFA is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate, multiplied by the number of days in the specified period. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. If we take positions in FFAs and do not correctly anticipate rate movements for the specified vessel route or routes and relevant time period or our assumptions regarding the relative relationships of certain vessels’ earnings, routes and other factors relevant to the FFA markets are incorrect, we could suffer losses in settling or terminating our FFAs. In addition, we cannot guarantee that such hedges will qualify for special hedge accounting and, as such, our use of such derivatives may lead to material fluctuations in our results of operations.
We also seek to manage our exposure to volatility in the market price of bunkers and interest rate fluctuations by entering into bunker hedging contracts and interest rate swap agreements. There can be no assurance that we will be able to successfully limit our risks, leaving us exposed to unprofitable contracts and we may suffer significant losses from these hedging activities.
Our long-term COAs, single charter bookings and time-charter agreements may result in significant fluctuations in our quarterly results, which may adversely affect our liquidity, as well as our ability to satisfy our financial obligations.
As part of our business strategy, we enter into long-term COAs, single charter bookings and time-charter agreements. We evaluate entering into long-term positions based on the expected return over the full term of the contract. However, long-term contracts that we believe provide attractive returns over their full term may produce losses over portions of the contract period. We may be required to provide additional margin collateral in connection with FFA positions that are settled through clearinghouses, depending upon movements in the FFA markets. These interim losses, fluctuations in our quarterly results or incremental collateral requirements may adversely affect our financial liquidity, as well as our ability to satisfy our financial obligations.
We depend on COAs, which could require us to operate at unfavorable rates for a certain amount of time or subject us to other operating risks.
A significant portion of our revenues are derived from COAs. While COAs provide a relatively stable and predictable source of revenue, they typically fix the rate we are paid for our drybulk shipping services. Once we have entered into a COA, if we have not correctly anticipated vessel rates, location and availability for our owned or chartered-in fleet to fulfill the COA, we could suffer losses. Moreover, factors beyond our control may cause the rates we are paid under that COA to become unprofitable. Nevertheless, we would be obligated to continue to perform at these rates for the term of the COA. In addition, factors beyond our control, such as vessel availability, port delays or congestion, changes in government or industry rules or regulation, industrial actions or acts of terrorism or war, could affect our ability to perform our obligations under our COAs, which could result in breach of contract or other claims by our COA counterparties. Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations and financial condition.
We are a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our common shares less attractive to investors.
We are a “smaller reporting company,” as defined in the Securities Act of 1934, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. Such exemptions may be available until our public float exceeds $75 million as of the last day of our most recently completed second fiscal quarter. Investors may find our common shares and the price of our common shares less attractive because we rely, or may rely, on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and the price of our common shares may be more volatile.
Obligations associated with being a public company require significant company resources and management attention, and we will incur increased costs as a result of being a public company.
We will continue to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other rules and regulations of the SEC, including Sarbanes-Oxley, and requirements of the NASDAQ Global Select Market. These requirements and rules may place a strain on our systems and resources. For example, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition and Sarbanes-Oxley requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources and will cause us to incur significant legal, accounting and other expenses that we had not previously incurred. The expenses incurred by public companies, generally, for reporting and corporate governance purposes have been increasing and the costs we will incur for such purposes may strain our resources. We expect these rules and regulations to increase our legal and financial compliance costs, divert management's attention to ensure compliance and to make some activities more time-consuming and costly. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. In addition, our limited management resources may exacerbate the difficulties in complying with these reporting and other requirements while focusing on executing our business strategy. Our incremental general and administrative expenses as a publicly traded corporation will include costs associated with reports to shareholders, tax returns, investor relations, registrar and transfer agent’s fees, incremental director and officer liability insurance costs and director compensation. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on our business. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, results of operations and financial condition. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common shares, fines, sanctions and other regulatory action.
We are required to comply with certain provisions of Section 404 of Sarbanes-Oxley, although as a smaller reporting company, we will be exempt from certain of its requirements for so long as we remain as such. For example, Section 404 of Sarbanes-Oxley requires that we and our independent auditors report annually on the effectiveness of our internal control over financial reporting. However, as a smaller reporting company, we may take advantage of an exemption from the auditor attestation requirement. Once we are no longer a smaller reporting company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting. Management, however, is not exempt from this requirement, and is required to, among other things, maintain and periodically evaluate our internal control over financial reporting and disclosure controls and procedures. In particular, we will need to perform system and process evaluation and testing of our internal control over financial reporting to allow us to report on the effectiveness of our internal control over financial reporting, as required.
A failure to pass inspection by classification societies could result in one or more vessels being unemployable unless and until they pass inspection, resulting in a loss of revenues from such vessels for that period and a corresponding decrease in earnings.
The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the United Nations Safety of Life at Sea Convention. Our owned fleet is currently enrolled with Bureau Veritas (BV), DNV GL Group (DNV), and Nippon Kaiji Kyokai (NK).
A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Our
vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel must undergo regulatory surveys of its underwater parts every 30 to 60 months.
If a vessel fails any annual survey, intermediate survey or special survey, the vessel may be unable to trade between ports and, therefore, would be unemployable, potentially causing a negative impact on our revenues due to the loss of revenues from such vessel until it was able to trade again.
If we purchase and operate secondhand vessels, we may be exposed to increased operating costs which could adversely affect our earnings and, as our fleet ages, the risks associated with older vessels could adversely affect our ability to obtain profitable charters.
As part of our current business strategy to increase our owned fleet, we may acquire new and secondhand vessels. While we typically inspect secondhand vessels prior to purchase, this does not provide us with the same knowledge about their condition that we would have had if these vessels had been built for and operated exclusively by us. Even if we physically inspect a secondhand vessel, an inspection does not provide us with the same knowledge about its condition that we would have if the vessel had been operated exclusively by us. Accordingly, we may not discover defects or other problems with secondhand vessels prior to purchase or charter, or may incur costs to terminate a purchase agreement. Any such hidden defects or problems, when detected, may be expensive to repair, and if not detected, may result in accidents or other incidents for which we may become liable to third parties.
In general, the costs to maintain a vessel in good operating condition increase with the age of the vessel. Older vessels are typically less fuel-efficient than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.
Furthermore, governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.
Unless we set aside reserves or are able to borrow funds for vessel replacement, we will be unable to replace the vessels in our fleet at the end of their useful lives.
We estimate the useful life of most of our vessels to be 25 years to 30 years from the date of initial delivery from the shipyard. The remaining estimated useful lives of our fleet range from 4 to 25 years, depending on the type of vessel and market conditions. The average age of our owned drybulk carriers at the time of this filing is approximately 9 years. A portion of our cash flows and income are dependent on the revenues earned by employing our vessels. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, results of operations, financial condition and ability to pay dividends could be materially and adversely affected. We currently do not maintain reserves for vessel replacements. We intend to finance vessel replacements from internally generated cash flow, borrowings under our credit facilities or additional equity or debt offerings.
Our ability to obtain additional debt financing, or refinance any existing indebtedness, may be dependent on the performance and length of our COAs and charters and the creditworthiness of our contract counterparties.
The performance and length of our COAs and charters and the actual or perceived credit quality of our contract counterparties, and any defaults by them, may materially affect our ability to obtain the additional capital resources required to purchase additional vessels or may significantly increase our costs of obtaining such capital. Our inability to obtain additional financing on acceptable terms or at all may materially affect our results of operations and our ability to implement our business strategy.
We intend to partially finance acquisitions of vessels with borrowings drawn under credit facilities. While we may refinance amounts drawn under our credit facilities with the net proceeds of future debt and equity offerings, we cannot assure you that we will be able to do so at interest rates and on terms that are acceptable to us or at all. If we are not able to refinance these amounts with the net proceeds of debt and equity offerings at an interest rate or on terms acceptable to us or at all, we will have to dedicate a larger portion of our cash flow from operations to pay the principal and interest of this indebtedness. If we are not able to satisfy these obligations, we may have to undertake alternative financing plans. The actual or perceived credit quality of our contract counterparties, any defaults by them and the market value of our fleet, among other things, may materially affect our ability to obtain alternative financing. In addition, debt service payments under our credit facilities or alternative financing may limit funds otherwise available for working capital, capital expenditures, the payment of dividends and other purposes. If we are unable to meet our debt obligations, or if we otherwise default under our credit facilities or alternative financing arrangements, our lenders could declare the debt, together with accrued interest and fees, to be immediately due and payable and foreclose on our fleet,
which could result in the acceleration of other indebtedness that we may have at such time and the commencement of similar foreclosure proceedings by other lenders.
We depend on our Chief Executive Officer, our Chief Financial Officer and other key employees, and the loss of their services would have a material adverse effect on our business, results and financial condition.
We depend on the efforts, knowledge, skill, reputations and business contacts of our Chief Executive Officer, Edward Coll, our Chief Financial Officer, Anthony Laura, our Chief Operating Officer, Mark Filanowski and other key employees including Claus Boggild, Mads Boye Petersen, Peter Koken, Robert Seward, Fotis Doussopoulos, and Gianni Del Signore. Accordingly, our success will depend on the continued service of these individuals. We do not have employment agreements with our executive officers. We may experience departures of senior executive officers and other key employees, and we cannot predict the impact that any of their departures would have on our ability to achieve our financial objectives. The loss of the services of any of them could have a material adverse effect on our business, results of operations and financial condition.
We may be subject to litigation, arbitration and other proceedings that could have an adverse effect on our business
We may be, from time to time, involved in various litigation matters arising in the ordinary course of business, or otherwise. These matters may include, among other things, contract disputes, personal injury claims, environmental matters, governmental claims for taxes or duties, securities, or maritime matters. The potential costs to resolve any claim or other litigation matter, or a combination of these, may have a material adverse effect on us because of potential negative outcomes, the costs associated with asserting our claims or defending such lawsuits, and the diversion of management's attention to these matters.
United States tax authorities could treat us as a “passive foreign investment company,” which could have adverse United States federal income tax consequences to U.S. holders
A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for United States federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of the corporation's assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” United States shareholders of a PFIC are subject to a disadvantageous United States federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
Based on our proposed method of operation, we do not believe that we will be a PFIC with respect to any taxable year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. Accordingly, we believe that our income from our time chartering activities does not constitute “passive income,” and the assets that we own and operate in connection with the production of that income do not constitute passive assets.
There is, however, no direct legal authority under the PFIC rules addressing our proposed method of operation. Accordingly, no assurance can be given that the United States Internal Revenue Service, or IRS, or a court of law will accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.
If the IRS were to find that we are or have been a PFIC for any taxable year, our United States shareholders will face adverse United States tax consequences. Under the PFIC rules, unless those shareholders make an election available under the Code (which election could itself have adverse consequences for such shareholders), such shareholders would be liable to pay United States federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period of our common shares.
We may have to pay tax on United States source income, which would reduce our earnings
Under sections 863(c)(3) and 887(a) of the United States Internal Revenue Code of 1986, as amended, or the “Code,” 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under section 883 of the Code and the applicable Treasury Regulations recently promulgated thereunder.
We expect that we and each of our subsidiaries qualify for this statutory tax exemption and we will take this position for United States federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to United States federal income tax on our United States source income. Due to the factual nature of the issues involved, we can give no assurances on our tax-exempt status or that of any of our subsidiaries.
If we or our subsidiaries are not entitled to exemption under Code section 883 for any taxable year, we or our subsidiaries could be subject for those years to an effective 2% United States federal income tax on the shipping income these companies derive during the year that are attributable to the transport of cargoes to or from the United States. The imposition of this taxation would have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders.
We have had and in the future may identify material weaknesses in our internal control over financial reporting that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements
Our management team is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.
The Company has been a public reporting company since October 1, 2014. Prior to that, we did not have a sufficient number of accounting personnel or adequate systems to maintain an effective system of internal control over financial reporting. We and our independent registered public accounting firm identified material weaknesses during the preparation of our financial statements as of and for the year ended December 31, 2014. During 2015, we made significant improvements to our internal controls and remediated the material weaknesses in internal control over financial reporting identified in 2014. While these measures correct the material weaknesses identified, we cannot assure that there will not be other material weaknesses that we or our independent registered public accounting firm will identify. If additional material weaknesses in our internal controls are discovered in the future, they may adversely affect our ability to record, process, summarize, and report financial information timely and accurately.
Risks Related To Our Common Shares
Future sales of our common shares could cause the market price of our common shares to decline.
The market price of our common shares could decline due to sales of a large number of shares in the market, including sales of shares by our large shareholders, or the perception that these sales could occur. These sales could also make it more difficult or impossible for us to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of common shares.
We may need to raise additional capital in the future, which may not be available on favorable terms or at all or which may dilute our common shares or adversely affect its market price.
We may require additional capital to expand our business and increase revenues, add liquidity in response to negative economic conditions, meet unexpected liquidity needs caused by industry volatility or uncertainty and reduce our outstanding indebtedness under our existing facilities. To the extent that our existing capital and borrowing capabilities are insufficient to meet these requirements and cover any losses, we will need to raise additional funds through debt or equity financings, including offerings of our common shares, securities convertible into our common shares, or rights to acquire our common shares, or curtail our growth and reduce our assets or restructure arrangements with existing security holders. Any equity or debt financing, or additional borrowings, if available at all, may be on terms that are not favorable to us. Equity financings could result in dilution to our shareholders, as described further below, and the securities issued in future financings may have rights, preferences and privileges that are senior to those of our common shares. If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital. If we cannot raise funds on acceptable terms if and when needed, we may not be able to take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements.
Future issuances of our common shares could dilute our shareholders’ interests in our company.
We may, from time to time, issue additional common shares to support our growth strategy, reduce debt or provide us with capital for other purposes that our Board of Directors believes to be in our best interest. To the extent that an existing shareholder does not purchase additional shares that we may issue, that shareholder’s interest in our company will be diluted, which means that its percentage of ownership in our company will be reduced. Following such a reduction, that shareholder’s common shares would represent a smaller percentage of the vote in our Board of Directors’ elections and other shareholder decisions.
Volatility in the market price and trading volume of our common shares could adversely impact the trading price of our common shares.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market factors may materially reduce the market price of our common shares, regardless of our operating performance. The market price of our common shares, which has experienced significant price fluctuations in the past twelve months, could continue to fluctuate significantly for many reasons, including in response to the risks described herein or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or negative announcements by our competitors or suppliers regarding their own performance, as well as industry conditions and general financial, economic and political instability.
Classified Board of Directors.
Our Board of Directors are divided into three classes of directors serving staggered, three-year terms beginning upon the expiration of the initial term for each class. This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of us. It could also delay shareholders who do not agree with the policies of our Board of Directors from removing a majority of our Board of Directors for up to two years.
We are incorporated in Bermuda and it may not be possible for our investors to enforce U.S. judgments against us.
We are incorporated in Bermuda and substantially all of our assets are located outside the United States. In addition, one of our directors is a non-resident of the United States, and all or a substantial portion of such director’s assets are located outside the United States. As a result, it may be difficult or impossible for U.S. investors to serve process within the United States. upon us or our directors and executive officers, or to enforce a judgment against us for civil liabilities in United States courts.
In addition, you should not assume that courts in the countries in which we are incorporated or where our assets are located would enforce judgments of United States courts obtained in actions against us based upon the civil liability provisions of applicable United States federal and state securities laws or would enforce, in original actions, liabilities against us based on those laws.
Because we are a foreign corporation, you may not have the same rights that a shareholder in a U.S. corporation may have.
We are a Bermuda exempted company. Our memorandum of association and bye-laws and the Companies Act, 1981 of Bermuda, or the Companies Act, govern our affairs. The Companies Act does not as clearly establish your rights and the fiduciary responsibilities of our directors as do statutes and judicial precedent in some United States jurisdictions. Therefore, you may have more difficulty in protecting your interests as a shareholder in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction. There is a statutory remedy under Section 111 of the Companies Act which provides that a shareholder may seek redress in the courts as long as such shareholder can establish that our affairs are being conducted, or have been conducted, in a manner oppressive or prejudicial to the interests of some part of the shareholders, including such shareholder. However, you may not have the same rights that a shareholder in a United States corporation may have.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Phoenix Bulk Carriers (US) LLC, the administrative agent for the Company, maintains office space at 109 Long Wharf, Newport, Rhode Island 02840. The building is owned by 109 Long Wharf LLC (“Long Wharf”), a wholly-owned subsidiary of the Company since September 1, 2014. Long Wharf was previously owned by certain of the Company’s Executive Officers and Directors. The Company leases office space in Copenhagen, Athens and Singapore.
ITEM 3. LEGAL PROCEEDINGS
We have not been involved in any legal proceedings which we believe are likely to have, or have had a significant effect on our business, financial position, results of operations or cash flows, nor are we aware of any proceedings that are pending or threatened which we believe are likely to have a significant effect on our business, financial position, results of operations or liquidity. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. We expect that these claims would be covered by insurance, subject to customary deductibles. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
NOTE 1 - GENERAL INFORMATION
Pangaea Logistics Solutions Ltd. and its subsidiaries (collectively, the “Company” or “Pangaea”) is a provider of seaborne drybulk transportation services. Pangaea utilizes its logistics expertise to service a broad base of industrial customers who require the transportation of a wide variety of drybulk cargoes, including grains, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone. The Company addresses the transportation needs of its customers by undertaking a comprehensive set of services and activities, including cargo loading, cargo discharge, vessel chartering, voyage planning, and technical vessel management.
The Company is a holding company incorporated under the laws of Bermuda as an exempted company on April 29, 2014. Bulk Partners (Bermuda) Ltd. (“Bulk Partners”), is wholly owned by the Company, and which is also a holding company that was incorporated under the laws of Bermuda as an exempted company on June 17, 2008, was formed by three individuals who are collectively referred to as the Founders.
At
December 31, 2016
, there are
36,590,417
common shares of the Company issued and outstanding of which the Founders own approximately
47.2%
.
As of
December 31, 2016
, the Company owned two Panamax, four Supramax and two Handymax Ice Class 1A drybulk vessels. The Company also owned one-third of a consolidated joint venture with a fleet of six Panamax Ice Class 1A drybulk vessels. The Company also owned one-half of a consolidated joint venture that took delivery of two Ultramax Ice Class 1C drybulk vessels from the shipbuilder in January 2017. The Company acquired 50% of this joint venture from its partner on January 23, 2017 making this entity a wholly-owned subsidiary.
NOTE 2 – NATURE OF ORGANIZATION
The consolidated financial statements include the operations of Pangaea Logistics Solutions Ltd. and its wholly-owned subsidiaries (collectively referred to as “the Company”), as well as other entities consolidated pursuant to Accounting Standards Codification (“ASC”) 810,
Consolidation
. A summary of the Company’s consolidation policy is provided in Note 3. A summary of the Company’s variable interest entities is provided at Note 4. At
December 31, 2016
and
2015
, entities that are consolidated pursuant to ASC 810-10 include the following wholly-owned subsidiaries:
|
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•
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Bulk Partners (Bermuda) Ltd. (“Bulk Partners”) – a corporation that was duly organized under the laws of Bermuda. The primary purpose of this corporation is a holding company.
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•
|
Phoenix Bulk Carriers (BVI) Limited (“PBC”) – a corporation that was duly organized under the laws of the British Virgin Islands. The primary purpose of this corporation is to manage and operate ocean-going vessels.
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•
|
Phoenix Bulk Management Bermuda Limited (“PBM”) – a corporation that was duly organized under the laws of Bermuda. Certain of the administrative management functions of PBC have been assigned to PBM.
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•
|
Americas Bulk Transport (BVI) Limited – a corporation that was duly organized under the laws of the British Virgin Islands. The primary purpose of this corporation is to charter ships.
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•
|
Bulk Ocean Shipping (Bermuda) Ltd. – a corporation that was duly organized under the laws of Bermuda. The primary purpose of this corporation is to manage the fuel procurement of the chartered vessels.
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•
|
Phoenix Bulk Carriers (US) LLC – a corporation that duly organized under the laws of Delaware. The primary purpose of this corporation is to act as the U.S. administrative agent for the Company.
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•
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Allseas Logistics Bermuda Ltd. – a corporation that was duly organized under the laws of Bermuda. The primary purpose of this corporation is the Treasury Agent for the group of Companies.
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•
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Bulk Pangaea Limited (“Bulk Pangaea”) – a corporation that was duly organized under the laws of Bermuda. Bulk Pangaea was established in September 2009 for the purpose of acquiring the m/v Bulk Pangaea.
|
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•
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Bulk Patriot Ltd. (“Bulk Patriot”) – a corporation that was duly organized under the laws of Bermuda. Bulk Patriot was established in September 2011 for the purpose of acquiring the m/v Bulk Patriot.
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•
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Bulk Juliana Ltd. (“Bulk Juliana”) – a corporation that was duly organized under the laws of Bermuda. Bulk Juliana was established in March 2012 for the purpose of acquiring the m/v Bulk Juliana.
|
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•
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Bulk Trident Ltd. (“Bulk Trident”) – a corporation that was duly organized under the laws of Bermuda. Bulk Trident was established in August 2012 for the purpose of acquiring the m/v Bulk Trident.
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•
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Bulk Atlantic Ltd. (“Bulk Beothuk”) – a corporation that was duly organized under the laws of Bermuda. Bulk Atlantic was established in February 2013 for the purpose of acquiring the m/v Bulk Beothuk.
|
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•
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Bulk Phoenix Ltd. (“Bulk Phoenix”) – a corporation that was duly organized under the laws of Bermuda. Bulk Phoenix was established in July 2013 for the purpose of acquiring the m/v Bulk Newport.
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•
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Nordic Bulk Barents Ltd. (“Bulk Barents”) – a corporation that was duly organized under the laws of Bermuda. Bulk Barents was established in November 2013 for the purpose of acquiring the m/v Nordic Barents.
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•
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Nordic Bulk Bothnia Ltd. (“Bulk Bothnia”) – a corporation that was duly organized under the laws of Bermuda. Bulk Bothnia was established in November 2013 for the purpose of acquiring the m/v Nordic Bothnia.
|
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•
|
109 Long Wharf LLC (“Long Wharf”) – a limited liability company that was duly organized under the laws of Delaware for the objective and purpose of holding real estate located in Newport, Rhode Island.
|
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•
|
Nordic Bulk Holding ApS (“NBH”) – a corporation that was duly organized in March 2009 under the laws of Denmark. The primary purpose of this corporation is to manage and operate vessels through its wholly owned subsidiary Nordic Bulk Carriers AS (“NBC”). NBC specializes in ice trading, as well as the carriage of a wide range of commodities, including cement clinker, steel scrap, fertilizers, and grains.
|
At
December 31, 2016
and
2015
, entities that are consolidated pursuant to ASC 810-10, but which are not wholly-owned, include the following:
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•
|
Nordic Bulk Holding Company Ltd. (“NBHC”) - a corporation that was duly organized under the laws of Bermuda. NBHC was established in October 2012, for the purpose of owning Bulk Nordic Odyssey Ltd. (“Bulk Odyssey”) and Bulk Nordic Orion Ltd. (“Bulk Orion”) and to invest in additional vessels through its wholly-owned subsidiaries. At
December 31, 2016
and
2015
the Company had one-third ownership interest in NBHC, the remainder of which is owned by third-parties. The operating results of NBHC are 100% dependent on transactions with related parties and affiliates. Accordingly, the Company has consolidated NBHC for the years ended
December 31, 2016 and 2015
. Bulk Bulk Odyssey, Bulk Orion, Bulk Nordic Oshima Ltd. (“Bulk Oshima”), Bulk Nordic Olympic Ltd. (“Bulk Olympic”), Bulk Nordic Odin Ltd. (“Bulk Odin”) and Bulk Nordic Oasis Ltd. (“Bulk Oasis”), corporations duly organized under the laws of Bermuda between March 2012 and February 2015, are owned by NBHC. These entities were established for the purpose of owning m/v Nordic Odyssey, m/v Nordic Orion, m/v Nordic Oshima, m/v Nordic Olympic, m/v Nordic Odin and m/v Nordic Oasis, respectively.
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•
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Nordic Bulk Ventures Holding Company Ltd. (“BVH”) – a corporation that was duly organized under the laws of Bermuda. BVH was established in August 2013, together with a third-party, for the purpose of owning Bulk Nordic Five Ltd. (“Five”) and Bulk Nordic Six Ltd. (“Six”). Five and Six are corporations that were duly organized under the laws of Bermuda in November 2013 for the purpose of owning m/v Bulk Destiny and m/v Bulk Endurance, new ultramax newbuildings delivered in January 2017. At
December 31, 2016
and
2015
, the Company had a
50%
ownership interest in BVH, the remainder of which was owned by a third-party until January 2017 as discussed in Note12. The operating results of BVH are 100% dependent on transactions with related parties and affiliates. Accordingly, the Company has consolidated BVH for the years ended
December 31, 2016
and
2015
.
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NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company and its subsidiaries is presented to assist in understanding the Company’s consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States, and have been applied in the preparation of the consolidated financial statements.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the establishment of the allowance for doubtful accounts and the estimate of salvage value used in determining vessel depreciation expense.
Consolidation
The purpose of consolidated financial statements is to present the financial position and results of operations of a company and its subsidiaries as if the group were a single company. The first step in the Company’s consolidation policy is to determine whether an entity is to be evaluated for potential consolidation based on its outstanding voting interests or its variable interests. Accordingly, the Company first determines whether the entity is a Variable Interest Entity (“VIE”) pursuant to the provisions of ASC 810-10. If the entity is a VIE, consolidation is based on the entity’s variable interests and not its outstanding voting shares. If the entity is not determined to be a VIE, the Company evaluates the entity based on its outstanding voting interests.
Amounts pertaining to the non-controlling ownership interest held by third parties in the financial position and operating results of the Company’s subsidiaries and/or consolidated VIEs are reported as non-controlling interest in the accompanying consolidated balance sheets.
As part of the Company’s consolidation process, intercompany transactions are eliminated in the consolidated financial statements.
Revenue Recognition
Voyage revenues represent revenues earned by the Company, principally from providing transportation services under voyage charters. A voyage charter involves the carriage of a specific amount and type of cargo on a load port to discharge port basis, subject to various cargo handling terms. Under a voyage charter, the service revenues are earned and recognized ratably over the duration of the voyage. Estimated losses under a voyage charter are provided for in full at the time such losses become probable. Demurrage, which is included in voyage revenues, represents payments by the charterer to the vessel owner when loading and discharging time exceed the stipulated time in the voyage charter. Demurrage is measured in accordance with the provisions of the respective charter agreements and the circumstances under which demurrage revenues arise. At the time demurrage revenue can be estimated, it is included in the calculation of voyage revenue and recognized ratably over the duration of the voyage to which it pertains. Voyage revenue recognized is presented net of address commissions.
Charter revenues relate to a time charter arrangement under which the Company is paid to provide transportation services on a per day basis for a specified period of time. Revenues from time charters are earned and recognized on a straight-line basis over the term of the charter, as the vessel operates under the charter. Revenue is not earned when vessels are offhire.
Deferred Revenue
Billings for services for which revenue is not recognized in the current period are recorded as deferred revenue. Deferred revenue recognized in the accompanying consolidated balance sheets is expected to be realized within 12 months of the balance sheet date.
Voyage Expenses
The Company incurs expenses for voyage charters that include bunkers (fuel), port charges, canal tolls, broker commissions and cargo handling operations, which are expensed as incurred.
Charter Expenses
The Company charters in vessels to supplement its owned fleet to support its voyage charter operations. The Company hires vessels under time charters with third party vessel owners, and recognizes the charter hire payments as an expense on a straight-line basis over the term of the charter. Charter hire payments are typically made in advance, and the unrecognized portion is reflected as advance hire in the accompanying consolidated balance sheets. Under time charters, the vessel owner is responsible for the vessel operating costs such as crews, maintenance and repairs, insurance, and stores.
Vessel Operating Expenses
Vessel operating expenses (“VOE”) represent the cost to operate the Company’s owned vessels. VOE include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumables, other miscellaneous expenses, and technical management fees. Technical management services include day-to-day vessel operations, performing general vessel maintenance, ensuring regulatory and classification society compliance, arranging the hire of crew and purchasing stores, supplies and spare parts. These expenses are recognized as incurred.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, trade receivables and derivative instruments. The Company maintains its cash accounts with various high-quality financial institutions in the United States, Germany, and Bermuda. The Company performs periodic evaluations of the relative credit standing of these financial institutions. The Company does not believe that significant concentration of credit risk exists with respect to these cash equivalents. Trade accounts receivable are recorded at the invoiced amount, and do not bear interest. The Company performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral. Historically, credit risk with respect to trade accounts receivable has been considered minimal due to the long-standing relationships with significant customers, and their relative financial stability. However, current economic conditions could impact the collectibility of certain customers' trade receivables, which could have a material effect on the Company's results of operations. Derivative instruments are recorded at fair value. The Company does not have any off-balance sheet credit exposure related to its customers.
At
December 31, 2016
,
two
customers accounted for
29%
of the Company’s trade accounts receivable. At
December 31, 2015
, there were
two
customers that accounted for
59%
of the Company’s trade accounts receivable.
At
December 31, 2016
, customers in each of the following countries accounted for at least
10%
of accounts receivable; the United States (
30%
), Canada (
20%
) and the Switzerland (
11%
). At
December 31, 2015
, customers in each of the following countries accounted for at least
10%
of the Company’s accounts receivable; Canada (
41%
) and the United States (
35%
).
For the year ended
December 31, 2016
, revenue from customers in each of the following countries accounted for at least
10%
of total revenue; the United States (
21%
) and Canada (
21%
). For the year ended
December 31, 2015
, revenue from customers in each of the following countries accounted for at least
10%
of total revenue; the United States (
29%
), Canada (
15%
) and Switzerland (
13%
).
For the year ended
December 31, 2016
two
customers accounted for
22%
of total revenue. For the year ended
December 31, 2015
,
one
customer accounted for
13%
of total revenue.
Cash and Cash Equivalents
Cash and cash equivalents include short-term deposits with an original maturity of less than three months. Cash and cash equivalents by type were as follows:
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|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Money market accounts – cash equivalents
|
|
$
|
6,540,489
|
|
|
$
|
28,491,872
|
|
Cash
(1)
|
|
15,782,460
|
|
|
9,028,368
|
|
Total
|
|
$
|
22,322,949
|
|
|
$
|
37,520,240
|
|
(1)
Consists of cash deposits at various major banks.
Restricted Cash
Restricted cash at
December 31, 2016
consists of
$1.1 million
held by a facility agent as required by the Bulk Atlantic Secured Note,
$2.5 million
held by the facility agent as required by the The Senior Secured Post-Delivery Term Loan Facility and
$2.5 million
held by the facility agent as required by the Bulk Nordic Odin Ltd., Bulk Nordic Olympic Ltd. Bulk Nordic Odyssey Ltd., Bulk Nordic Orion Ltd. And Bulk Nordic Oshima Ltd. – Dated September 28, 2015 - Amended and Restated Loan Agreement (See Note 12). At December 31, 2015, restricted cash consists of
$0.5 million
held by a facility agent as required by a letter of credit on behalf of PBC as security for a performance guarantee on a contract,
$0.5 million
held by a facility agent as required by
the Bulk Atlantic Secured Note and
$1.0 million
being held by a facility agent as required by the letter of credit issued as security for the appeal of a lawsuit brought by a shareholder.
Allowance for Doubtful Accounts
The Company provides a specific reserve for significant outstanding accounts that are considered potentially uncollectible in whole or in part. In addition, the Company’s policy based on experience is to establish a reserve equal to approximately 25% of accounts receivable balances that are 30-180 days past due and approximately 50% of accounts receivable balances that are 180 or more days past due, and which are not otherwise reserved. The reserve estimates are adjusted as additional information becomes available, or as payments are made. At
December 31, 2016
and
2015
, the Company has provided an allowance for doubtful accounts of
$4,752,265
and
$5,067,194
respectively, for amounts that are not expected to be fully collected. The provision for doubtful accounts was approximately
$922,000
in 2016 and
$975,000
in
2015
. The Company wrote off approximately
$1,237,000
and
$157,000
during
2016
and
2015
, respectively, which amounts were previously included in the allowance, because these amounts were determined to be uncollectible.
Bunker Inventory
Inventory is primarily comprised of fuel oil purchased and stored onboard a vessel. Inventory is measured at the lower of cost under the first-in, first-out method or net realizable value.
Advanced Hire, Prepaid Expenses and Other Current Assets
Advance hire represents payment to ship owners under time-charters for days subsequent to the balance sheet date. Hire is typically paid in advance for the following fifteen days, but intervals vary by time-charter contract. Prepaid expenses include advance funding to the technical manager for vessel operating expenses, lubricating oils and stores kept on board owned vessels, certain voyage expenses paid in advance and direct costs incurred to fulfill a COA. These specifically identified costs are used to satisfy the contract and are expected to be recovered over the term of the COA. Such costs are amortized on a straight-line basis and charged equally to each of the voyages under the contract. Other assets include deposits held by counterparties to various derivative instruments and the fair value of derivative instruments when it exceeds the settlement price of the instrument.
At
December 31,
advance hire, prepaid expenses and other current assets were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Advance hire
|
|
$
|
2,232,444
|
|
|
$
|
1,138,300
|
|
Prepaid expenses
|
|
1,844,522
|
|
|
537,192
|
|
Other current assets
|
|
2,364,617
|
|
|
1,003,800
|
|
Total
|
|
$
|
6,441,583
|
|
|
$
|
2,679,292
|
|
Vessels and Depreciation
Vessels are stated at cost, which includes contract price and acquisition costs. Significant improvements to vessels are capitalized; maintenance and repairs that do not improve or extend the lives of the vessels are expensed as incurred. Depreciation is provided using the straight-line method over the remaining estimated useful lives of the vessels (excluding the time a vessel in is dry dock), based on cost less salvage value. Each vessel’s salvage value is equal to the product of its lightweight tonnage and an estimated scrap rate of
$300
per ton, which was determined by reference to quoted rates and is reviewed annually. The Company estimates the useful life of its vessels to be
25 years
to
30 years
from the date of initial delivery from the shipyard. The remaining estimated useful lives of the current fleet are
4
-
25
years. The Company does not incur depreciation expense when vessels are taken out of service for dry docking.
Vessels held for sale are carried at estimated fair value less cost to sell. No additional depreciation expense is recorded for vessels categorized as held for sale.
Dry Docking Expenses and Amortization
Significant upgrades made to the vessels during dry docking are capitalized when incurred and amortized on a straight-line basis over the five year period until the next dry docking. Costs capitalized as part of the dry docking include direct costs incurred to meet regulatory requirements that add economic life to the vessel, that increase the vessel’s earnings capacity or which improve the vessel’s efficiency. Direct costs include the shipyard costs, parts, inspection fees, steel, blasting and painting. Expenditures for
normal maintenance and repairs, whether incurred as part of the dry docking or not, are expensed as incurred. Unamortized dry-docking costs of vessels that are sold are written off and included in the calculation of the resulting gain or loss on sale.
Long-lived Assets Impairment Considerations
The carrying values of the Company’s vessels may not represent their fair market value or the amount that could be obtained by selling the vessel at any point in time, since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of new vessels. Historically, both charter rates and vessel values tend to be cyclical. The carrying amounts of vessels held and used by the Company are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of a particular vessel may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the asset group level which represents the lowest level for which identifiable cash flows are largely independent of other groups of assets. The asset groups established by the Company are defined by vessel size, age and classification. At
December 31, 2016
and
2015
, the Company identified a potential impairment indicator based on the estimated market value of its vessels. As a result, the Company evaluated each asset group for impairment by estimating the total undiscounted cash flows expected to result from the use of the asset group and its eventual disposal.
The significant factors and assumptions used in the undiscounted projected net operating cash flow analysis include: the Company’s estimate of future time charter equivalent (“TCE”) rates based on current rates under existing charters and contracts. The Company applies a multiple to account for expected growth or decline in TCE rates due to market conditions for periods beyond those for which rates are available. Projected net operating cash flows are net of brokerage and address commissions and exclude revenue on scheduled off-hire days. The Company uses current vessel operating expense amounts, estimated costs of drydocking and historical general and administrative expenses as the basis for its expected outflows, and applies an inflation factor it considers appropriate. The net of these inflows and outflows, plus an estimated salvage value, constitutes the projected undiscounted future cash flows.
At December 31, 2016, the estimated undiscounted future cash flows were higher than the carrying amount of the vessels in the Company's fleet and as such, no loss on impairment was recognized.
At December 31, 2015, the carrying amounts of the m/v Nordic Barents and m/v Nordic Bothnia were determined to be higher than their estimated undiscounted future cash flows because estimated TCE rates anticipated in the analysis have declined. The decrease in TCE rates is due to the fact that these vessels are older and are not preferable in a weakening market where there is an oversupply of newer tonnage. As a result, a loss on impairment of these vessels totaling approximately
$5.4 million
, which is equal to the excess of the carrying amount of the assets over their fair value, is included in the consolidated statements of operations.
Debt Issuance Costs, Bank Fees and Amortization
Qualifying expenses associated with commercial financing and fees paid to financial institutions to obtain financing are carried as a reduction of the outstanding debt and amortized over the term of the arrangement using the effective interest method. The unamortized portion is included as a reduction of secured long-term debt on the consolidated balance sheets.
In connection with the Company’s new and amended secured term loans executed in 2016, the Company incurred financing costs of approximately
$46,000
. In connection with the Company’s new and amended secured term loans executed in 2015, the Company incurred bank fees and financing costs of approximately
$1,178,000
.
Amortization of the debt issuance costs is included as a component of interest expense in the consolidated statements of income. Unamortized debt issuance costs of approximately
$37,000
were written off in conjunction with the the repayment of the loan by Bulk Discovery in 2015.
The components of net debt issuance costs and bank fees, which are included in secured long-term debt on the consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Debt issuance costs and bank fees paid to financial institutions
|
|
$
|
5,321,206
|
|
|
$
|
5,275,238
|
|
Less: accumulated amortization
|
|
(3,792,695
|
)
|
|
(3,129,972
|
)
|
Unamortized debt issuance costs and bank fees
|
|
$
|
1,528,511
|
|
|
$
|
2,145,266
|
|
|
|
|
|
|
Amortization included in interest expense
|
|
$
|
662,724
|
|
|
$
|
745,522
|
|
Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Accounts payable
|
|
$
|
15,435,179
|
|
|
$
|
14,064,870
|
|
Accrued expenses
|
|
6,955,389
|
|
|
5,232,864
|
|
Accrued interest
|
|
412,984
|
|
|
455,818
|
|
Other accrued liabilities
|
|
427,627
|
|
|
2,402,650
|
|
Total
|
|
$
|
23,231,179
|
|
|
$
|
22,156,202
|
|
Taxation
The Company is not subject to corporate income taxes on its profits in Bermuda because Bermuda does not impose an income tax.
NBC, a wholly-owned subsidiary of the Company, is subject to a Danish tonnage tax. NBC is not taxed on the basis of their actual income derived from their business but on an alternative income determination based on the net tons carrying capability of their fleet. As the tax is not determined based on taxable income, NBC’s tax expense of approximately
$198,000
(net of prior year adjustment of
$79,000
) and
$373,000
is included within voyage expenses in the accompanying consolidated statements of operations as of
December 31, 2016
and
2015
, respectively.
Shipping income derived from sources outside the United States is not subject to any United States federal income tax. The Company is exempt from U.S. federal income taxation on its U.S. source shipping income if the Company’s Common Stock meets either the “Controlled Foreign Corporation Test” or the “Publicly-Traded Test” under Section 883 of the Code. To the extent the Company is unable to qualify for exemption from tax under Section 883, and the U.S. source shipping income is considered to be effectively connected with the conduct of a U.S. trade or business, as defined in the Code, the Company will be subject to U.S. federal income taxation of 4% of its U.S. source shipping income on a gross basis without the benefit of deductions. If certain other conditions are present, as defined in the Code, U.S. source shipping income, net of applicable deductions, may be subject to a U.S. federal corporate income tax of up to
35%
and a
30%
branch profits tax. The Company believes that none of its U.S. source shipping income will be effectively connected with the conduct of a U.S. trade or business.
Since earnings from shipping operations of the Company are not subject to U.S. or foreign income taxation, the Company has not recorded income tax expense, deferred tax assets or liabilities for the years ending
December 31, 2016
and
2015
.
Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company has determined that it has no uncertain tax positions as of
December 31, 2016
and
2015
. Additionally, the Company accrues interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense.
Where required, the Company complies with income tax filings in its various jurisdictions of operations. As of
December 31, 2016
and
2015
, the Company is not subject to U.S. federal or foreign examinations by tax authorities for years before 2013.
Restricted Common Share Awards
Compensation cost of restricted share awards is measured using the grant date fair value of the Company's common shares, as quoted on the Nasdaq Capital Market, multiplied by the total number of shares granted. Compensation cost is amortized according to the vesting period indicated in the grant agreement. Total compensation cost recognized during the years ended December 31, 2016 and 2015 is approximately
$602,000
and
$457,000
, respectively, which is included in general and administrative expenses in the consolidated statements of operations.
Dividends
Dividends on common stock are recorded when declared by the Board of Directors. Refer to Note10 for a discussion regarding common stock dividends.
Earnings per Common Share
Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period.
Diluted EPS is computed using the treasury stock method. Under this method, the amount of unrecognized compensation cost related to future services by employees who were awarded restricted shares is assumed to be used to repurchase common stock at the average market price during the period. The incremental shares (nonvested less repurchased) are considered to be outstanding for diluted EPS.
Foreign Exchange
The Company conducts all of its business in U.S. dollars; accordingly, there are no foreign exchange transaction gains or losses reflected in the consolidated statements of income.
Derivatives and Hedging Activities
The Company accounts for derivatives in accordance with the provisions of ASC 815, Derivatives and Hedging. The Company uses interest rate swaps to reduce market risks associated with its operations, principally changes in variable interest rates on its bank debt. Additionally, the Company uses forward freight agreements to protect against changes in charter rates and bunker (fuel) swaps to protect against changes in fuel prices. Derivative instruments are measured at fair value and are recorded as assets or liabilities.
The Company is exposed to credit loss in the event of nonperformance by the counterparty to the interest rate swaps, forward freight agreements and bunker hedges.
Segment Reporting
Operating segments are components of a business that are evaluated regularly by the chief operating decision maker ("CODM") for the purpose of assessing performance and allocating resources. Based on the information that the CODM uses, including consideration of whether discrete financial information is available for the business activities, the Company has identified multiple operating segments which have been aggregated based on considerations such as the nature of its services, customers and operations. The Company has determined that it operates under one reportable segment.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate fair value due to the short-term maturities of these instruments. The carrying amount of a portion of the Company’s long-term debt approximates fair value due to the variable interest rates associated with the related credit facilities.
At
December 31, 2016
, the Company has nine fully fixed rate debt facilities and one facility of which fifty percent is fixed. At December 31,
2015
, the Company had six fixed rate debt facilities. The aggregate carrying amounts and fair values of the long-term debt associated with the fixed rate borrowing arrangements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Carrying amount of long-term debt
|
|
$
|
82,001,821
|
|
|
$
|
28,320,101
|
|
Fair value of long-term debt
|
|
$
|
82,224,170
|
|
|
$
|
28,960,879
|
|
Fair values of these debt obligations were estimated based on quoted market prices for the same or similar issues of debt with the same remaining maturities, which is considered Level 2 in the fair value hierarchy established by ASC 820.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s previously reported consolidated operations or shareholders’ equity.
Recent Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18, Accounting Standards Update for Statement of Cash Flows. This update requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer be required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. Entities are required to apply the guidance retrospectively. The Company is currently evaluating the effect of adopting this new accounting guidance.
In February 2016, the FASB issued an ASU 2016-02, Accounting Standards Update for Leases. The update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The Company does not typically enter into contracts with terms exceeding six months. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. Accordingly, the Company does not expect adoption of this guidance to have a material impact on its financial statements.
In August 2014, the FASB issued ASU 2014-15, Accounting Standards Update for Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under this guidance, if conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following:
|
|
a.
|
Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
|
|
|
b.
|
Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
|
|
|
c.
|
Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
|
The new standard was effective for annual periods ending after December 15, 2016. Implementation of this guidance did not have a material impact on its consolidated financial statements.
In May 2014, the FASB issued an ASU 2014-09, Accounting Standards Update for Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of 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. The new standard is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2017. While we are continuing to assess all potential impacts of the standard, we expect that revenue from vessels operating on time charter will continue to be recognized under current revenue recognition policies because the services being provided to its customers currently reflect the consideration to which the entity expects to be entitled in exchange for those services, and because these arrangements qualify as single performance obligations that meet the criteria to recognize revenue over time, as the customer is simultaneously receiving and consuming the benefits of these services. The performance obligation in a voyage charter is also the transportation service provided and also meets the criteria to recognize revenue over time. However, under the new standard, we expect revenue for these voyages to be recognized over the period between load port and discharge port in contrast to the current recognition policy to recognize revenue from discharge port to discharge port. The Company also believes that under the new standard, it will recognize an asset from certain costs incurred to fulfill contracts that have not begun to load if they meet the criteria outlined in this Update. Such assets will be amortized pro rata over the period of the contract. Neither of these changes is expected to have a material impact on the consolidated financial statements because the number of open voyages at any point in time are not a significant portion of the annual total and the difference in revenue is expected to be only a percentage of such voyage revenue. The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect adjustment to opening retained earnings in the period of initial period of adoption and we have not yet selected which transition method we will apply. In addition, we are evaluating recently issued guidance on practical expedients as part of our transition decision.
NOTE 4 - VARIABLE INTEREST ENTITIES
The Company has evaluated all of its wholly and partially-owned entities, as well as entities with common ownership or other relationships, pursuant to ASC 810. A summary of the Company’s consolidation policy is provided in Note 3. The Company has concluded that Bulk Pangaea, Bulk Patriot, Bulk Juliana, Bulk Atlantic, Bulk Trident, Bulk Phoenix, Bulk Barents, Bulk Bothnia, NBH, Long Wharf, NBHC and BVH should be consolidated as VIEs at
December 31, 2016
and
2015
.
Bulk Pangaea, Bulk Patriot, Bulk Juliana, Bulk Atlantic, Bulk Trident, Bulk Phoenix, Bulk Barents and Bulk Bothnia are wholly-owned subsidiaries that were established for the purpose of acquiring bulk carriers. The Company has concluded that Bulk Pangaea, Bulk Patriot, Bulk Juliana, Bulk Atlantic, Bulk Trident, Bulk Phoenix, Bulk Barents and Bulk Bothnia are VIEs due to the existence of guarantees and cross-collateralization on their outstanding debt, which is indicative of an inability to finance the entities’ activities without additional subordinated financial support. Accordingly, the Company has consolidated these subsidiaries for the years ended
December 31, 2016
and
2015
. The consolidation of all of these entities increased total assets by approximately
$46.2 million
and increased total liabilities by approximately
$46.0 million
at
December 31, 2016
. Total shareholders’ equity increased by approximately
$0.2 million
. The consolidation of all of these entities increased total assets by approximately
$53.0 million
and increased total liabilities by approximately
$54.1 million
at
December 31, 2015
. Total shareholders’ equity decreased by approximately
$1.1 million
.
NBH is a wholly-owned subsidiary of the Company following the conversion of debt to equity and acquisition of the remaining outstanding shares during 2015. On June 22, 2015, N.B.V. Nordic Bulk Ventures (Cyprus) Limited ("NBV"), a wholly-owned subsidiary of the Company, acquired
24.5%
of NBH for
$250,000
. Prior to the transaction, NBV owned
51%
of NBH. This transaction follows the conversion of
$4.0 million
of intercompany debt held by NBV to additional share capital of NBC. On October 13, 2015, NBV acquired the remaining
24.5%
of NBH in exchange for
400,000
shares of the Company. Prior to these transactions, NBC was a wholly-owned subsidiary of NBH. Following these transactions, the Company owns
100%
of NBH and NBC. The Company determined that NBH is a VIE due to the fact that NBH’s total equity investment at risk is not sufficient to permit it to finance its activities without additional subordinated financial support. Furthermore, the Company determined that it is NBH’s primary beneficiary, as it has a controlling financial interest in NBH, and has the power to direct the activities of the entity. Accordingly, the Company has consolidated NBH for the years ended
December 31, 2016
and
2015
. The consolidation of NBH increased total assets by approximately
$5.5 million
and
$6.1 million
and increased total liabilities by approximately
$5.1 million
and
$7.6 million
at
December 31, 2016
and
2015
, respectively. Total shareholders’ equity increased by approximately
$0.5 million
at December 31, 2016 and decreased by approximately
$1.5 million
at December 31,
2015
.
Long Wharf was established in 2009 for the purpose of buying a new office building. Ownership of Long Wharf was transferred to the Company on October 1, 2014. The Company determined that Long Wharf is a VIE as Long Wharf’s total equity investment at risk is not sufficient to permit it to finance its activities without additional subordinated financial support. The Company determined that the entities/individuals that had a variable interest in Long Wharf prior to the transfer were also related parties, and that none of those entities individually met the criteria to be the primary beneficiary, as none had the obligation to absorb the entity’s losses; therefore, since the Company represented the party within the related party group that was most closely associated with the VIE, the Company concluded it was the primary beneficiary. Accordingly, the Company has consolidated Long Wharf for the years ended
December 31, 2016
and
2015
. The consolidation of Long Wharf increased total assets by approximately
$0.7
million
and
$0.8 million
and increased total liabilities by approximately
$1.0 million
and
$1.2 million
at
December 31, 2016
and
2015
, respectively. Total shareholders’ equity decreased by approximately
$0.4 million
and
$0.3 million
at
December 31, 2016
and
2015
, respectively.
NBHC was established in March 2012, for the purpose of acquiring the m/v Nordic Odyssey, the m/v Nordic Orion and to invest in additional vessels, all through wholly-owned subsidiaries.
Each of the ship owning companies owned by NBHC entered into a Head Charterparty Agreement to charter the owned vessel to ST Shipping and Transport Ltd. (“STST”), which in turn, entered into a Sub-Charterparty Agreement with NBC under a five year, fixed price, time charter arrangement. The Company determined that NBHC is a VIE and that it is the primary beneficiary of NBHC, as it has the power to direct its activities as a result of these time charter arrangements. Accordingly, the Company has consolidated NBHC for the years ended
December 31, 2016
and
2015
. The consolidation of NBHC increased total assets by approximately
$161.3 million
and
$171.0 million
and increased total liabilities by approximately
$98.1 million
and
$112.0 million
at
December 31, 2016
and
2015
, respectively. Total shareholders’ equity increased by approximately
$2.8 million
and
$1.9 million
at
December 31, 2016
and
2015
. Amounts pertaining to the non-controlling ownership interest held by third parties in the financial position and operating results of NBHC are reported as non-controlling interest in the accompanying consolidated balance sheets. The non-controlling ownership interest attributable to NBHC amounts to approximately
$60.4 million
and
$57.1 million
at
December 31, 2016
and
2015
.
BVH was established in August 2013, together with a third-party, for the purpose of owning Five and Six. Five and Six were established for the purpose of owning new ultramax newbuildings to be delivered in 2017. The Company determined that BVH is a VIE and is the primary beneficiary of BVH, as it has the power to direct its activities. Accordingly, the Company has consolidated BVH and its wholly-owned subsidiaries for the years ended
December 31, 2016
and
2015
. The consolidation of BVH increased total assets by approximately
$9.5 million
and
$4.4 million
and increased total liabilities by approximately
$9.6 million
and
$4.5 million
at
December 31, 2016
and
2015
, respectively. Total shareholders’ equity decreased by approximately
$47,000
and
$33,000
at
December 31, 2016
and
2015
, respectively. Amounts pertaining to the non-controlling ownership interest held by third parties in the financial position and operating results of BVH are reported as non-controlling interest in the accompanying consolidated balance sheets. The non-controlling ownership interest attributable to BVH amounts to accumulated deficits of approximately
$42,000
and
$28,000
at
December 31, 2016
and
2015
, respectively. The Company acquired the remaining
50%
of BVH from its joint venture partner in January 2017.
NOTE 5 - FIXED ASSETS
At
December 31,
fixed assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Vessels and vessel upgrades
|
|
$
|
313,102,479
|
|
|
$
|
279,042,265
|
|
Capitalized dry docking
|
|
7,142,445
|
|
|
7,238,119
|
|
|
|
320,244,924
|
|
|
286,280,384
|
|
Accumulated depreciation and amortization
|
|
(47,862,126
|
)
|
|
(33,963,405
|
)
|
Vessels, vessel upgrades and capitalized dry docking, net
|
|
272,382,798
|
|
|
252,316,979
|
|
|
|
|
|
|
Land and building
|
|
2,541,085
|
|
|
2,541,085
|
|
Internal use software
|
|
268,313
|
|
|
268,313
|
|
Computers and equipment
|
|
1,250,096
|
|
|
934,178
|
|
|
|
4,059,494
|
|
|
3,743,576
|
|
Accumulated depreciation
|
|
(1,176,620
|
)
|
|
(914,748
|
)
|
Other fixed assets, net
|
|
2,882,874
|
|
|
2,828,828
|
|
|
|
|
|
|
Total fixed assets, net
|
|
$
|
275,265,672
|
|
|
$
|
255,145,807
|
|
The net carrying value of the Company’s fleet consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Vessel
|
|
2016
|
|
2015
|
m/v BULK PANGAEA
|
|
$
|
17,879,380
|
|
|
$
|
19,555,658
|
|
m/v BULK PATRIOT
|
|
12,391,724
|
|
|
13,732,984
|
|
m/v BULK JULIANA
|
|
12,252,733
|
|
|
13,096,232
|
|
m/v NORDIC ODYSSEY
|
|
27,021,211
|
|
|
28,537,024
|
|
m/v NORDIC ORION
|
|
27,874,584
|
|
|
29,242,572
|
|
m/v BULK TRIDENT
|
|
14,962,163
|
|
|
15,696,689
|
|
m/v BULK BEOTHUK
|
|
12,006,270
|
|
|
12,653,475
|
|
m/v BULK NEWPORT
|
|
13,473,429
|
|
|
14,109,300
|
|
m/v NORDIC BOTHNIA
|
|
3,517,151
|
|
|
3,700,000
|
|
m/v NORDIC BARENTS
|
|
3,520,616
|
|
|
3,700,000
|
|
m/v NORDIC OSHIMA
|
|
31,346,414
|
|
|
32,540,468
|
|
m/v NORDIC OLYMPIC
|
|
31,560,965
|
|
|
32,780,722
|
|
m/v NORDIC ODIN
|
|
31,741,658
|
|
|
32,971,855
|
|
m/v NORDIC OASIS
(1)
|
|
32,834,500
|
|
|
—
|
|
|
|
$
|
272,382,798
|
|
|
$
|
252,316,979
|
|
|
|
(1)
|
The m/v Nordic Oasis was delivered to the Company on January 5, 2016.
|
At December 31, 2016, BVH had deposits on the Ultramax Ice Class 1C panamax newbuildings of approximately
$18,400,000
which was included in investment in newbuildings in process on the consolidated balance sheets. These vessels were delivered to the Company in January 2017.
On July 5, 2016, the Company entered into five-year bareboat charter agreements with the owner of two vessels (which were then renamed the m/v Bulk Power and the m/v Bulk Progress). Under a bareboat charter, the charterer is responsible for all of the vessel operating expenses in addition to the charter hire. The agreement also contains a profit sharing arrangement. Scheduled increases in charter hire are included in minimum rental payments and recognized on a straight-line basis over the lease term. Profit sharing will be excluded from minimum lease payments and recognized as incurred. The rent expense under these bareboat charters (which are classified as operating leases) totals approximately
$365,000
per annum.
At December 31, 2015, NBHC had deposits on one Panamax 1A Ice Class newbuilding of approximately
$33,800,000
which was included in investment in newbuildings in process on the consolidated balance sheets. This vessel was delivered to the Company in January 2016.
The Company did not capitalize any dry-docking costs in 2016. The Company capitalized dry-docking costs on two vessels in 2015. The 5 year amortization period of the capitalized dry docking costs is within the remaining useful life of these vessels.
NOTE 6 - MARGIN ACCOUNTS
During
December 31, 2016
and
2015
, the Company was party to forward freight agreements and fuel swap contracts in order to mitigate the risk associated with volatile freight rates and fuel prices. Under the terms of these contracts, the Company is required to deposit funds in margin accounts if the market value of the hedged item declines. See Note 7 for a complete discussion of these and other derivatives. The Company had approximately
$488,000
on deposit in one margin account at
December 31, 2016
due to the decline in market value of its FFAs. The Company had
$433,000
on deposit in one margin account at
December 31, 2015
, due to the decline in market value of its fuel swaps. The funds are required to remain in margin accounts as collateral until the market value of the items being hedged return to preset limits. The margin accounts are included in advance hire, prepaid expenses and other current assets in the consolidated balance sheets at
December 31, 2016
and
2015
.
NOTE 7 - DERIVATIVES AND FAIR VALUE MEASURES
Interest Rate Swaps
From time to time, the Company enters into interest rate swap agreements to mitigate the risk of interest rate fluctuations on its variable rate debt. At December 31, 2015, the Company was party to
one
interest rate swap, which was entered into in February 2011, as required by the 109 Long Wharf Construction Loan agreement. Under the terms of the swap agreement, the interest rate on this note was fixed at
6.63%
. This swap was cancelled in conjunction with the repayment of the loan in May 2016.
The Company did not elect to designate the swap as a hedge at inception, pursuant to ASC 815,
Derivatives and Hedging.
Accordingly, changes in the fair value are recorded in current earnings in the accompanying consolidated statements of operations.
Derivative instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Interest rate swap agreement on:
|
|
|
|
|
|
|
Long Wharf Construction to Term Loan:
|
|
|
|
|
|
|
Notional amount
|
|
$
|
—
|
|
|
$
|
976,500
|
|
Effective dates
|
|
|
|
2/1/11-1/24/21
|
|
Fair value at year-end
|
|
—
|
|
|
(103,783
|
)
|
The fair value of the interest rate swap agreement at December 31,
2015
was a liability of approximately
$104,000
, which was included in other non-current liabilities on the consolidated balance sheet based on the instrument’s maturity date. The aggregate change in the fair value of the interest rate swap agreement for the years ended
December 31, 2016
and
2015
were gains of approximately
$104,000
and
$8,500
, respectively, which are reflected in unrealized loss on derivative instruments in the accompanying consolidated statements of income.
Fuel Swap Contracts
The Company continuously monitors the market volatility associated with bunker prices and seeks to reduce the risk of such volatility through a bunker hedging program. In
2016
and
2015
, the Company entered into various fuel swap contracts that were not designated for hedge accounting. The aggregate fair value of these fuel swaps at
December 31, 2016
and
2015
are assets of approximately
$304,000
and liabilities of
$1,777,000
, respectively, which are included in other current liabilities on the consolidated balance sheets. The change in the aggregate fair value of the fuel swaps during the years ended
December 31, 2016
and
2015
resulted in gains of approximately
$2,081,000
and losses of approximately
$386,000
, which are included in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of income.
Forward Freight Agreements
The Company assesses risk associated with fluctuating future freight rates and, when appropriate, actively hedges identified economic risk related to long-term cargo contracts with forward freight agreements, or FFAs. The usage of such derivatives can lead to fluctuations in the Company’s reported results from operations on a period-to-period basis. During the years ended December 31, 2016 and 2015, the Company entered into FFAs that were not designated for hedge accounting. The aggregate fair value of these FFAs at December 31, 2016 were liabilities of approximately
$21,000
. There were no open positions at December 31, 2015.
Fair Value Hierarchy
The three levels of the fair value hierarchy established by ASC 820, in order of priority, are as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Margin accounts
|
|
$
|
488,084
|
|
|
$
|
488,084
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fuel swap contracts
|
|
$
|
303,675
|
|
|
$
|
—
|
|
|
$
|
303,675
|
|
|
$
|
—
|
|
Forward freight agreements
|
|
$
|
(20,950
|
)
|
|
$
|
—
|
|
|
$
|
(20,950
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Margin accounts
|
|
$
|
433,000
|
|
|
$
|
433,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
$
|
(103,783
|
)
|
|
—
|
|
|
$
|
(103,783
|
)
|
|
—
|
|
Fuel swap contracts
|
|
$
|
(1,776,975
|
)
|
|
—
|
|
|
$
|
(1,776,975
|
)
|
|
—
|
|
The estimated fair values of the Company’s interest rate swap instruments and fuel swap contracts are based on market prices obtained from an independent third-party valuation specialist. Such quotes represent the estimated amounts the Company would receive to terminate the contracts.
NOTE 8 - RELATED PARTY TRANSACTIONS
Amounts and notes payable to related parties consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Activity
|
|
December 31, 2016
|
Included in accounts payable and accrued expenses on the consolidated balance sheets:
|
|
|
|
|
|
|
Affiliated companies (trade payables)
|
|
$
|
1,254,985
|
|
|
$
|
(145,415
|
)
|
|
$
|
1,109,570
|
|
|
|
|
|
|
|
|
Included in current related party debt on the consolidated balance sheets:
|
|
|
|
|
|
|
Loan payable – 2011 Founders Note
|
|
$
|
4,325,000
|
|
|
$
|
—
|
|
|
$
|
4,325,000
|
|
Interest payable – 2011 Founders Note
(i)
|
|
553,919
|
|
|
(185,572
|
)
|
|
368,347
|
|
Promissory Note
|
|
4,000,000
|
|
|
(2,000,000
|
)
|
|
2,000,000
|
|
Loan payable – BVH shareholder (STST)
(ii)
|
|
4,442,500
|
|
|
4,836,300
|
|
|
9,278,800
|
|
Total current related party debt
|
|
$
|
13,321,419
|
|
|
$
|
2,650,728
|
|
|
$
|
15,972,147
|
|
|
|
ii.
|
ST Shipping and Transport Pte. Ltd. ("STST")
|
In November 2014, the Company entered into a
$5 million
Promissory Note (the “Note”) with Bulk Invest Ltd., a company controlled by the Founders. The Note was amended in 2015 and is payable on demand. Interest on the Note is
5%
. The balance of the Note at December 31, 2016 and 2015 was
$2 million
and
$4 million
, respectively.
BVH entered into an agreement for the construction of two new ultramax newbuildings in 2013. STST has provided loans totaling of
$9,278,800
used to make deposits on the contracts. The loans are payable on demand and do not bear interest.
On October 1, 2011, the Company entered into a
$10,000,000
loan agreement with the Founders, which was payable on demand at the request of the lenders (the 2011 Founders Note). The note bears interest at a rate of
5%
. The outstanding balance of the note was
$4,325,000
at
December 31, 2016
and
2015
.
Under the terms of a technical management agreement between the Company and Seamar Management S.A. (Seamar), an equity method investee, Seamar is responsible for the day-to-day operation of some of the Company’s owned vessels. During the years ended
December 31, 2016
and
2015
, the Company incurred technical management fees of
$1,963,200
and
$2,262,000
under this arrangement, which is included in vessel operating expenses in the consolidated statements of income. The total amounts payable to Seamar at
December 31, 2016
and
2015
, (including amounts due for vessel operating expenses), were $
1,109,570
and
$1,254,985
, respectively.
NOTE 9 - SECURED LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Bulk Pangaea Secured Note
(1)
|
|
$
|
1,040,625
|
|
|
$
|
1,734,375
|
|
Bulk Patriot Secured Note
(1)
|
|
1,087,500
|
|
|
2,312,500
|
|
Bulk Trident Secured Note
(1)
|
|
5,737,500
|
|
|
6,375,000
|
|
Bulk Juliana Secured Note
(1)
|
|
3,042,186
|
|
|
3,718,229
|
|
Bulk Nordic Odin Ltd., Bulk Nordic Olympic Ltd. Bulk Nordic Odyssey Ltd., Bulk Nordic Orion Ltd. and Bulk Nordic Oshima Ltd. Amended and Restated Loan Agreement
(2)
|
|
77,325,001
|
|
|
89,625,000
|
|
Bulk Atlantic Secured Note
|
|
5,350,000
|
|
|
6,530,000
|
|
Bulk Phoenix Secured Note
(1)
|
|
6,816,685
|
|
|
7,649,997
|
|
Term Loan Facility of USD 13,000,000 (Nordic Bulk Barents Ltd. and Nordic Bulk Bothnia Ltd.)
|
|
7,097,820
|
|
|
10,717,370
|
|
Bulk Nordic Oasis Ltd. Loan Agreement
(2)
|
|
20,000,000
|
|
|
21,500,000
|
|
109 Long Wharf Commercial Term Loan
|
|
1,032,067
|
|
|
978,210
|
|
Phoenix Bulk Carriers (US) LLC Automobile Loan
|
|
28,582
|
|
|
—
|
|
Phoenix Bulk Carriers (US) LLC Master Loan
|
|
236,242
|
|
|
—
|
|
Total
|
|
128,794,208
|
|
|
151,140,681
|
|
Less: current portion
|
|
(19,627,846
|
)
|
|
(19,499,262
|
)
|
Less: unamortized bank fees
|
|
(1,528,511
|
)
|
|
(2,145,266
|
)
|
Secured long-term debt
|
|
$
|
107,637,851
|
|
|
$
|
129,496,153
|
|
|
|
(1)
|
The Bulk Pangaea Secured Note, the Bulk Patriot Secured Note, the Bulk Trident Secured Note, the Bulk Juliana Secured Note, and the Bulk Phoenix Secured Note are cross-collateralized by the vessels m/v Bulk Pangaea, m/v Bulk Patriot, m/v Bulk Trident, m/v Bulk Juliana, and m/v Bulk Newport and are guaranteed by the Company.
|
|
|
(2)
|
The borrower under this facility is NBHC, of which the Company and its joint venture partners, STST and ASO2020, each own one-third. NBHC is consolidated in accordance with ASC 810-10 and as such, amounts pertaining to the non-controlling ownership held by these third parties in the financial position of NBHC are reported as non-controlling interest in the accompanying balance sheets.
|
The Senior Secured Post-Delivery Term Loan Facility
On July 14, 2016, the Company, through its wholly owned subsidiaries, Bulk Pangaea, Bulk Patriot, Bulk Juliana, Bulk Trident and Bulk Phoenix, entered into the Third Amendatory Agreement, (the "Third Amendment"), amending and supplementing the Loan Agreement dated April 15, 2013, as amended by a First Amendatory Agreement dated May 16, 2013 and by a Second Amendatory Agreement dates August 28, 2013. The Third Amendment extends the maturity dates and modifies the repayment schedule of the tranches, as follows:
Bulk Pangaea Secured Note
Initial amount of
$12,250,000
, entered into in December 2009, for the acquisition of m/v Bulk Pangaea. The Third Amendment defers the final
three
quarterly installments of
$346,875
, extending the maturity date to October 19, 2017. The interest rate is fixed at
3.96%
through the original maturity date, at which time the rate becomes floating at LIBOR plus
3.5%
.
Bulk Patriot Secured Note
Initial amount of
$12,000,000
, entered into in September 2011, for the acquisition of the m/v Bulk Patriot. The Third Amendment defers the
two
final quarterly installments of
$543,750
, extending the maturity date to July 19, 2017. The interest rate is fixed at
4.01%
through the original maturity date, at which time the rate becomes floating at LIBOR plus
3.5%
.
Bulk Trident Secured Note
Initial amount of
$10,200,000
, entered into in April 2012, for the acquisition of the m/v Bulk Trident. The Third Amendment defers
two
quarterly installments, increases the following
three
installments to
$550,000
and the next
four
installments to
$327,500
. A balloon payment of
$2,777,500
is payable on October 19, 2018. The interest rate is fixed at
4.29%
.
Bulk Juliana Secured Note
Initial amount of
$8,112,500
, entered into in April 2012, for the acquisition of the m/v Bulk Juliana. The Third Amendment defers
three
installments and increases the final
six
quarterly installments to
$507,031
. The final payment is due in July 19, 2018. The interest rate is fixed at
4.38%
.
Bulk Phoenix Secured Note
Initial amount of
$10,000,000
, entered into in May 2013, for the acquisition of m/v Bulk Newport. The Third Amendment defers
two
quarterly installments, which are followed by
one
installment of
$500,000
,
two
of
$700,000
and
seven
installments of
$442,858
. A balloon payment of
$1,816,659
is payable on July 19, 2019. The interest rate is fixed at
5.09%
.
The Third Amendment contains financial covenants that require the Company to maintain a minimum net worth and minimum liquidity, on a consolidated basis. The facility also contains a consolidated leverage ratio and a consolidated debt service coverage ratio. In addition, the facility contains other Company and vessel related covenants that, among other things, restrict changes in management and ownership of the vessel, declaration of dividends, further indebtedness and mortgaging of a vessel without the bank’s prior consent. It also requires minimum collateral maintenance, which is tested at the discretion of the lender. As of December 31, 2016, the Company was in compliance with these covenants. At
December 31, 2015
, the Company was granted a waiver of compliance with the consolidated debt service coverage ratio by the facility agent and was in compliance with the other covenants.
Bulk Atlantic Secured Note
Initial amount of
$8,520,000
, entered into on February 18, 2013, for the acquisition of m/v Bulk Beothuk. The loan requires repayment in
8
equal quarterly installments of
$90,000
beginning in May 2013,
12
equal quarterly installments of
$295,000
and a balloon payment of
$4,170,000
due in February 2018. Interest is fixed at
6.46%
.
The Bulk Atlantic Secured Note is collateralized by the vessel m/v Bulk Beothuk and is guaranteed by the Company. The agreement contains a collateral maintenance ratio clause and a minimum EBITDA to fixed charges ratio. During 2016, the Company increased the letter of credit held by the facility agent to
$1.1 million
in order to remain in compliance with the collateral maintenance ratio clause. As of
December 31, 2016
, and 2015, the Company is in compliance with these covenants.
Bulk Nordic Odin Ltd., Bulk Nordic Olympic Ltd. Bulk Nordic Odyssey Ltd., Bulk Nordic Orion Ltd. And Bulk Nordic Oshima Ltd. – Dated September 28, 2015 - Amended and Restated Loan Agreement
The amended agreement advanced
$21,750,000
in respect of each the m/v Nordic Odin and the m/v Nordic Olympic;
$13,500,000
in respect of each the m/v Nordic Odyssey and the m/v Nordic Orion, and
$21,000,000
in respect of the m/v Nordic Oshima.
The agreement requires repayment of the advances as follows:
In respect of the Odin and Olympic advances, repayment to be made in
28
equal quarterly installments of
$375,000
per borrower (one of which was paid prior to the amendment by each borrower) and balloon payments of
$11,233,150
due with each of the final installments in January 2022.
In respect of the Odyssey and Orion advances, repayment to be made in
20
quarterly installments of
$375,000
per borrower and balloon payments of
$5,677,203
due with each of the final installments in September 2020.
In respect of the Oshima advance, repayment to be made in
28
equal quarterly installments of
$375,000
and a balloon payment of
$11,254,295
due with the final installment in September 2021.
Interest on
50%
of the advances to Odyssey and Orion will be fixed at
4.24%
in March 2017. Interest on the remaining advances to Odyssey and Orion is floating at LIBOR plus
2.40%
(
3.40%
at December 31, 2016). Interest on
50%
of the advances to Odin and Olympic was fixed at
3.95%
in January 2017. Interest on the remaining advances to Odin and Olympic is floating at LIBOR plus
2.0%
(
3.0%
at December 31, 2016). Interest on
50%
of the advance to Oshima was fixed at
4.16%
in January 2017. Interest on the remaining advance to Oshima is floating at LIBOR plus
2.25%
(
3.25%
at December 31, 2016).
The amended loan is secured by first preferred mortgages on the m/v Nordic Odin, m/v Nordic Olympic, m/v Nordic Odyssey, m/v Nordic Orion and m/v Nordic Oshima, the assignment of earnings, insurances and requisite compensation of the five entities, and by guarantees of their shareholders.
The amended agreement contains one financial covenant that requires the Company to maintain minimum liquidity and a collateral maintenance ratio clause, which requires the aggregate fair market value of the vessels plus the net realizable value of any additional collateral provided, to remain above defined ratios. At December 31, 2016 and 2015, the Company was in compliance with this clause. At December 31, 2016 and 2015, the Company was in compliance with this clause. On August 8, 2016, the Company prepaid
$4.8 million
of the debt which was allocated across each of the Tranches and which reduced the final installments of each tranche, as follows: Odyssey and Orion -
$697,797
; Oshima -
$1,120,705
; Odin and Olympic -
$1,141,850
. These amounts are reflected in the balloon payments noted above. The funds for the prepayment were contributed equally by each of the NBHC shareholders.
The Bulk Nordic Oasis Ltd. - Loan Agreement -- Dated December 11, 2015
The agreement advanced
$21,500,000
in respect of the m/v Nordic Oasis. The agreement requires repayment of the advance in
24
equal quarterly installments of
$375,000
beginning on March 28, 2016 and a balloon payment of
$12,500,000
due with the final installment in March 2022. Interest on this advance is fixed at
4.30%
.
The loan is secured by a first preferred mortgage on the m/v Nordic Oasis, the assignment of earnings, insurances and requisite compensation of the entity, and by guarantees of its shareholders. Additionally, the agreement contains a collateral maintenance ratio clause which requires the fair market value of the vessel plus the net realizable value of any additional collateral previously provided, to remain above defined ratios. As of December 31, 2016 and 2015, the Company was in compliance with this covenant.
Term Loan Facility of USD 13,000,000 (Nordic Bulk Barents Ltd. and Nordic Bulk Bothnia Ltd.)
Barents and Bothnia entered into a secured Term Loan Facility of
$13,000,000
in
two
tranches of
$6,500,000
which were drawn in conjunction with the delivery of the m/v Bulk Bothnia on January 23, 2014 and the m/v Bulk Barents on March 7, 2014. The loan is secured by mortgages on the m/v Nordic Bulk Barents and m/v Nordic Bulk Bothnia and is guaranteed by the Company.
The facility bears interest at LIBOR plus
2.50%
(
3.50%
at December 31, 2016). The loan requires repayment in
22
equal quarterly installments of
$163,045
(per borrower) beginning in June 2014, one installment of
$163,010
(per borrower) and a balloon payment of
$1,755,415
(per borrower) due in December 2019.
In addition, any cash in excess of $750,000 per borrower on any repayment date shall be applied toward prepayment of the relevant loan in inverse order, so the balloon payment is prepaid first.
The agreement also contains a profit split in respect of the proceeds from the sale of either vessel and a minimum value clause ("MVC"), of not less than
100%
of the outstanding indebtedness. The Company was in compliance with the minimum value clause at December 31, 2016 and 2015.
On February 22, 2016, the Company was notified by the facility agent of an MVC breach. On March 15, 2016, additional cash collateral of approximately
$1,200,000
, which was deposited by the Company during 2015, was applied to the outstanding balance of the facility. On May 5, 2016, the Company prepaid the installments due in June 2016 and an additional
$547,955
per vessel, for a total of
$711,000
per vessel, in order to cure the breach. These prepayments reduced the amount of the balloon payments due at maturity and are reflected in the balloon payments noted above.
109 Long Wharf Commercial Term Loan
Initial amount of
$1,096,000
entered into on May 27, 2016. The
Long Wharf Construction to Term Loan
was repaid from the proceeds of this new facility. The loan is payable in
120
equal monthly installments of
$9,133
. Interest is floating at the 30 day LIBOR plus
2.00%
(
2.80%
at December 31, 2016). The loan is collateralized by all real estate located at 109 Long Wharf,
Newport, RI, and a corporate guarantee of the Company. The loan contains a maximum loan to value covenant and a debt service coverage ratio. At December 31, 2016, the Company was in compliance with these covenants.
Phoenix Bulk Carriers (US) LLC Automobile Loan
The Company purchased a commercial vehicle for use at the site of its port project on the Atlantic Coast. The total loan amount of
$29,435
is payable in
60
equal monthly installments of
$539
. Interest is fixed at
3.74%
.
Phoenix Bulk Carriers (US) LLC Master Equipment Loan
The Company purchased commercial equipment for use at the site of its port project on the Atlantic Coast. The total loan amount of
$250,536
is payable in
48
equal monthly installments of
$5,741
. Interest is fixed at
4.75%
.
The future minimum annual payments under the debt agreements are as follows:
|
|
|
|
|
|
Years ending December 31,
|
|
|
|
2017
|
$
|
19,627,846
|
|
2018
|
21,704,371
|
|
2019
|
16,371,749
|
|
2020
|
19,021,179
|
|
2021
|
16,618,718
|
|
Thereafter
|
35,450,345
|
|
|
$
|
128,794,208
|
|
NOTE 10 - COMMON STOCK AND NON-CONTROLLING INTEREST
Common stock
The Company has
100,000,000
shares of common stock (
$0.0001
par value) authorized, of which
36,590,417
were issued as of
December 31, 2016
.
During 2014, the Company adopted the 2014 Share Incentive Plan (the “2014 Plan”). The purpose of the 2014 Plan is to assist in attracting, retaining, motivating, and rewarding certain key employees, officers, directors, and consultants of the Company and its affiliates and promoting the creation of long-term value for our shareholders by closely aligning the interests of such individuals with those of such shareholders. The 2014 Plan authorizes the award of share-based incentives to encourage eligible employees, officers, directors, and consultants to expend maximum effort in the creation of shareholder value. Shares authorized for awards under the 2014 Plan were
1.5 million
.
On September 22, 2015, the Company's shareholders approved an amendment and restatement of the 2014 Plan that was adopted by the Board on August 7, 2015. The PANGAEA LOGISTICS SOLUTIONS LTD. 2014 SHARE INCENTIVE PLAN (as amended and restated by the Board of Directors on August 7, 2015), limits the value of awards that may be granted to non-employee directors in any calendar year to
$150,000
(calculating the value of any award based in shares to be determined based on the grant date fair value of such awards for financial reporting purposes), which limitation under the 2014 Plan was
10,000
shares.
On August 9, 2016, the Company's shareholders approved an amendment and restatement of the 2014 Plan that was adopted by the Board on May 9, 2016. The PANGAEA LOGISTICS SOLUTIONS LTD. 2014 SHARE INCENTIVE PLAN (as amended and restated by the Board of Directors on May 9, 2016), (the "Amended Plan"), increased the aggregate number of common shares with respect to which awards may be granted under the Amended Plan, such that the total number of shares made available for grant is
3,000,000
. This is a net increase of 1,500,000 new shares.
At December 31, 2016, shares issued to members of our board of directors who are not our employees totaled
312,540
restricted shares of our common stock pursuant to the Amended Plan. These restricted shares vest at the rate of
50%
after one year and the remaining
50%
after two years. Vested shares at December 31, 2016 total
86,088
. There were
30,000
shares vested at December 31, 2015.
At
December 31, 2016
, shares issued to employees under the Amended Plan totaled
1,180,897
after forfeitures. These restricted shares vest at the rate of one-third of the total granted on each of the third, fourth and fifth anniversaries of the vesting commencement date. Vested shares at December 31, 2016 total
16,000
. There were no shares vested at December 31, 2015.
Total non-cash compensation cost recognized during the years ended
December 31, 2016
and
2015
is approximately
$602,000
and
$457,000
, respectively, which is included in general and administrative expenses in the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
Restricted share awards pursuant to the Amended Plan
|
|
|
Shares
|
|
Weighted-Average Grant-Date Fair Value Per Share
|
Nonvested shares at December 31, 2015
|
|
1,376,857
|
|
|
$
|
2.45
|
|
Granted
|
|
146,364
|
|
|
2.66
|
|
Vested
|
|
(102,088
|
)
|
|
3.29
|
|
Forfeited
|
|
(59,784
|
)
|
|
2.39
|
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
1,361,349
|
|
|
$
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended December 31,
|
|
|
2016
|
|
2015
|
Fair value of restricted shares vested
|
|
$
|
336,364
|
|
|
$
|
142,500
|
|
Unrecognized compensation cost for restricted shares
|
|
$
|
2,768,484
|
|
|
$
|
3,120,082
|
|
Weighted average remaining period to expense for restricted shares (years)
|
|
3.30
|
|
|
3.33
|
|
Dividends
Dividends on common stock are recorded when declared by the Board of Directors.
Dividends payable consist of the following, all of which are payable to related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
common
stock
dividend
|
|
2012
common
stock
special
dividend
|
|
2013
common
stock
dividend
|
|
2013
Odyssey
and Orion
dividend
|
|
Total
|
Balance at December 31, 2014
|
|
$
|
2,574,125
|
|
|
$
|
2,934,357
|
|
|
$
|
6,411,540
|
|
|
$
|
904,803
|
|
|
$
|
12,824,825
|
|
Paid in cash
|
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
Balance at December 31, 2015
|
|
2,474,125
|
|
|
2,934,357
|
|
|
6,411,540
|
|
|
904,803
|
|
|
12,724,825
|
|
Paid in cash
|
|
(100,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
Balance at December 31, 2016
|
|
$
|
2,374,125
|
|
|
$
|
2,934,357
|
|
|
$
|
6,411,540
|
|
|
$
|
904,803
|
|
|
$
|
12,624,825
|
|
Non-controlling interest
Amounts pertaining to the non-controlling ownership interest held by third parties in the financial position and operating results of the Company’s subsidiaries and/or consolidated VIEs are reported as non-controlling interest in the accompanying consolidated balance sheets. The non-controlling ownership interest attributable to NBHC and its wholly-owned shipowning subsidiaries amounts to approximately
$60,449,000
and
$57,133,000
at
December 31, 2016
and
2015
, respectively. Non-controlling interest attributable to BVH was approximately
$(42,000)
and
$(28,000)
, respectively at
December 31, 2016
and
2015
. See Note 12.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is subject to certain asserted claims arising in the ordinary course of business. The Company intends to vigorously assert its rights and defend itself in any litigation that may arise from such claims. While the ultimate outcome of these matters could affect the results of operations of any one year, and while there can be no assurance with respect thereto, management believes that after final disposition, any financial impact to the Company would not be material to its consolidated financial position, results of operations, or cash flows.
Vessel Acquisition and Sale-Leaseback
In December 2013, the Company entered into shipbuilding contracts for the construction of two ultramax vessels for
$28,950,000
each. At December 31, 2016, the Company had approximately
$18,400,000
on deposit with the shipyard for these newbuildings. The total purchase obligations under the shipbuilding contracts total approximately
$39,500,000
at December 31, 2016.
The Company entered into a sale-leaseback financing agreement for one of the two ultramax vessels under construction. The selling price of the vessel to the new owner (lessor) is
$21,000,000
. The lease back is recorded as a capital lease based on the transfer of ownership of the vessel to the Company at the end of the seven year lease term. At inception of the lease, the Company (seller-lessee) intends to recognize a loss equal to the difference between the vessel's undepreciated cost and its fair value at the time of sale, of approximately
$5.0 million
.
The Company financed the final payment for the second vessel with a commercial facility.
Long-term Contracts Accounted for as Operating Leases
As discussed in Note 5, the Company entered into bareboat charter contracts with the owner of two ultramax vessels. The charters are recorded as operating leases and as such, the minimum rental payments are being recognized on a straight-line basis over the lease term. Profit sharing is excluded from minimum rental payments and recognized as incurred.
The Company leases office space for its Copenhagen operations. The lease can be terminated with six months prior notice after June 30, 2018.
Obligations under Operating Leases:
|
|
|
|
|
Years ending December 31,
|
2017
|
581,008
|
|
2018
|
581,008
|
|
2019
|
365,000
|
|
2020
|
365,000
|
|
2021
|
193,000
|
|
|
2,085,016
|
|
NOTE 12 - SUBSEQUENT EVENTS
On January 7, 2017, the Company took delivery of two Ultramax Ice Class 1C bulk carriers. The Company financed the vessels under separate financing arrangements.
The m/v Bulk Destiny was financed under a sale-leaseback transaction for a total of
$21.0 million
, inclusive of the purchase price at the end of the seven-year lease term, as follows:
The Bulk Nordic Five Ltd. Purchase Agreement dated October 27, 2016
The agreement obligated Bulk Nordic Five Ltd. to sell the m/v Bulk Destiny upon Acquisition Completion (as defined), as part of the financing arrangements for the vessel, and following the sale, charter the vessel from the buyer under a Bareboat Charter. As noted above, the vessel was delivered on January 7, 2017, at which time the purchase agreement became effective.
The Company (seller) will recognize a loss equal to the difference between the vessel's undepreciated cost and its fair value at the time of sale of approximately
$5.0 million
.
The Bulk Nordic Five Ltd. Bareboat Charter Party dated October 27, 2016
The bareboat charter party will be recorded as a capital lease because the agreement contains a bargain purchase option. The agreement requires
28
hire payments consisting of a fixed and variable portion beginning on April 6, 2017, and a balloon payment of
$11,200,000
due with the final hire payment on January 7, 2024.
The bareboat charter party is secured by a first preferred mortgage on the m/v Bulk Destiny, the assignment of earnings, insurances and requisite compensation of the entity, and by guarantees of its shareholders. Additionally, the agreement contains a collateral maintenance ratio clause which requires the fair market value of the vessel plus the net realizable value of any additional collateral previously provided, to remain above defined ratios.
The Company obtained commercial financing with a European bank for the m/v Bulk Endurance, which is apportioned into a senior debt tranche of
$16.0 million
and a junior debt tranche of
$3.5 million
, as follows:
The Bulk Nordic Six Ltd. - Loan Agreement -- Dated December 21, 2016
The agreement advanced
$19,500,000
in respect of the m/v Bulk Endurance on January 7, 2017. The agreement requires repayment of this Tranche A in
3
equal quarterly installments of
$100,000
beginning on April 7, 2017 and thereafter,
17
equal quarterly installments of
$266,667
and a balloon payment of
$11,667,667
due with the final installment in March 2022. Interest on this advance is floating at LIBOR plus
2.75%
(
3.75%
at December 31, 2016). The agreement also advanced
$3,500,000
in respect of the m/v Bulk Endurance on January 7, 2017. The agreement requires repayment of this Tranche B in
18
equal quarterly installments of
$65,000
beginning on October 7, 2017, and a balloon payment of
$2,330,000
due with the final installment in March 2022. Interest on this advance is floating at LIBOR plus
6.00%
(
7.00%
at December 31, 2016).
The loan is secured by a first preferred mortgage on the m/v Bulk Endurance, the assignment of earnings, insurances and requisite compensation of the entity, and by guarantees of its shareholders. Additionally, the agreement contains a minimum liquidity requirement, positive working capital of the borrower and a collateral maintenance ratio clause which requires the fair market value of the vessel plus the net realizable value of any additional collateral previously provided, to remain above defined ratios.
In January 2017, the Company purchased its joint venture partner’s
50%
interest in BVH for
$0.8 million
, which became a wholly-owned subsidiary thereafter.
Quarterly Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
2016
|
2015
|
(Dollars in millions, except per share amounts. Figures may not foot due to rounding)
|
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4
|
Revenues:
|
|
|
|
|
|
|
|
|
Voyage revenue
|
$
|
42.0
|
|
$
|
53.5
|
|
$
|
66.0
|
|
$
|
60.6
|
|
$
|
90.6
|
|
$
|
60.9
|
|
$
|
64.6
|
|
$
|
50.6
|
|
Charter revenue
|
2.0
|
|
3.4
|
|
4.8
|
|
5.7
|
|
4.5
|
|
4.2
|
|
6.6
|
|
5.3
|
|
|
43.9
|
|
57.0
|
|
70.8
|
|
66.3
|
|
95.1
|
|
65.1
|
|
71.2
|
|
55.9
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expense
|
18.5
|
|
26.8
|
|
29.2
|
|
29.2
|
|
45.3
|
|
28.1
|
|
30.4
|
|
21.8
|
|
Charter hire expense
|
8.5
|
|
15.0
|
|
19.7
|
|
20.5
|
|
24.7
|
|
15.2
|
|
20.6
|
|
15.5
|
|
Vessel operating expenses
|
6.9
|
|
7.9
|
|
7.5
|
|
8.6
|
|
7.8
|
|
7.1
|
|
8.5
|
|
8.2
|
|
General and administrative
|
3.0
|
|
2.9
|
|
3.2
|
|
3.6
|
|
4.3
|
|
3.9
|
|
3.6
|
|
3.1
|
|
Depreciation and amortization
|
3.5
|
|
3.5
|
|
3.5
|
|
3.5
|
|
3.0
|
|
3.3
|
|
3.2
|
|
3.3
|
|
Loss on impairment of vessels
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5.4
|
|
Loss on sale of vessels
|
—
|
|
—
|
|
—
|
|
—
|
|
0.1
|
|
0.5
|
|
0.1
|
|
—
|
|
Total expenses
|
40.4
|
|
56.2
|
|
63.0
|
|
65.5
|
|
85.2
|
|
58.1
|
|
66.3
|
|
57.2
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
3.5
|
|
0.8
|
|
7.8
|
|
0.8
|
|
9.9
|
|
7.0
|
|
4.9
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
(1.4
|
)
|
(1.5
|
)
|
(1.3
|
)
|
(1.3
|
)
|
(1.4
|
)
|
(1.3
|
)
|
(1.5
|
)
|
(1.2
|
)
|
Interest expense related party debt
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
(0.1
|
)
|
Unrealized (loss) gain on derivative instruments
|
(0.3
|
)
|
1.4
|
|
0.2
|
|
1.0
|
|
0.8
|
|
0.4
|
|
(0.5
|
)
|
(1.1
|
)
|
Other expense
|
(0.1
|
)
|
0.1
|
|
—
|
|
(0.1
|
)
|
0.1
|
|
0.1
|
|
—
|
|
(1.1
|
)
|
Total other expense, net
|
(1.9
|
)
|
(0.2
|
)
|
(1.2
|
)
|
(0.5
|
)
|
(0.6
|
)
|
(1.0
|
)
|
(2.1
|
)
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
1.6
|
|
0.6
|
|
6.6
|
|
0.3
|
|
9.3
|
|
6.0
|
|
2.8
|
|
(4.8
|
)
|
(Income) loss attributable to noncontrolling interests
|
(0.4
|
)
|
(0.5
|
)
|
(0.5
|
)
|
(0.3
|
)
|
(1.7
|
)
|
(0.6
|
)
|
0.2
|
|
—
|
|
Net income (loss) attributable to Pangaea Logistics Solutions Ltd.
|
$
|
1.2
|
|
$
|
0.1
|
|
$
|
6.1
|
|
$
|
0.1
|
|
$
|
7.6
|
|
$
|
5.5
|
|
$
|
3.0
|
|
$
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Data (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
2016
|
2015
|
(Dollars in millions, except per share amounts)
|
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.03
|
|
$
|
—
|
|
$
|
0.17
|
|
$
|
0.002
|
|
$
|
0.22
|
|
$
|
0.16
|
|
$
|
0.09
|
|
$
|
(0.14
|
)
|
Diluted
|
$
|
0.03
|
|
$
|
—
|
|
$
|
0.17
|
|
$
|
0.002
|
|
$
|
0.22
|
|
$
|
0.16
|
|
$
|
0.09
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
35,130,211
|
|
35,150,453
|
|
35,165,532
|
|
35,189,068
|
|
34,696,980
|
|
34,696,980
|
|
34,696,980
|
|
35,045,132
|
|
Diluted
|
35,201,307
|
|
35,337,290
|
|
35,347,403
|
|
35,581,897
|
|
34,695,930
|
|
34,887,177
|
|
35,004,808
|
|
35,382,734
|
|
|
|
|
|
|
|
|
|
|
Common Stock Information:
|
|
|
|
|
|
|
|
|
Price Range:
|
|
|
|
|
|
|
|
|
High
|
3.53
|
|
2.74
|
|
2.92
|
|
2.69
|
|
4.70
|
|
3.77
|
|
3.68
|
|
3.65
|
|
Low
|
2.46
|
|
2.29
|
|
2.25
|
|
2.12
|
|
2.70
|
|
2.22
|
|
2.72
|
|
2.57
|
|
|