UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of October 2015
Commission File Number: 000-51672
FREESEAS INC.
(Name of Registrant)
10, Eleftheriou Venizelou Street (Panepistimiou
Ave.), 106 71, Athens, Greece
(Address of principal
executive office)
Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F ¨
Form 40-F ¨
Indicate by check mark if the registrant
is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant
is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
Attached hereto as
Exhibits 99.1 and 99.2 are the unaudited interim condensed consolidated financial statements of FreeSeas Inc. for the six months
ended June 30, 2015 and 2014 and Management's Discussion and Analysis of Financial Condition and Results of Operations, respectively.
Exhibit
Number |
|
Description |
|
|
|
99.1 |
|
Unaudited Interim Condensed Consolidated Financial Statements for the six months ended June 30, 2015 and 2014 |
99.2 |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
SIGNATURE
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
FREESEAS INC. |
|
|
Date: October 2, 2015 |
By: |
/s/ DIMITRIS PAPADOPOULOS |
|
Dimitris Papadopoulos |
|
Chief Financial Officer |
Exhibit 99.1
FREESEAS INC.
INDEX TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
|
Page
Number |
|
|
Interim Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014 (audited) |
F-2 |
|
|
Unaudited Interim Condensed Consolidated Statements of Operations for the Six Months ended June 30, 2015 and 2014 |
F-3 |
|
|
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2015 and 2014 |
F-4 |
|
|
Notes to Unaudited Interim Condensed Consolidated Financial Statements |
F-5 to F-21 |
FREESEAS INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts are expressed in thousands of United States dollars)
| |
Notes | | |
June 30, 2015 | | |
December 31, 2014 | |
ASSETS | |
| | |
| | |
| |
CURRENT ASSETS: | |
| | | |
| | | |
| | |
Cash and cash equivalents | |
| | | |
$ | 71 | | |
$ | 45 | |
Trade receivables, net of provision of $3,263 at June 30, 2015 and December 31, 2014. | |
| | | |
| 73 | | |
| 594 | |
Due from related party | |
| 4 | | |
| - | | |
| 433 | |
Inventories | |
| | | |
| 542 | | |
| 165 | |
Deferred charges — current portion | |
| | | |
| - | | |
| 16 | |
Prepayments and other | |
| | | |
| 577 | | |
| 664 | |
Other current asset | |
| 6 | | |
| 725 | | |
| 25 | |
Total current assets | |
| | | |
| 1,988 | | |
| 1,943 | |
| |
| | | |
| | | |
| | |
Vessels, net | |
| 5 | | |
| 30,450 | | |
| 50,484 | |
Options advance payments- purchase of leased vessels | |
| 6 | | |
| 9, 000 | | |
| 11,826 | |
Total non-current assets | |
| | | |
| 39,450 | | |
| 62,310 | |
| |
| | | |
| | | |
| | |
Total assets | |
| | | |
$ | 41,438 | | |
$ | 64,253 | |
| |
| | | |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | | |
| | |
Accounts payable | |
| | | |
$ | 8,058 | | |
$ | 8,444 | |
Convertible notes, net | |
| 9 | | |
| 717 | | |
| 166 | |
Accrued liabilities | |
| 7 | | |
| 5,586 | | |
| 4,588 | |
Unearned revenue | |
| | | |
| - | | |
| 52 | |
Due to related party | |
| 4 | | |
| 256 | | |
| - | |
Leases – current portion | |
| 6 | | |
| - | | |
| 1,944 | |
Bank loans — current portion | |
| 10 | | |
| 17,598 | | |
| 17,598 | |
Total current liabilities | |
| | | |
| 32,215 | | |
| 32,792 | |
LONG - TERM LIABILITIES: | |
| | | |
| | | |
| | |
Leases – net of current portion | |
| 6 | | |
| - | | |
| 6,457 | |
Total long - term liabilities | |
| | | |
| - | | |
| 6,457 | |
| |
| | | |
| | | |
| | |
Total liabilities | |
| | | |
$ | 32,215 | | |
$ | 39,249 | |
| |
| | | |
| | | |
| | |
Commitments and Contingencies | |
| 11 | | |
| - | | |
| - | |
SHAREHOLDERS’ EQUITY: | |
| | | |
| | | |
| | |
Minority interest investment | |
| | | |
| (3 | ) | |
| - | |
Preferred Stock, $0.001 par value; 5,000,000 shares authorized, Series D
Convertible Preferred Stock, $0.001 par value, 250,000 shares designated, 8,160 issued and outstanding at June 30, 2015 and
December 31, 2014. | |
| 13,15 | | |
| - | | |
| - | |
Common stock, $0.001 par value; 750,000,000 shares authorized, 1,644,354 and 307,922 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively. | |
| 13,15 | | |
| 2 | | |
| - | |
Additional paid-in capital | |
| | | |
| 215,977 | | |
| 209,931 | |
Accumulated deficit | |
| | | |
| (206,753 | ) | |
| (184,927 | ) |
Total shareholders’ equity | |
| | | |
| 9,223 | | |
| 25,004 | |
| |
| | | |
| | | |
| | |
Total liabilities and shareholders’ equity | |
| | | |
$ | 41,438 | | |
$ | 64,253 | |
The accompanying notes are an integral part of these unaudited
interim condensed consolidated financial statements.
FREESEAS INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts are expressed in thousands of United States dollars,
except for share and per share data)
| |
For the Six Months Ended June 30, 2015 | | |
For the Six Months Ended June 30, 2014 | |
OPERATING REVENUES | |
$ | 766 | | |
$ | 2,240 | |
| |
| | | |
| | |
OPERATING EXPENSES: | |
| | | |
| | |
Voyage expenses | |
| (750 | ) | |
| (445 | ) |
Commissions | |
| (86 | ) | |
| (133 | ) |
Vessel operating expenses | |
| (3,336 | ) | |
| (10,698 | ) |
Depreciation expense (Note 5) | |
| (2,331 | ) | |
| (2,573 | ) |
Management and other fees to a related party (Note 4) | |
| (558 | ) | |
| (841 | ) |
General and administrative expenses | |
| (2,286 | ) | |
| (1,758 | ) |
Provision and write-offs of insurance claims and bad debts | |
| 1 | | |
| 54 | |
Disposal of vessels | |
| (7,620 | ) | |
| (33 | ) |
Bareboat hire | |
| (88 | ) | |
| - | |
| |
| | | |
| | |
Loss from operations | |
| (16,289 | ) | |
| (14,187 | ) |
| |
| | | |
| | |
OTHER INCOME (EXPENSE): | |
| | | |
| | |
Interest and finance costs | |
| (974 | ) | |
| (1,231 | ) |
Loss on derivative instruments (Note 8) | |
| - | | |
| (19 | ) |
Loss due to capital lease write-off (Note 6) | |
| (3,058 | ) | |
| - | |
Gain on settlement of payable (Note 15) | |
| 273 | | |
| - | |
Gain on debt extinguishment | |
| - | | |
| 16,057 | |
Other expense (Note 9) | |
| (1,781 | ) | |
| (50 | ) |
Other expense | |
| (5,539 | ) | |
| 14,757 | |
| |
| | | |
| | |
Net (loss) income | |
$ | (21,828 | ) | |
$ | 570 | |
| |
| | | |
| | |
Basic (loss) income per share | |
$ | (37.13 | ) | |
$ | 7.85 | |
Diluted (loss) income per share | |
$ | (37.13 | ) | |
$ | 7.29 | |
Basic weighted average number of shares | |
| 587,917 | | |
| 72,576 | |
Diluted weighted average number of shares | |
| 587,917 | | |
| 78,218 | |
The accompanying notes are an integral part of these unaudited
interim condensed consolidated financial statements.
FREESEAS INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(All amounts in tables in thousands of United States dollars)
| |
For the Six Months Ended June 30, 2015 | | |
For the Six Months Ended June 30, 2014 | |
Cash Flows from Operating Activities: | |
| | | |
| | |
Net ( loss) income | |
$ | (21,828 | ) | |
$ | 570 | |
| |
| | | |
| | |
Adjustments to reconcile net (loss) income to net cash used in operating activities: | |
| | | |
| | |
Depreciation expense (Note 5) | |
| 2,331 | | |
| 2,573 | |
Amortization of debt discount (Note 9) | |
| 1,886 | | |
| 14 | |
Amortization of deferred financing fees | |
| 16 | | |
| 1,189 | |
Write-offs of capital lease | |
| 3,057 | | |
| - | |
Stock-based compensation charge (Notes 14) | |
| 484 | | |
| - | |
Gain on settlement of payable (Note 15) | |
| (273 | ) | |
| - | |
Gain on debt extinguishment | |
| - | | |
| (15,000 | ) |
Loss on sale of vessels | |
| 7,620 | | |
| - | |
Change in fair value of derivatives (Note 8) | |
| - | | |
| (200 | ) |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
-Trade receivables | |
| 521 | | |
| (318 | ) |
-Insurance claims | |
| - | | |
| (784 | ) |
-Due from related party | |
| 433 | | |
| (298 | ) |
-Inventories | |
| (376 | ) | |
| (604 | ) |
-Prepayments and other | |
| 112 | | |
| (281 | ) |
-Accounts payable | |
| 889 | | |
| (532 | ) |
-Accrued liabilities | |
| 1,006 | | |
| 260 | |
-Due to related party | |
| (256 | ) | |
| - | |
-Unearned revenue | |
| (52 | ) | |
| - | |
-Dry-docking and special survey costs paid | |
| - | | |
| - | |
Net Cash used in Operating Activities | |
| (4,430 | ) | |
| (13,411 | ) |
| |
| | | |
| | |
Cash flows from Investing Activities: | |
| | | |
| | |
Proceeds from sale of vessel, net | |
| 978 | | |
| 3,465 | |
Cash flows provided by Investing Activities | |
| 978 | | |
| 3,465 | |
| |
| | | |
| | |
Cash flows from Financing Activities: | |
| | | |
| | |
Payments of bank loans | |
| - | | |
| (21,450 | ) |
Proceeds from convertible notes (Note 9) | |
| 3,478 | | |
| - | |
Proceeds from sale of vessels | |
| - | | |
| - | |
Issuance of convertible preferred stock for cash, net of fees of $930 | |
| - | | |
| 24,070 | |
Net Cash provided by Financing Activities | |
| 3,478 | | |
| 2,620 | |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
$ | 26 | | |
$ | (7,326 | ) |
Cash and cash equivalents, beginning of period | |
| 45 | | |
| 7,581 | |
| |
| | | |
| | |
Cash and cash equivalents, end of period | |
$ | 71 | | |
$ | 255 | |
| |
| | | |
| | |
Supplemental Cash Flow Information: | |
| | | |
| | |
Cash paid for interest | |
$ | - | | |
$ | 115 | |
| |
| | | |
| | |
Cash paid for income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Non-Cash Investing and Financing Activities: | |
| | | |
| | |
| |
| | | |
| | |
Accrued interest converted into common stock (Notes 9 and 15) | |
$ | 46 | | |
$ | 5 | |
Notes converted to common Stock (Notes 9 and 15) | |
$ | 2,429 | | |
$ | 129 | |
Series C Preferred Stock converted into common stock | |
$ | - | | |
$ | 2 | |
Series D Preferred Stock converted into common stock | |
$ | - | | |
$ | 10 | |
Common stock issued for repayment of payables | |
$ | 781 | | |
$ | - | |
Beneficial conversion feature | |
$ | 2,385 | | |
$ | 164 | |
Options advance payments- purchase of leased vessels | |
$ | 9,000 | | |
$ | - | |
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
1. |
Basis of Presentation and General Information |
The accompanying unaudited interim condensed
consolidated financial statements include the accounts of FreeSeas Inc. and its wholly owned subsidiaries (collectively, the “Company”
or “FreeSeas”). FreeSeas, formerly known as Adventure Holdings S.A., was incorporated in the Marshall Islands on April
23, 2004 for the purpose of being the ultimate holding company of ship-owning companies.
The accompanying
unaudited condensed consolidated interim financial statements have been prepared by the Company’s management in conformity
with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange
Commission (“SEC”), and should be read in conjunction with the audited consolidated financial statements and notes
thereto of the Company contained in the Company’s Annual Report on Form 20-F for the year ended December 31, 2014 (“Form
20-F”), which was filed on April 30, 2015.The condensed consolidated financial statements are prepared in accordance with
the requirements for unaudited interim periods, and consequently, do not include all disclosures required to be made in conformity
with accounting principles generally accepted in the United States of America.
In the opinion
of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position
and the results of operations for the interim periods presented have been reflected herein. The results of operations for
the interim periods are not necessarily indicative of the results to be expected for the full year. Some footnotes to the unaudited
condensed consolidated interim financial statements that would substantially duplicate the disclosures contained in the audited
financial statements for the fiscal year ended December 31, 2014 as reported in the Form 20-F have been omitted.
We have contracted the management of our
fleet to entities controlled (our Managers) by Ion G. Varouxakis, our Chairman, President and Chief Executive Officer, and one
of our principal shareholders. Our Managers provide technical management of our fleet, commercial management of our fleet, financial
reporting and accounting services and office space (see Note 4).
Effective May 11, 2015 and June 26, 2015,
the Company effectuated a 7.5-to-1 reverse stock split and a 50-to-1 reverse stock split, respectively, on its issued and outstanding
common stock (Note 12). All share and per share amounts disclosed in the financial statements give effect to these reverse stock
splits retroactively, for all periods presented.
On May 20, 2015, the M/V Free Hero,
1995-built, 24,318 dwt Handysize dry bulk carrier and the M/V Free Goddess, 1995-built, 22,051 dwt Handysize dry bulk carrier,
have been sold for a gross sale price of $5,500 each, and the Company’s subsidiaries have entered into long-term bareboat
agreements for such vessels with purchase options at a daily hire rate of $1,100 per vessel. The vessels have been renamed to Fiorello
and Figaro, respectively (Notes 5 and 6).
On June 10, 2015 the Company acquired a
51% controlling stake in the newly formed Standcorp International Limited (“Standcorp”). The rest of the shares are
owned by non-affiliated entities associated with the Marvin group of companies, whose extensive experience for over twenty years
has focused in the operation and ownership of tanker vessels. Standcorp will engage in the commercial operation of product and
crude oil tankers covering a large array of sizes, by contracting them through time charter or bareboat charter arrangements, and
subsequently deploying them in the spot market or in fulfillment of contract cargoes. The Company intends to operate in generic
markets but also to focus on a number of niche markets, such as West Africa. In addition, the Company shall, depending on market
conditions, commercially operate dry-bulk carriers either chartered-in, acquired, or through services agreements with affiliated
Owners, including the Company’s tonnage.
During the six months ended June 30, 2015,
the Company owned two Handysize dry bulk carriers and operated four Handysize dry bulk carriers. As of June 30, 2015, FreeSeas
is the owner of the outstanding shares of the following subsidiaries:
Company | |
% Owned | | |
M/V | |
Type | |
Dwt | | |
Year Built/ Expected
Year of Delivery | |
Date of Acquisition | |
Date of Disposal | |
Date of Contract
Termination | |
Date of Initiation
of Bareboat
Charter |
| |
| | | |
| |
| |
| | | |
| |
| |
| |
| |
|
Adventure Two S.A. | |
| 100 | % | |
Free Destiny | |
Handysize | |
| 25,240 | | |
1982 | |
08/04/04 | |
08/27/10 | |
N/A | |
N/A |
Adventure Three S.A. | |
| 100 | % | |
Free Envoy | |
Handysize | |
| 26,318 | | |
1984 | |
09/29/04 | |
05/13/11 | |
N/A | |
N/A |
Adventure Four S.A. | |
| 100 | % | |
Free Fighter | |
Handysize | |
| 38,905 | | |
1982 | |
06/14/05 | |
04/27/07 | |
N/A | |
N/A |
Adventure Five S.A. | |
| 100 | % | |
Free Goddess | |
Handysize | |
| 22,051 | | |
1995 | |
10/30/07 | |
05/20/15 | |
N/A | |
N/A |
Adventure Six S.A. | |
| 100 | % | |
Free Hero | |
Handysize | |
| 24,318 | | |
1995 | |
07/03/07 | |
05/20/15 | |
N/A | |
N/A |
Adventure Seven S.A. | |
| 100 | % | |
Free Knight | |
Handysize | |
| 24,111 | | |
1998 | |
03/19/08 | |
02/18/14 | |
N/A | |
N/A |
Adventure Eight S.A. | |
| 100 | % | |
Free Jupiter | |
Handymax | |
| 47,777 | | |
2002 | |
09/05/07 | |
09/16/14 | |
N/A | |
N/A |
Adventure Nine S.A. | |
| 100 | % | |
Free Impala | |
Handysize | |
| 24,111 | | |
1997 | |
04/02/08 | |
09/24/14 | |
N/A | |
N/A |
Adventure Ten S.A. | |
| 100 | % | |
Free Lady | |
Handymax | |
| 50,246 | | |
2003 | |
07/07/08 | |
11/08/11 | |
N/A | |
N/A |
Adventure Eleven S.A. | |
| 100 | % | |
Free Maverick | |
Handysize | |
| 23,994 | | |
1998 | |
09/01/08 | |
N/A | |
N/A | |
N/A |
Adventure Twelve S.A. | |
| 100 | % | |
Free Neptune | |
Handysize | |
| 30,838 | | |
1996 | |
08/25/09 | |
N/A | |
N/A | |
N/A |
Adventure Fourteen S.A. | |
| 100 | % | |
Hull 1 | |
Handysize | |
| 33,600 | | |
2012 | |
N/A | |
N/A | |
04/28/12 | |
N/A |
Adventure Fifteen S.A. | |
| 100 | % | |
Hull 2 | |
Handysize | |
| 33,600 | | |
2012 | |
N/A | |
N/A | |
06/04/12 | |
N/A |
Nemorino Shipping S.A. | |
| 100 | % | |
Nemorino | |
Handymax | |
| 47,777 | | |
2002 | |
N/A | |
N/A | |
N/A | |
09/16/14 |
Fiorello Shipping S.A. | |
| 100 | % | |
Fiorello | |
Handysize | |
| 24,318 | | |
1995 | |
N/A | |
N/A | |
N/A | |
05/20/15 |
Figaro Shipping S.A. | |
| 100 | % | |
Figaro | |
Handysize | |
| 22,051 | | |
1995 | |
N/A | |
N/A | |
N/A | |
05/20/15 |
Standcorp International Limited | |
| 51 | % | |
N/A | |
N/A | |
| N/A | | |
N/A | |
N/A | |
N/A | |
N/A | |
N/A |
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
2. | Significant Accounting policies: |
Convertible debt instruments
The Company evaluates and accounts for
conversion options embedded in its convertible instruments in accordance with accounting standards for “Accounting for Derivative
Instruments and Hedging Activities.” Accounting standards generally provides three criteria that, if met, require companies
to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments.
These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument
are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that
embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also
provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards
as “The Meaning of Conventional Convertible Debt Instrument.” The Company accounts for convertible instruments (when
it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with
professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional
standards pertain to “Certain Convertible Instruments.”
Accordingly, the Company records, when
necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon
the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt
to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion
options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment
date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 provides that, among other things,
generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be
classified as an asset or a liability.
Described below are the accounting standards
that were adopted in the six months of 2015. A discussion of the Company's significant accounting policies can be found in the
Company's consolidated financial statements included in the Company’s Annual Report on Form 20-F for the year ended December
31, 2014 filed with the Securities and Exchange Commission (“SEC”) on April 30, 2015 (the "Consolidated Financial
Statements for the year ended December 31, 2014").
Recent Accounting Standards Updates:
In February 2015, the FASB issued new guidance
to improve consolidation guidance for legal entities (Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic
810): Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015 and interim periods
within those years and early adoption is permitted. The new standard is intended to improve targeted areas of the consolidation
guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amendments
in the ASU affect the consolidation evaluation for reporting organizations. In addition, the amendments in this ASU simplify and
improve current GAAP by reducing the number of consolidation models. The Company is currently evaluating the impact of this guidance
on its consolidated financial statements.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
In January 2015, the FASB issued ASU No.
2015-01 "Income Statement-Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept
of Extraordinary Items". The concept of extraordinary items is removed and instead items that are both unusual in nature and
infrequently occurring should be presented within income from continuing operations or disclosed in notes to financial statements
because those items satisfy the conditions for an item that is unusual in nature or infrequently occurring. The new accounting
guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early
application is permitted. Companies have the option to apply the amendments of ASU No. 2015-01 either prospectively or retrospectively.
In April 2015, FASB issued Accounting Standards
Update (“ASU”) No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs, to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. For public
companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim
periods within those fiscal years. Early application is permitted. This updated guidance is not expected to have a material impact
on our results of operations, cash flows or financial condition.
Any new accounting standards, not disclosed
above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material
impact on the financial statements upon adoption.
As a result
of the historically low charter rates for drybulk vessels which have been affecting the Company for over five years, and the resulting
material adverse impact on the Company’s results from operations, the accompanying unaudited interim condensed consolidated
financial statements have been prepared on a going concern basis. The Company has incurred
net loss of $21,828 and net income of $570 during the six months ended June 30, 2015, and 2014, respectively. The Company’s
cash flow projections for the remaining of 2015, indicate that cash on hand will not be sufficient to cover debt repayments scheduled
as of June 30, 2015 and operating expenses and capital expenditure requirements for at least twelve months from the balance
sheet date. As of June 30, 2015 and December 31, 2014, the Company had working capital deficits of $30,227 and $30,849, respectively.
All of the above raises substantial doubt regarding the Company’s ability to continue as a going concern. Management plans
to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their
business plan. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary
financing to meet its obligations and repay its liabilities arising from normal course of business operations when they come due
and to generate profitable operations in the future.
In January and April 2013, the Company
received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants
and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits
and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to the National
Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation. The Company’s
loan facility and deposits have been transferred to NBG. On February 22, 2014, the Company and certain of its subsidiaries entered
into terms with NBG for settlement of its obligations arising from the loan agreement with NBG. Pursuant to the terms, NBG agreed
to accept a cash payment of $22,000 no later than December 31, 2014, in full and final settlement of all of the Company’s
obligations to NBG and NBG would forgive the remaining outstanding balance of approximately $4,700. On September 17, 2014 the Company
made a payment of $2,700 to reduce outstanding indebtedness with NBG. On September 24, 2014, the Company sold the M/V Free Impala,
a 1997-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3,600 and the vessel was delivered to her new owners.
Subsequently, the amount of $3,300 had been used to reduce outstanding indebtedness with NBG, which had a mortgage on the vessel.
The agreed settlement of the Company’s obligations, arising from the loan agreement with NBG mentioned above, was not realized
and negotiations have resumed for a new agreement. In June 2015, the Company received notification from NBG that the Company has
not paid the aggregate amount of $11,271 constituting repayment installments, accrued loan and default interest due on June 16,
2015. On June 18, 2015, the Company received from NBG a reservation of rights letter stating that the Bank may take any actions
and may exercise all of their rights and remedies referred in the security documents.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
If the Company is not able to reach an
agreement with NBG, this could lead to the acceleration of the outstanding debt under its debt agreement. The Company’s failure
to satisfy its covenants under its debt agreement and any consequent acceleration of its outstanding indebtedness would have a
material adverse effect on the Company’s business operations, financial condition and liquidity.
Generally accepted accounting principles
require that long-term debt be classified as a current liability when a covenant violation gives the lender the right to call the
debt at the balance sheet date, absent a waiver. As a result of the actual breach existing under the Company’s credit facility
with NBG (Note 10) acceleration of such debt by its lender could result. Accordingly, as of June 30, 2015, the Company is required
to reclassify its long term debt as current liability on its consolidated balance sheet since the Company has not received waiver
in respect to the breach discussed above.
The Company is currently exploring several
alternatives aiming to manage its working capital requirements and other commitments, including offerings of securities through
structured financing agreements (Note 9), sale and lease back of certain vessels (Note 6), disposition of certain vessels in its
current fleet (Note 5) and additional reductions in operating and other costs.
The accompanying unaudited interim condensed
consolidated financial statements as of June 30, 2015, were prepared assuming that the Company would continue as a going concern
despite its significant losses and working capital deficit. Accordingly, the financial statements did not include any adjustments
relating to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities, or
any other adjustments that might result in the event the Company is unable to continue as a going concern, except for the classification
of all debt, as current.
4. |
Related Party Transactions |
Managers
The vessels owned and the vessels sold
and leased back by the Company receive management services from the Managers (Free Bulkers S.A. and OpenSeas Maritime S.A., respectively),
pursuant to ship management agreements between each of the subsidiaries and the Managers.
Each of the Company’s subsidiaries
pays, as per its management agreement with the Managers, a monthly management fee of $18.975 (on the basis that the $/Euro exchange
rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate exceeds 1.30 then the management fee
payable will be increased for the month in question, so that the amount payable in $ will be the equivalent in Euro based on 1.30
$/Euro exchange rate) plus a fee of $400 per day for superintendent attendance and other direct expenses.
The Company also pays Free Bulkers and
OpenSeas Maritime a fee equal to 1.25% of the gross freight or hire from the employment of the Company’s vessels. In addition,
the Company pays a 1% commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold
by the Company with the assistance of Free Bulkers and OpenSeas Maritime.
On May 20, 2015, the M/V Free Hero,
1995-built, 24,318 dwt Handysize dry bulk carrier and the M/V Free Goddess, 1995-built, 22,051 dwt Handysize dry bulk carrier,
have been sold for a gross sale price of $5,500 each, and the Company’s subsidiaries have entered into long-term bareboat
agreements for such vessels with purchase options at a daily hire rate of $1,100 per vessel (Note 6). The vessels have been renamed
to Fiorello and Figaro, respectively and are managed by OpenSeas Maritime. In this respect, the Company paid Free
Bulkers $110 relating to the sale of the M/V Free Hero and M/V Free Goddess (Note 5) during the six months ended
June 30, 2015. On February 18, 2014 the Company sold the M/V Free Knight, a 1998-built, 24,111 dwt Handysize dry bulk
carrier for a gross sale price of $3.6 million. In this respect, the Company paid Free Bulkers $36 relating to the sale of
the M/V Free Knight (Note 5) during the six months ended June 30, 2014. In addition, the Company has incurred commission
expenses relating to its commercial agreement with the Managers amounting to $16 and $26 for the six months ended June 30,
2015 and 2014, respectively, included in “Commissions” in the accompanying unaudited interim condensed consolidated
statements of operations.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The Company also pays, as per its services
agreement with Free Bulkers, a monthly fee of $136 (on the basis that the $/Euro exchange rate is 1.35 or lower; if on the last
business day of each month the $/Euro exchange rate exceeds 1.35 then the service fee payable will be adjusted for the following
month in question, so that the amount payable in dollars will be the equivalent in Euro based on 1.35 $/Euro exchange rate) as
compensation for services related to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over financial
reporting procedures and general administrative and management services plus expenses. Free Bulkers is entitled to a termination
fee if the agreement is terminated upon a “change of control” as defined in its services agreement with the Manager.
The termination fee as of June 30, 2015 would be approximately $60,146.
Fees and expenses charged by the Managers
are included in the accompanying unaudited interim condensed consolidated financial statements in “Management and other fees
to related parties,” “General and administrative expenses” and “Operating expenses”. The total amounts
charged for the six months ended June 30, 2015 and 2014 amounted to $1,395 ($558 of management fees, $818 of services fees, $16
of superintendent fees and $3 for other expenses) and $1,895 ($841 of management fees, $831 of services fees, $220 of superintendent
fees and $3 for other expenses), respectively.
The balance due from the Managers as of
June 30, 2015 and as of December 31, 2014 was $nil and $433 respectively. The balance due to the Managers as of June
30, 2015 and as of December 31, 2014 was $256 and $nil respectively. The amount paid to Free Bulkers for office space during
the six months ended June 30, 2015 and 2014 was $69 and $84, respectively and is included in “General and administrative
expenses” in the accompanying unaudited interim condensed consolidated statements of operations.
| |
Vessels Cost | | |
Accumulated
Depreciation | | |
Net Book
Value | |
December 31, 2014 | |
$ | 88,078 | | |
$ | (25,768 | ) | |
$ | 62,310 | |
Depreciation | |
| - | | |
| (2331 | ) | |
| (2,331 | ) |
Disposal of vessels | |
| (42,674 | ) | |
| 13,145 | | |
| (29,529 | ) |
June 30, 2015 | |
$ | 45,404 | | |
$ | (14,954 | ) | |
$ | 30,450 | |
Vessels disposed during the
six months ended June 30, 2015.
On May 20, 2015, the M/V Free Hero,
1995-built, 24,318 dwt Handysize dry bulk carrier and the M/V Free Goddess, 1995-built, 22,051 dwt Handysize dry bulk carrier,
have been sold for a gross sale price of $5,500 each, and the Company’s subsidiaries have entered into long-term bareboat
agreements for such vessels with purchase options at a daily hire rate of $1,100 per vessel. The vessels have been renamed to M/V
Fiorello and M/V Figaro, respectively (Note 6). As a result of the sale of the M/V Free Hero and the M/V Free
Goddess the Company recognized a gain of $950 and a loss of $8,571 in the accompanying unaudited interim condensed consolidated
statement of operations for the six months ended June 30, 2015, respectively.
Vessel disposed during the six months
ended June 30, 2014.
On February 18, 2014 the Company sold the
M/V Free Knight, a 1998-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3.6 million and
the vessel was delivered to her new owners. The Company recognized an impairment charge of $24 million in the consolidated statement
of operations for the year ended December 31, 2013.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
As of June 30,
2015, the Company performed an impairment assessment of its long-lived assets (M/V Free Maverick and M/V Free Neptune)
by comparing the undiscounted net operating cash flows for each vessel to its respective carrying value. The
significant factors and assumptions the Company used in each future undiscounted net operating cash flow analysis included, among
others, operating revenues, commissions, off-hire days, dry-docking costs, operating expenses and management fee estimates. Revenue
assumptions were based on contracted time charter rates up to the end of life of the current contract of each vessel as well as
the ten year historical average time charter rates for the remaining life of the vessel after the completion of the current contracts.
In addition, the Company used an annual operating expenses escalation factor and an estimate of off hire days. All estimates used
and assumptions made were in accordance with the Company’s internal budgets and historical experience of the shipping industry.
The Company’s assessment concluded that no impairment existed as of June 30, 2015, as the vessels’
future undiscounted net operating cash flows exceeded their carrying value by $29,922. If the Company were to utilize the most
recent five year historical average rates would recognize an impairment loss of $19,945 and if were to utilize the most recent
three year historical average rates or one year historical average rates, would recognize an impairment loss of $22,950.
6. | Options Advance Payments- Purchase of Leased Vessels |
In conjunction with the financing agreement
for a new vessel acquisition, as publicly disclosed on May 26, 2015 in the Form 6-K filed with S.E.C. (Commission File No. 000-51672),
which has not yet occurred, the M/V Free Hero, (1995-built, 24,318 dwt) and the M/V Free Goddess, (1995-built, 22,051
dwt) both Handysize dry bulk carriers, were sold for a gross sale price of $5,500 each payable in tranches, with certain conditions
precedent, and a seller’s credit of $4,500 per vessel. An amount of $725 of the sales price remains payable by the new owners.
The vessels have been renamed M/V Fiorello and M/V Figaro, respectively. Concurrently, two of the Company’s subsidiaries
entered into five-year bareboat charter agreements with the new owners of these two vessels at a daily hire rate of $1,100 per
vessel with purchase options at any time up to May 20, 2020. The sellers’ credit of $ 9,000 in the aggregate was agreed to
be an Options Advance Payment of $ 4,500 per vessel to be netted against any of the Company’s options’ purchase prices
under the bareboat charter agreement and any rightful claim of the owners in case of default or breach by the Company of the bareboat
agreements’ terms.
The Company recorded the above transaction
as an “operating lease” since none of the four criteria according to ASC 840-55-7 “Classification of the Lease”
has been met.
The following table summarizes our bareboat charter obligation
of the operating lease p.a.:
Year | |
| Annual Operating Lease Payments | |
1 | |
$ | 803 | |
2 | |
| 803 | |
3 | |
| 803 | |
4 | |
| 803 | |
5 | |
| 803 | |
Total | |
$ | 4,015 | |
As a result of the settlement agreement
executed on September 9, 2015 by the Company and the owners of the M/V Nemorino with regards to disputes that arose in connection
with a Notice of Termination of the bareboat charter (see Note 16), the Company has written-off the capital lease and removed from
its records the related short and long-term lease obligations, previously recorded as of December 31, 2014 in the amounts of $11,826,
and $8,401, respectively, recognizing a loss of $3,058 in the accompanying unaudited interim condensed consolidated statement of
operations of June 30, 2015.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
As of June 30, 2015, the amount of $5,586
in the interim condensed consolidated balance sheet, includes the NBG loan accrued interest of $4,513 (Note 10). The balance amount
of $1,073 relates to operating accruals.
8. |
Financial Instruments and Fair
Value Measurements |
The Company is exposed to interest rate
fluctuations associated with its variable rate borrowings and its objective is to manage the impact of such fluctuations on earnings
and cash flows of its borrowings. In this respect, the Company partially uses interest rate swaps to manage net exposure to interest
rate fluctuations related to its borrowings.
The Company was party of two interest rate
swap agreements which were fully unwound on February 3, 2014. The total of the change in fair value and settlements for the six
months ended June 30, 2015 and 2014 aggregate to losses of $nil and $19, respectively, which is separately reflected in “Loss
on derivative instruments” in the accompanying unaudited interim condensed consolidated statement of operations.
Tabular Disclosure of Derivatives Location
Derivatives are recorded in the balance
sheet on a net basis by counterparty when a legal right of setoff exists. The following table present information with respect
to the fair values of derivatives reflected in the balance sheet on a gross basis by transaction. The tables also present information
with respect to gains and losses on derivative positions reflected in the Statement of Operations.
| |
| |
Amount | |
Derivative | |
Loss Recognized on Derivative Location | |
June 30, 2015 | | |
June 30, 2014 | |
Interest rate swaps | |
Loss on derivative instruments | |
$ | - | | |
$ | (19 | ) |
| |
| |
| | | |
| | |
Total | |
| |
$ | - | | |
$ | (19 | ) |
The following methods and assumptions were
used to estimate the fair value of each class of financial instrument:
|
• |
Cash and cash equivalents, restricted cash, accounts receivable and accounts payable: The carrying values reported in the consolidated balance sheets for those financial instruments are reasonable estimates of their fair values due to their short-term nature. |
|
• |
Long-term debt: The fair values of long-term bank loans approximate the recorded values due to the variable interest rates payable. |
|
• |
Derivative financial instruments: The fair values of the Company’s derivative financial instruments equate to the amount that would be paid or received by the Company if the agreements were cancelled at the reporting date, taking into account current market data per instrument and the Company’s or counterparty’s creditworthiness, as appropriate. |
The guidance for fair value measurements
applies to all assets and liabilities that are being measured and reported on a fair value basis.
This statement enables the reader of the
financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality
and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at
fair value be classified and disclosed in one of the following three categories:
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Level 1: Unadjusted quoted market prices
in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Observable inputs other than quoted
prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical
or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3: Unobservable inputs that are not
corroborated by market data and that are significant to the fair value of the assets or liabilities.
The Company’s derivative financial
instruments are valued using pricing models that are used to value similar instruments by market participants. Where possible,
the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs,
including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs.
The Company’s derivatives trade in liquid markets, and as such, model inputs can generally be verified and do not involve
significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.
As of June 30, 2015 all the Company’s
vessels were classified as “held and used”.
9. |
Convertible Notes Payable |
On November 17, 2014, the Company sold
to KBM WORLDWIDE, Inc. (“KBM”) an 8% interest bearing convertible note for $304 due in nine months subject to the restrictions
of Rule 144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has the right to
convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s common
stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares of
Common Stock. The conversion price is the 65% of the average of the lowest five trading prices of the Company’s common stock
on any trading day during the ten trading days prior to the conversion. Upon written notice, during the first six months the Company
could prepay the note with amounts ranging from 110% of principal plus interest (during days 1—30) to 135% of principal plus
interest (during days 121-180). On June 1, 2015, upon full conversion of the convertible note plus accrued interest, the Company
has issued in aggregate 121,038 shares of common stock to KBM.
On January 5, 2015, the Company sold to
Himmil Investments Ltd., a non-U.S. investor, (“Himmil”), a $500 convertible promissory note, which matures a year
from issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common stock
any portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it to own
more than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i) $169.50
and (ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion. Upon
prior notice, the Company may prepay the Investor in cash, for 127.5% of any outstanding principal and interest remaining on the
note. On March 24, 2015, upon full conversion of this convertible promissory note plus accrued interest, the Company has issued
in aggregate 34,204 shares of common stock to Himmil.
On January 21, 2015, the Company sold to
KBM WORLDWIDE, Inc. (“KBM”) an 8% interest bearing convertible note for $154 due in nine months subject to the restrictions
of Rule 144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has the right to
convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s common
stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares of
Common Stock. The conversion price is the 65% of the average of the lowest five trading prices of the Company’s common stock
on any trading day during the ten trading days prior to the conversion. Upon written notice, during the first six months the Company
could prepay the note with amounts ranging from 110% of principal plus interest (during days 1—30) to 135% of principal plus
interest (during days 121-180). As of August 12, 2015 upon full conversion of all principal and interest due under the note The
Company has issued in aggregate 192,360 shares of common stock to KBM.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On February 5, 2015, the Company sold to
Himmil a $500 convertible promissory note, which matures a year from issuance and accrues interest at the rate of 8% per annum.
The investor is entitled at any time to convert into common stock any portion of the outstanding and unpaid principal and accrued
interest, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares
of Common Stock. The conversion price is the lower of (i) $232.5 and (ii) 60% of the lowest daily VWAP on any trading day during
the twenty-one consecutive trading days prior to conversion. Upon prior notice, the Company may prepay the Investor in cash, for
127.5% of any outstanding principal and interest remaining on the note. On April 29, 2015, upon full conversion of this convertible
promissory note plus accrued interest, the Company has issued in aggregate 51,391 shares of common stock to Himmil.
On March 5, 2015, the Company sold to Glengrove
Small Cap Value, Ltd., a non-U.S. investor (“Glengrove”), a $750 convertible promissory note, which matures a year
from issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common stock
any portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it to own
more than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i) $169.5
and (ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion. Upon
prior notice, the Company may prepay the Investor in cash, for 127.5% of any outstanding principal and interest remaining on the
note. On June 10, 2015, upon full conversion of this convertible promissory note plus accrued interest, the Company has issued
in aggregate 264,358 shares of common stock to Glengrove.
On April 16, 2015, the Company sold to
Alderbrook Ship Finance Ltd., a non-U.S. investor (“Alderbrook”), a $500 convertible promissory note, which matures
a year from issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common
stock any portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it
to own more than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i)
$90 and (ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion.
Upon prior notice, the Company may prepay the investor in cash, for 127.5% of any outstanding principal and interest remaining
on the note. (see Note 16).
On May 6, 2015, the Company sold to LG
CAPITAL FUNDING, LLC (“LG CAPITAL”) an 8% interest bearing convertible note, which contained an 8% OID, for $56.5 due
in twelve months subject to the restrictions of Rule 144 promulgated under the 1933 Act. The holder of this note is entitled, at
its option, at any time to convert all or any amount outstanding into shares of the Company’s Common Stock, provided that
such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion
price is the 65% of the lowest trading price of the Company’s common stock on any trading day for the twenty prior trading
days including the day upon which a notice of conversion is received by the Company. During the first six months, the Company may
prepay the note with amounts ranging from 118% of principal plus interest (during days 1—30) to 148% of principal plus interest
(during days 121-180).
On May 7, 2015, the Company sold to JSJ
Investments Inc. (“JSJ”) an 8% interest bearing convertible note, which contained an 5% OID, for $150 due in twelve
months subject to the restrictions of Rule 144 promulgated under the 1933 Act. The investor is entitled at any time on or after
issuance date to convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s
common stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares
of Common Stock. The conversion price is the lesser of $37.5 or a 35% discount to the lowest VWAP during the twenty one trading
days prior to the conversion.
On May 12, 2015, the Company sold to VIS
VIRES GROUP, INC. (“VIS VIRES”) an 8% interest bearing convertible note for $154 due in nine months subject to the
restrictions of Rule 144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has
the right to convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s
common stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares
of Common Stock. The conversion price is the 65% of the average of the lowest five trading prices of the Company’s common
stock on any trading day during the ten trading days prior to the conversion. Upon written notice, during the first six months
the Company may prepay the note with amounts ranging from 110% of principal plus interest (during days 1—30) to 135% of principal
plus interest (during days 121-180).
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On May 19, 2015, the Company sold to AUCTUS
FUND LLC. (“AUCTUS”) an 8% interest bearing convertible note for $105 due in nine months subject to the restrictions
of Rule 144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has the right to
convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s common
stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares of
Common Stock. The conversion price is the 65% of the two lowest trading prices of the Company’s common stock on any trading
day during the twenty trading days prior to the conversion. During the first six months, the Company may prepay the note with amounts
ranging from 125% of principal plus interest (during days 1—30) to 150% of principal plus interest (during days 121-180).
On June 3, 2015, the Company sold to Bas
Cole Value Fund Ltd., a non-U.S. investor (“Bas Cole”), a $500 convertible promissory note, which matures a year from
issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common stock any
portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it to own more
than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i) $14.97 and
(ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion. Upon prior
notice, the Company may prepay the investor in cash, for 127.5% of any outstanding principal and interest remaining on the note.
On June 16, 2015, the Company sold to VIS
VIRES GROUP, INC. (“VIS VIRES”) an 8% interest bearing convertible note for $104 due in nine months subject to the
restrictions of Rule 144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has
the right to convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s
common stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares
of Common Stock. The conversion price is the 65% of the average of the lowest five trading prices of the Company’s common
stock on any trading day during the ten trading days prior to the conversion. Upon written notice, during the first six months
the Company may prepay the note with amounts ranging from 110% of principal plus interest (during days 1—30) to 135% of principal
plus interest (during days 121-180).
During the six months ended June 30, 2015,
the Company converted convertible debt and related accrued interest amounting to $2,429 by issuing to note holders 470,991 shares
of common stock in the aggregate.
As of June 30, 2015, pursuant to the issued
convertible notes above, the Company has received the aggregate amount of $3,478.
In connection with the issuance of convertible
instruments, the Company has recorded a debt discount in additional paid in capital related to the beneficial conversion feature
amounting to $2,385 and amortization of $1,886 which is included in “other expense” in the accompanying statement of
operations.. As of June 30, 2015 the net balance outstanding amounted to $717 net of remaining unamortized debt discount of $636.
10. |
Bank
Loan – current portion |
As of June 30, 2015, the Company’s bank debt is as follows:
| |
NBG | |
December 31, 2014 | |
$ | 17,598 | |
Additions | |
$ | - | |
Payments | |
$ | - | |
June 30, 2015 | |
$ | 17,598 | |
The Company’s credit facility with
NBG bears interest at LIBOR plus a margin of 4%, and is secured by mortgage on the financed vessel (M/V Free Neptune)
and assignments of vessel’s earnings and insurance coverage proceeds. It also includes affirmative and negative financial
covenants of the borrower, including maintenance of operating accounts, average cash balances to be maintained with the lending
bank and minimum ratios for the fair value of the collateral vessel compared to the outstanding loan balance. The borrower is restricted
under its respective loan agreement from incurring additional indebtedness, changing the vessel’s flag without the lender’s
consent or distributing earnings.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The weighted average interest rate for
the six months ended June 30, 2015 and 2014 was 3.2% and 3.3%, respectively. Interest expense incurred amounted to $557 and
$981 for the six months ended June 30, 2015 and 2014, respectively, and is included in “Interest and Finance Costs”
in the accompanying unaudited interim condensed consolidated statements of operations.
NBG Facility (fka FBB Facility)
In January and April 2013, the Company
received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants
and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits
and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to the National
Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation. The Company’s
loan facility and deposits have been transferred to NBG. On February 22, 2014, the Company and certain of its subsidiaries entered
into terms with NBG for settlement of its obligations arising from the loan agreement with NBG. Pursuant to the terms, NBG agreed
to accept a cash payment of $22,000 no later than December 31, 2014, in full and final settlement of all of the Company’s
obligations to NBG and NBG would forgive the remaining outstanding balance of approximately $4,700. On September 17, 2014 the Company
made a payment of $2,700 to reduce outstanding indebtedness with NBG. On September 24, 2014, the Company sold the M/V Free Impala,
a 1997-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3,600. Subsequently, the amount of $3,300 had been
used to reduce outstanding indebtedness with NBG, which had a mortgage on the vessel. The agreed settlement of the Company’s
obligations, arising from the loan agreement with NBG mentioned above, was not realized and negotiations have resumed for a new
agreement. In June 16, 2015, the Company received notification from NBG that the Company has not paid the aggregate amount of $11,271
constituting unpaid loan installments and accrued default interest then due. On June 18, 2015, the Company received from NBG a
reservation of rights letter stating that the Bank may take any actions and may exercise all of their rights and remedies referred
in the security documents.
Loan Covenants
As of December 31, 2014 and June 30, 2015,
the Company was in breach of certain of its financial covenants for its loan agreement with NBG, including the loan-to-value ratio,
interest cover ratio, minimum liquidity requirements and leverage ratio. Thus, in accordance with guidance related to classification
of obligations that are callable by the creditor, the Company has classified all of the related long-term debt amounting to $17,598
as current at June 30, 2015.
NBG (fka FBB) loan agreement:
|
· |
Average corporate liquidity: the Company is required to maintain an average corporate liquidity of at least $3,000; |
|
· |
Leverage ratio: the corporate guarantor’s leverage ratio shall not at any time exceed 55%; |
|
· |
Ratio of EBITDA to net interest expense shall not be less than 3; and |
|
· |
Value to loan ratio: the fair market value of the financed vessels shall be at least (a) 115% for the period July 1, 2010 to June 30, 2011 and (b) 125% thereafter. |
The covenants described above are tested
annually on December 31st.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
11. |
Commitments and Contingencies |
The following table summarizes our contractually
committed obligations and their maturity dates as of June 30, 2015:
| |
Payments
Due by Period | |
(Dollars in
thousands) | |
Total | | |
Less
than 1
year | | |
2-
year | | |
3-
year | | |
4-
year | | |
5-
year | | |
More
than 5
years | |
| |
(U.S. dollars in thousands) | |
| |
| |
Interest on variable-rate debt | |
| 394 | | |
| 394 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Services fees to the Manager | |
| 5,326 | | |
| 1,635 | | |
| 1,635 | | |
| 1,635 | | |
| 421 | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Management fees to the Managers | |
| 8,045 | | |
| 683 | | |
| 683 | | |
| 683 | | |
| 683 | | |
| 683 | | |
| 4,630 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Hire on Leased Vessels | |
| 3,927 | | |
| 405 | | |
| 803 | | |
| 803 | | |
| 803 | | |
| 310 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total obligations | |
$ | 17,692 | | |
$ | 3,117 | | |
$ | 3,121 | | |
$ | 3,121 | | |
$ | 1,907 | | |
$ | 993 | | |
$ | 4,630 | |
The above table does
not include our share of the monthly rental expenses for our offices of approximately 8.7 Euro (in thousands)
Claims
Various claims, suits, and complaints,
including those involving government regulations and product liability, arise in the ordinary course of the shipping business.
In addition, losses may arise from disputes with charterers, agents, insurance and other claims with suppliers relating to the
operations of the Company’s vessels. Currently, management is not aware of any such claims or contingent liabilities, which
should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The
Company is a member of a protection and indemnity association, or P&I Club that is a member of the International Group of P&I
Clubs, which covers its third party liabilities in connection with its shipping activities. A member of a P&I Club that is
a member of the International Group is typically subject to possible supplemental amounts or calls, payable to its P&I Club
based on its claim records as well as the claim records of all other members of the individual associations, and members of the
International Group. Although there is no cap on its liability exposure under this arrangement, historically supplemental calls
have ranged from 25%-40% of the Company’s annual insurance premiums, and in no year have exceeded $1 million. The Company
accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able to reasonably
estimate the probable exposure. Currently, management is not aware of any such claims or contingent liabilities, which should be
disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The Company’s
protection and indemnity (P&I) insurance coverage for pollution is $1 billion per vessel.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
Since the release from the pirates, the
ex M/V Free Goddess, renamed to M/V Figaro (Note 6), has been laying at the port of Salalah, Oman, undertaking repairs
funded mostly by insurers. The repairs of the vessel were completed, and notice of readiness was tendered to her Charterers for
the resumption of the voyage. The Charterers repudiated the Charter and we accepted Charterers’ repudiation and terminated
the fixture reserving our right to claim damages and other amounts due to us. The Tribunal previously constituted will hear our
claim for (amongst others) unpaid hire and damages from the Charterers. In the meantime, cargo interests have commenced proceedings
under the Bills of Lading although they have not yet particularized their claims. At the same time, we as the Bareboat Charterers
of the M/V Figaro, we explore all options for the commercial resolution of the situation arising from Charterers refusal
to honor their obligations, including the further contribution by insurers and cargo interests towards the completion of the voyage
and recovery of amounts due. We are working for a diligent solution in order to complete the voyage without further delays. In
case no commercially reasonable solution may be found, we will explore our strategic alternatives with respect to this vessel.
12. |
Earnings/(loss) per Share and Series A, B & C Warrants |
The computation of basic earnings/loss
per share is based on the weighted average number of common shares outstanding during the period, as adjusted to reflect the 7.5-to-1
reverse stock split and the 50-to-1 reverse stock split, effective on May 11, 2015 and June 26, 2015, respectively, on its issued
and outstanding common stock.
The computation of the dilutive common
shares outstanding does not include the 9,756 Series A Warrants (adjusted to reflect the two recent reverse splits), 153 Series B
Warrants (adjusted to reflect the two recent reverse splits) and 95,258 Series C Warrants (adjusted to reflect the two recent reverse
splits) outstanding as of June 30, 2015, as the average stock price during the six months ended June 30, 2015 was less than their
exercise price, thus resulting in an antidilutive effect.
Presented below is a table reflecting the
activity in the Series A Warrants, Series B Warrants and Series C Warrants from December 31, 2014 through June 30, 2015:
| |
Series A
Warrants | | |
Series B
Warrants | | |
Series C
Warrants | | |
Total | | |
Exercise
Price |
| |
| | |
| | |
| | |
| | |
|
December 31, 2014 | |
| 13,333 | | |
| 2,642 | | |
| 95,914 | | |
| 111,889 | | |
$975 (Series A&B)
$532.50 (Series C) |
Warrants cashless exercised | |
| (3,577 | ) | |
| (2,489 | ) | |
| (656 | ) | |
| (6,722 | ) | |
|
June 30, 2015 | |
| 9,756 | | |
| 153 | | |
| 95,258 | | |
| 105,167 | | |
|
As of June 30, 2015, pursuant to the cashless exercise formula
set forth in the Series A, B & C warrants, the Company has issued to warrant holders 586,730 shares of common stock in the
aggregate.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
The components of the denominator for the calculation
of basic earnings/(loss) per share and diluted earnings/(loss) per share for the six months ended June 30, 2015 and 2014, respectively,
are as follows:
| |
For the six months Ended | | |
For the six months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
Numerator: | |
| | | |
| | |
Net income/(loss) - basic and diluted | |
$ | (21,828 | ) | |
$ | 570 | |
| |
| | | |
| | |
Basic earnings/(loss) per share denominator: | |
| | | |
| | |
Weighted average common shares outstanding | |
| 587,917 | | |
| 72,576 | |
Diluted earnings/(loss) per share denominator: | |
| | | |
| | |
Weighted average common shares outstanding | |
| 587,917 | | |
| 78,218 | |
| |
| | | |
| | |
Dilutive common shares: | |
| | | |
| | |
Series A & C warrants | |
| - | | |
| 5,642 | |
Restricted shares | |
| - | | |
| - | |
| |
| | | |
| | |
Dilutive effect | |
| - | | |
| 5,642 | |
| |
| | | |
| | |
Weighted average common shares - diluted | |
| 587,917 | | |
| 78,218 | |
| |
| | | |
| | |
Basic earnings/(loss) per common share | |
$ | (37.13 | ) | |
$ | 7.85 | |
Diluted earnings/(loss) per common share | |
$ | (37.13 | ) | |
$ | 7.29 | |
Effective May 11, 2015 and June 26, 2015,
the Company effectuated a 7.5-to-1 reverse stock split and a 50-to-1 reverse stock split, respectively, on its issued and outstanding
common stock. The reverse stock split did not affect any shareholder’s ownership percentage of the Company’s common
shares, except to the limited extent that the reverse stock split resulted in any shareholder owning a fractional share. Fractional
shares of common stock were rounded up to the nearest whole share.
On July 30, 2014, the Company’s Board
of Directors approved the Company’s 2014 Equity Incentive Plan (the “2014 Plan”). Under the terms of the 2014
Plan, the Company may issue (1) stock options (incentive and non-statutory), (2) restricted stock, (3) stock appreciation rights,
or SARs, (4) restricted stock units, or RSUs, (5) other stock-based awards, and (6) cash-based awards. The 2014 Plan provided for
the issuance of up to 13,333 shares of common stock. The Board determines the exercise price, vesting and expiration period of
the grants under the 2014 Plan. However, the exercise price of an incentive stock option may not be less than 110% of fair value
of the common stock at the date of the grant for a 10% or more shareholder and 100% of fair value for a grantee who is not a 10%
shareholder. The fair value of the common stock is determined based on quoted market price or in absence of such quoted market
price, by the Board in good faith. Additionally, the vesting period of the grants under the 2014 Plan may not be more than five
years and expiration period not more than ten years. On November 5, 2014, the Company amended the 2014 Plan, which increased the
authorized number of shares of common stock issuable thereunder from 13,333 to 40,000.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On November 10, 2014, the Company pursuant
to the recommendation of the Company’s Compensation Committee and the Board of Directors’ approval, issued an aggregate
of 28,267 shares of its common stock to officers, directors and employees as an incentive for their commitment and hard work during
adverse market conditions. In addition, the Company issued an aggregate of 1,066 shares of its common stock to its non-executive
members of its Board of Directors in payment of $80 in unpaid Board fees for the second and third quarters of 2014. Subject to
the provisions of a restricted stock award granted to the holders by the Company pursuant to its Amended 2014 Plan, 2,933 shares
of its common stock were vested on May 10, 2015, 7,933 shares of its common stock will vest on November 10, 2015 and 7,933 shares
of its common stock will vest on November 10, 2016.
Pursuant to the plan, there are 10,667
shares of the Company’s common stock available for grant as of June 30, 2015.
For the six months ended June 30, 2015,
the recognized stock based compensation expense in relation to the common shares granted is $484. The total unrecognized compensation
cost of the non-vested restricted shares granted under the Plan is $842. The cost is expected to be recognized over a period of
approximately 18 months.
On July 15, 2014, we received a letter
from NASDAQ, notifying us that for the last 30 consecutive business days, the closing bid price of the Company’s common stock
has been below $1.00 per share, the minimum closing bid price required by the continued listing requirements of NASDAQ set forth
in Listing Rule 5550(a)(2). We have 180 calendar days, or until January 12, 2015, to regain compliance with Rule 5550(a)(2) (the
"Compliance Period"). To regain compliance, the closing bid price of the Company’s common stock must be at least
$1.00 per share for a minimum of 10 consecutive business days during the Compliance Period. The NASDAQ notification has no effect
at this time on the listing of the Company's common stock on The NASDAQ Capital Market.
On July 16, 2014, we
received a letter from NASDAQ indicating that we were not in compliance with the applicable $2.5 million stockholders’ equity
requirement, as set forth in Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”). The letter indicated
that we had 45 days, or until September 2, 2014, to submit a plan to regain compliance. If our plan is accepted, NASDAQ has the
discretion to grant us up to 180 days from July 16, 2014 to regain compliance. If NASDAQ does not accept our plan, we would have
the opportunity to appeal that decision to a hearings panel.
On August 13, 2014, we received a letter
from NASDAQ indicating that we had achieved compliance with the Stockholders’ Equity Requirement for continued listing on
The NASDAQ Capital Market and that the matter was closed.
On January 13, 2015, the Company received
a letter from NASDAQ notifying that it has been provided an additional 180 calendar day period, or until July 13, 2015, to regain
compliance with the minimum $1 bid price per share requirement. The Company’s eligibility for the additional period was based
on meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for
initial listing on the NASDAQ Capital Market with the exception of the bid price requirement, and the Company’s written notice
of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary. If
at any time during this additional time period the closing bid price of the Company’s common stock is at least $1 per share
for a minimum of 10 consecutive business days, NASDAQ will provide written confirmation of compliance and this matter will be closed.
If compliance cannot be demonstrated by July 13, 2015, NASDAQ will provide written notification that the Company’s common
stock will be delisted. At that time, the Company may appeal NASDAQ’s determination to a Hearings Panel (the “Panel”).
If the Company appeals, it will be asked to provide a plan to regain compliance to the Panel (please see Note 16).
As of June 30, 2015, pursuant to the conversion
of the notes (Note 9), the Company has issued to note holders 841,633 shares of common stock in the aggregate.
As of June 30, 2015, pursuant to the cashless
exercise formula set forth in the Series A, B & C warrants, the Company has issued to warrant holders 586,730 shares of common
stock in the aggregate (Note 12).
As of June 30, 2015, following the settlement
agreements the Company entered with eight vendors, non-U.S. creditors, the Company has issued 30,640 common shares in the aggregate
as payment in full of unpaid invoices of the aggregate amount of $1,024.
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
8,160 shares of Series D Preferred Stock
is outstanding as of June 30, 2015.
Common Stock Dividends
During the six months ended June 30,
2015 and 2014, the Company did not declare or pay any dividends.
On July 13, 2015, NASDAQ notified the Company
that it had regained compliance with Listing Rule 5550(a)(2), which requires a minimum bid price of $1.00 for continued listing
on the NASDAQ Stock Market and that the matter is now closed.
On July 13, 2015, the Company sold to AMVS
Value Fund Ltd., a non-U.S. investor (“AMVS”), a $600 convertible promissory note, which matures a year from issuance
and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common stock any portion
of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it to own more than
4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i) $15.481 and (ii)
60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion. Upon prior
notice, the Company may prepay the investor in cash, for 127.5% of any outstanding principal and interest remaining on the note.
To induce AMVS to consummate the transaction, the Company has agreed to provide certain registration rights under the 1933 Act
of 1933 and file a Registration Statement required hereunder, the 60th calendar day after the date hereof.
On July 16, 2015, the Company entered into
settlement agreements with five vendors, non-U.S. creditors, who agreed to accept 75,485 Company’s common shares as payment
in full of unpaid invoices of the aggregate amount of $189.
On July 17, 2015, the Company sold to Black
Mountain Equities Inc., (“Black Mountain”) an 8% interest bearing convertible note subject to the restrictions of Rule
144 promulgated under the 1933 Act, which contained a 10% OID, for $110 due in twelve months. One hundred eighty days following
the date of this note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount and accrued
interest of the note into Company’s common stock, provided that such conversion does not cause it to own more than 4.99%
of the common stock of the Company, into shares of Common Stock. The conversion price is the lesser of (i) $2.75 and (ii) and 65%
of the lowest VWAP for the 20 trading days prior to the date of conversion. At any time prior to the maturity date, the Company
shall have the option, upon ten business days’ notice to the holder, to pre-pay the entire remaining outstanding principal
amount of this note in cash, provided that the Company shall pay the holder one hundred twenty percent (120%) of the principal
plus interest outstanding in repayment hereof.
On July 17, 2015, the Company sold to Gemini
Master Fund Ltd., (“Gemini”) an 8% interest bearing convertible note subject to the restrictions of Rule 144 promulgated
under the 1933 Act, which contained a 10% OID, for $165 due in twelve months. One hundred eighty days following the date of this
note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount and accrued interest of
the note into Company’s common stock, provided that such conversion does not cause it to own more than 4.99% of the common
stock of the Company, into shares of Common Stock. The conversion price is the lesser of (i) $2.75 and (ii) and 65% of the lowest
VWAP for the 20 trading days prior to the date of conversion. At any time prior to the maturity date, the Company shall have the
option, upon ten business days’ notice to the holder, to pre-pay the entire remaining outstanding principal amount of this
note in cash, provided that the Company shall pay the holder 120% of the principal plus interest outstanding in repayment hereof.
On July 21, 2015, the Company received
notice of Arbitration from the owners of the M/V Nemorino, under the terms of the bareboat charter party and for the resolution
of the dispute that has arisen thereunder between the parties.
On July 27, 2015, the Company sold to VIS VIRES GROUP, INC.
(“VIS VIRES”) an 8% interest bearing convertible note for $154 due in nine months subject to the restrictions of Rule
144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has the right to convert
all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s common stock,
provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares of Common
Stock. The conversion price is the 65% of the average of the lowest five trading prices of the Company’s common stock on
any trading day during the ten trading days prior to the conversion. Upon written notice, during the first six months the Company
may prepay the note with amounts ranging from 110% of principal plus interest (during days 1—30) to 135% of principal plus
interest (during days 121-180).
FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(All amounts in thousands of United States Dollars, except for
share and per share data)
On July 29, 2015, upon full conversion
of the $500 convertible promissory note to Alderbrook, plus accrued interest, the Company has issued in aggregate 370,642 shares
of common stock to the note holder.
On August 12, 2015, upon full conversion
of the $154 convertible promissory note to KBM, plus accrued interest, the Company has issued in aggregate 324,701 shares of common
stock to the note holder.
On August 18, 2015, upon full conversion
of the $500 convertible promissory note to Bas Cole, plus accrued interest, the Company has issued in aggregate 1,764,900 shares
of common stock to the note holder.
On September 2, 2015,
the Company sold to Casern Holdings Ltd., a non-U.S. investor (“Casern”), a $600 convertible promissory note, which
matures a year from issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert
into common stock any portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does
not cause it to own more than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the
lower of (i) $2.18 and (ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior
to conversion. Upon prior notice, the Company may prepay the investor in cash, for 127.5% of any outstanding principal and interest
remaining on the note. To induce Casern to consummate the transaction, the Company has agreed to provide certain registration rights
under the 1933 Act of 1933 and file a Registration Statement required hereunder, the 60th calendar day after the date hereof.
On September 4, 2015, the Company sold
to Service Trading Company, LLC, (“Service Trading Co.”) an 8% interest bearing convertible note subject to the restrictions
of Rule 144 promulgated under the 1933 Act, which contained an 8% OID, for $37.8 due in twelve months. One hundred eighty days
following the date of this note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount
and accrued interest of the note into Company’s common stock, provided that such conversion does not cause it to own more
than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price equals 65% of the lowest trading
price of the Common Stock for the twenty prior trading days including the day upon which a Notice of Conversion is received by
the Company. Upon written notice, during the first six months the Company may prepay the note with amounts ranging from 118% of
principal plus interest (during days 1—30) to 148% of principal plus interest (during days 151-180).
On September 9, 2015, a settlement agreement
was executed by the Company and the owners of M/V Nemorino with regards to disputes that arose in connection with the bareboat
charter dated September 11, 2014. According to the terms of the settlement agreement, both the Company and the owners of M/V Nemorino
released each other from any claim, discontinued the arbitration proceedings and agreed that the Company is entitled to receive,
upon sale of the M/V Nemorino by its owners to a buyer acting in cooperation or associated with the Company, 20% of any
net sale proceeds above $7,000 such milestone amount to be reduced by any net profits resulting from any operations of the vessel
prior to a sale.
On September 18, 2015, the Company received
from The NASDAQ Stock Market a letter, dated September 14, 2015, stating that, for the previous 30 consecutive business days, the
bid price of the Company's common stock closed below the minimum $1.00 per share. This is a requirement for continued listing on
the NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule 5550(a)(2) (the "Minimum Bid Price Rule"). The NASDAQ letter
has no immediate effect on the listing of the Company's common stock, which will continue to trade on the NASDAQ Capital Market
under the symbol "FREE". In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), the Company has a grace period of
180 calendar days, which expires on March 14, 2016 (the “Compliance Period”), to regain compliance with the "Minimum
Bid Price Rule", by maintaining a closing bid price of at least $1.00 per share for a minimum of ten consecutive business
days during the Compliance Period. In the event the Company does not regain compliance, the Company may be eligible for an additional
grace period of 180 calendar days if it satisfies the continued listing requirement for market value of publicly held shares and
all other initial listing standards (with the exception of the Bid Price Rule) for listing on the NASDAQ Capital Market, and submits
a timely notification to NASDAQ of its intention to cure the deficiency during the second compliance period, by effecting a reverse
stock split of the shares of its Common Stock, if necessary. If the Company meets these requirements, the NASDAQ will inform the
Company that it has been granted an additional 180 calendar days. However, if it appears to NASDAQ’s Staff that the Company
will not be able to cure the deficiency, or if the Company is otherwise not eligible, the NASDAQ will provide notice that its securities
will be subject to delisting. At that time, the Company may also appeal NASDAQ's delisting determination to a NASDAQ Hearings Panel.
The Company intends to evaluate available options to resolve the deficiency and regain compliance with the Minimum Bid Price Rule.
As of the date of the filing and subsequently to June 30, 2015,
pursuant to the cashless exercise formula set forth in the Series A, B & C warrants, the Company has issued to warrant holders
5,353,392 shares of common stock in the aggregate.
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as defined in Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act
of 1934 (the “Exchange Act”). These forward-looking statements include information about our possible or assumed future
results of operations or our performance. Words such as “expects,” “intends,” “plans,” “believes,”
“anticipates,” “estimates,” “projects”, “forecasts”, “may”, “should”
and variations of such words and similar expressions are intended to identify the forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations
will prove to be correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates
which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results
may differ materially from those expressed or implied by such forward-looking statements.
Forward-looking statements
include statements regarding:
· |
our future operating or financial results; |
· |
our financial condition and liquidity, including our ability to comply with our loan covenants, to repay our indebtedness and to continue as a going concern; |
· |
potential liability from future litigation and incidents involving our vessels, including seizures by pirates, and our expected recoveries of claims under our insurance policies; |
· |
our ability to comply with the continued listing standards on the exchange or trading market on which our common stock is listed for trading; |
· |
our ability to find employment for our vessels; |
· |
drybulk shipping industry trends, including charter rates and factors affecting vessel supply and demand; |
· |
business strategy, areas of possible expansion, and expected capital spending or operating expenses and general and administrative expenses; |
· |
the useful lives and value of our vessels; |
· |
our ability to receive in full or partially our accounts receivable and insurance claims; |
· |
greater than anticipated levels of drybulk vessel new building orders or lower than anticipated rates of drybulk vessel scrapping; |
· |
changes in the cost of other modes of bulk commodity transportation; |
· |
availability of crew, number of off-hire days, dry-docking requirements and insurance costs; |
· |
changes in condition of our vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated dry-docking costs); |
· |
competition in the seaborne transportation industry; |
· |
global and regional economic and political conditions; |
· |
fluctuations in currencies and interest rates; |
· |
our ability to leverage to our advantage the relationships and reputation Free Bulkers S.A., our Manager, has in the drybulk shipping industry; |
· |
the overall health and condition of the U.S. and global financial markets; |
· |
changes in seaborne and other transportation patterns; |
· |
changes in governmental rules and regulations or actions taken by regulatory authorities; |
· |
our ability to pay dividends in the future; and |
· |
acts of terrorism and other hostilities. |
We undertake no obligation
to publicly update or revise any forward-looking statements contained in this report to reflect any change in our expectations
with respect to such statements or any change in events, conditions or circumstances on which any statement is based.
FreeSeas Inc. is a
Republic of the Marshall Islands company that is referred to in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations, together with its subsidiaries, as “FreeSeas Inc.,” “FreeSeas,” “the Company,”
"the Group," “we,” “us,” or “our.” All references to dollar amounts in this report
are expressed in thousands of U.S. dollars, unless otherwise stated.
Overview
We are an international
drybulk shipping company incorporated under the laws of the Republic of the Marshall Islands with principal executive offices in
Athens, Greece. During the six months ended June 30, 2015, the Company owned two Handysize dry bulk carriers and operated four
Handysize dry bulk carriers. Our vessels carry a variety of drybulk commodities, including iron ore, grain and coal, which are
referred to as “major bulks,” as well as bauxite, phosphate, fertilizers, steel products, cement, sugar and rice, or
“minor bulks.” As of September 22, 2015, the aggregate dwt of the fleet we operate is 101,201 dwt and the average age
of the fleet is 19.2 years.
Our investment and
operational focus has been in the Handysize sector, which is generally defined as less than 40,000 dwt of carrying capacity and
the Handymax sector which is generally defined as between 40,000 dwt and 60,000 dwt. Handysize and Handymax vessels are, we believe,
more versatile in the types of cargoes that they can carry and trade routes they can follow, and offer less volatile returns than
larger vessel classes. We believe this segment also offers better demand and supply demographics than other drybulk asset classes.
Due to the very adverse charter rate environment of the latest shipping cycle values of larger vessels have dropped to levels that
constitute buying opportunities. We shall explore the possibility to expand into other segments of the dry-bulk sector and the
tanker market.
On June 10, 2015 the
Company acquired a 51% controlling stake in the newly formed Standcorp International Limited (“Standcorp”). The rest
of the shares are owned by non-affiliated entities associated with the Marvin group of companies, whose extensive experience for
over twenty years has focused in the operation and ownership of tanker vessels. Standcorp will engage in the commercial operation
of product and crude oil tankers covering a large array of sizes, by contracting them through time charter or bareboat charter
arrangements, and subsequently deploying them in the spot market or in fulfillment of contract cargoes. The Company intends to
operate in generic markets but also to focus on a number of niche markets, such as West Africa. In addition, the Company shall,
depending on market conditions, commercially operate dry-bulk carriers either chartered-in, acquired, or through services agreements
with affiliated Owners, including the Company’s tonnage.
We have contracted
the management of our fleet to entities controlled (our Managers) by Ion G. Varouxakis, our Chairman, President and Chief Executive
Officer, and one of our principal shareholders. Our Managers provide technical management of our fleet, commercial management of
our fleet, financial reporting and accounting services and office space. While the Managers are responsible for finding and arranging
charters for our vessels, the final decision to charter our vessels remains with us.
Recent Developments
On July 13, 2015, NASDAQ notified the Company
that it had regained compliance with Listing Rule 5550(a)(2), which requires a minimum bid price of $1.00 for continued listing
on the NASDAQ Stock Market and that the matter is now closed.
On July 13, 2015, the Company sold to
AMVS Value Fund Ltd., a non-U.S. investor (“AMVS”), a $600 convertible promissory note, which matures a year
from issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common stock
any portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it to own
more than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i) $15.481
and (ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion.
Upon prior notice, the Company may prepay the investor in cash, for 127.5% of any outstanding principal and interest remaining
on the note. To induce AMVS to consummate the transaction, the Company has agreed to provide certain registration rights under
the 1933 Act of 1933 and file a Registration Statement required hereunder, the 60th calendar day after the date hereof.
On July 16, 2015, the Company entered into
settlement agreements with five vendors, non-U.S. creditors, who agreed to accept 75,485 Company’s common shares as payment
in full of unpaid invoices of the aggregate amount of $189.
On July 17, 2015, the Company sold to Black
Mountain Equities Inc., (“Black Mountain”) an 8% interest bearing convertible note subject to the restrictions of Rule
144 promulgated under the 1933 Act, which contained a 10% OID, for $110 due in twelve months. One hundred eighty days following
the date of this note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount and accrued
interest of the note into Company’s common stock, provided that such conversion does not cause it to own more than 4.99%
of the common stock of the Company, into shares of Common Stock. The conversion price is the lesser of (i) $2.75 and (ii) and 65%
of the lowest VWAP for the 20 trading days prior to the date of conversion. At any time prior to the maturity date, the Company
shall have the option, upon ten business days’ notice to the holder, to pre-pay the entire remaining outstanding principal
amount of this note in cash, provided that the Company shall pay the holder one hundred twenty percent (120%) of the principal
plus interest outstanding in repayment hereof.
On July 17, 2015, the Company sold to Gemini
Master Fund Ltd., (“Gemini”) an 8% interest bearing convertible note subject to the restrictions of Rule 144 promulgated
under the 1933 Act, which contained a 10% OID, for $165 due in twelve months. One hundred eighty days following the date of this
note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount and accrued interest of
the note into Company’s common stock, provided that such conversion does not cause it to own more than 4.99% of the common
stock of the Company, into shares of Common Stock. The conversion price is the lesser of (i) $2.75 and (ii) and 65% of the lowest
VWAP for the 20 trading days prior to the date of conversion. At any time prior to the maturity date, the Company shall have the
option, upon ten business days’ notice to the holder, to pre-pay the entire remaining outstanding principal amount of this
note in cash, provided that the Company shall pay the holder 120% of the principal plus interest outstanding in repayment hereof.
On July 21, 2015, the Company received
notice of Arbitration from the owners of the M/V Nemorino, under the terms of the bareboat charter party and for the resolution
of the dispute that has arisen thereunder between the parties.
On July 27, 2015, the Company sold to VIS
VIRES GROUP, INC. (“VIS VIRES”) an 8% interest bearing convertible note for $154 due in nine months subject to the
restrictions of Rule 144 promulgated under the 1933 Act. One hundred eighty days following the date of this note, the holder has
the right to convert all or any part of the outstanding and unpaid principal amount and accrued interest of the note into Company’s
common stock, provided that such conversion does not cause it to own more than 4.99% of the common stock of the Company, into shares
of Common Stock. The conversion price is the 65% of the average of the lowest five trading prices of the Company’s common
stock on any trading day during the ten trading days prior to the conversion. Upon written notice, during the first six months
the Company may prepay the note with amounts ranging from 110% of principal plus interest (during days 1—30) to 135% of principal
plus interest (during days 121-180).
On July 29, 2015, upon full conversion
of the $500 convertible promissory note to Alderbrook, plus accrued interest, the Company has issued in aggregate 370,642 shares
of common stock to the note holder.
On August 12, 2015, upon full conversion
of the $154 convertible promissory note to KBM, plus accrued interest, the Company has issued in aggregate 324,701 shares of common
stock to the note holder.
On August 18, 2015, upon full conversion
of the $500 convertible promissory note to Bas Cole, plus accrued interest, the Company has issued in aggregate 1,764,900 shares
of common stock to the note holder.
On September 2, 2015, the Company sold
to Casern Holdings Ltd., a non-U.S. investor (“Casern”), a $600 convertible promissory note, which matures a year from
issuance and accrues interest at the rate of 8% per annum. The investor is entitled at any time to convert into common stock any
portion of the outstanding and unpaid principal and accrued interest, provided that such conversion does not cause it to own more
than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price is the lower of (i) $2.18 and
(ii) 60% of the lowest daily VWAP on any trading day during the twenty-one consecutive trading days prior to conversion. Upon prior
notice, the Company may prepay the investor in cash, for 127.5% of any outstanding principal and interest remaining on the note.
To induce Casern to consummate the transaction, the Company has agreed to provide certain registration rights under the 1933 Act
of 1933 and file a Registration Statement required hereunder, the 60th calendar day after the date hereof.
On September 4, 2015, the Company sold
to Service Trading Company, LLC, (“Service Trading Co.”) an 8% interest bearing convertible note subject to the restrictions
of Rule 144 promulgated under the 1933 Act, which contained an 8% OID, for $37.8 due in twelve months. One hundred eighty days
following the date of this note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount
and accrued interest of the note into Company’s common stock, provided that such conversion does not cause it to own more
than 4.99% of the common stock of the Company, into shares of Common Stock. The conversion price equals 65% of the lowest trading
price of the Common Stock for the twenty prior trading days including the day upon which a Notice of Conversion is received by
the Company. Upon written notice, during the first six months the Company may prepay the note with amounts ranging from 118% of
principal plus interest (during days 1—30) to 148% of principal plus interest (during days 151-180).
On September 9, 2015, a settlement agreement
was executed by the Company and the owners of M/V Nemorino with regards to disputes that arose in connection with the bareboat
charter dated September 11, 2014. According to the terms of the settlement agreement, both the Company and the owners of M/V Nemorino
released each other from any claim, discontinued the arbitration proceedings and agreed that the Company is entitled to receive,
upon sale of the M/V Nemorino by its owners to a buyer acting in cooperation or associated with the Company, 20% of any
net sale proceeds above $7,000 such milestone amount to be reduced by any net profits resulting from any operations of the vessel
prior to a sale.
On September 18, 2015, the Company received
from The NASDAQ Stock Market a letter, dated September 14, 2015, stating that, for the previous 30 consecutive business days, the
bid price of the Company's common stock closed below the minimum $1.00 per share. This is a requirement for continued listing on
the NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule 5550(a)(2) (the "Minimum Bid Price Rule"). The NASDAQ letter
has no immediate effect on the listing of the Company's common stock, which will continue to trade on the NASDAQ Capital Market
under the symbol "FREE". In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), the Company has a grace period of
180 calendar days, which expires on March 14, 2016 (the “Compliance Period”), to regain compliance with the "Minimum
Bid Price Rule", by maintaining a closing bid price of at least $1.00 per share for a minimum of ten consecutive business
days during the Compliance Period. In the event the Company does not regain compliance, the Company may be eligible for an additional
grace period of 180 calendar days if it satisfies the continued listing requirement for market value of publicly held shares and
all other initial listing standards (with the exception of the Bid Price Rule) for listing on the NASDAQ Capital Market, and submits
a timely notification to NASDAQ of its intention to cure the deficiency during the second compliance period, by effecting a reverse
stock split of the shares of its Common Stock, if necessary. If the Company meets these requirements, the NASDAQ will inform the
Company that it has been granted an additional 180 calendar days. However, if it appears to NASDAQ’s Staff that the Company
will not be able to cure the deficiency, or if the Company is otherwise not eligible, the NASDAQ will provide notice that its securities
will be subject to delisting. At that time, the Company may also appeal NASDAQ's delisting determination to a NASDAQ Hearings Panel.
The Company intends to evaluate available options to resolve the deficiency and regain compliance with the Minimum Bid Price Rule.
As of the date of the filing and subsequently
to June 30, 2015, pursuant to the cashless exercise formula set forth in the Series A, B & C warrants, the Company has issued
to warrant holders 5,353,392 shares of common stock in the aggregate.
Employment and Charter Rates
The following table details the vessels
we operate in our fleet as of September 22, 2015:
Vessel Name |
|
Type |
|
Built |
|
Dwt |
|
Employment |
M/V Free Maverick |
|
Handysize |
|
1998 |
|
23,994 |
|
Hot Laid-up |
M/V Free Neptune |
|
Handysize |
|
1996 |
|
30,838 |
|
About 30 day time charter trip at $9,500 per day through October 2015 |
M/V Fiorello on Bareboat Charter (ex M/V Free Hero) |
|
Handysize |
|
1995 |
|
24,318 |
|
Hot Laid-up |
M/V Figaro on Bareboat Charter (ex M/V Free Goddess) |
|
Handysize |
|
1995 |
|
22,051 |
|
See note (*) below. |
(*) Since the release from the pirates,
the ex M/V Free Goddess, renamed to M/V Figaro, has been laying at the port of Salalah, Oman, having undertaken repairs
funded mostly by insurers. The repairs of the vessel were completed, and notice of readiness was tendered to her Charterers for
the resumption of the voyage. The Charterers repudiated the Charter and we accepted Charterers’ repudiation and terminated
the fixture reserving our right to claim damages and other amounts due to us. The Tribunal previously constituted will hear our
claim for (amongst others) unpaid hire and damages from the Charterers. In the meantime, cargo interests have commenced proceedings
under the Bills of Lading although they have not yet particularized their claims. At the same time, we as the Bareboat Charterers
of the M/V Figaro, we explore all options for the commercial resolution of the situation arising from Charterers’
refusal to honor their obligations, including the further contribution by insurers and cargo interests towards the completion of
the voyage and recovery of amounts due. We are working for a diligent solution in order to complete the voyage without further
delays. In case no commercially reasonable solution may be found, we will explore our strategic alternatives with respect to this
vessel.
Our Fleet-Illustrative Comparison of
Possible Excess of Carrying Value over Estimated Charter-Free Market Value of Certain Vessels
In “-Critical
Accounting Policies-Impairment of Long Lived Assets,” which can be found in the Company's consolidated financial statements
included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2014 filed with the Securities and Exchange
Commission (“SEC”) on April 30, 2015 (the "Consolidated Financial Statements for the year ended December
31, 2014"), we discuss our policy for impairing the carrying values of our vessels. Historically, the market values of vessels
have experienced volatility, which from time to time may be substantial. As a result, the charter-free market value, or basic market
value, of certain of our vessels may have declined below those vessels’ carrying value, even though we would not impair those
vessels’ carrying value under our accounting impairment policy, due to our belief that future undiscounted cash flows expected
to be earned by such vessels over their operating lives would exceed such vessels’ carrying amounts. Based on: (i) the
carrying value of each of our vessels as of June 30, 2015 and (ii) what we believe the charter free market value of each
of our vessels was as of June 30, 2015, the aggregate carrying value of the vessels owned (the M/V Free Maverick and the
M/V Free Neptune ) in our fleet as of June 30, 2015 exceeded their aggregate charter-free market value by approximately
$22,900, as noted in the table below (which includes a comparative analysis of how the carrying values of our vessels compare to
the fair market value of such vessels as of each balance sheet date presented in our accompanying unaudited interim condensed consolidated
financial statements). This aggregate difference represents the approximate analysis of the amount by which we believe we would
have to reduce our net income if we sold all of such vessels (at June 30, 2015, on industry standard terms, in cash transactions,
and to a willing buyer where we were not under any compulsion to sell, and where the buyer was not under any compulsion to buy.
For purposes of this calculation, we have assumed that these vessels would be sold at a price that reflects our estimate of their
charter-free market values as of June 30, 2015).
Our estimates of charter-free
market value assume that our vessels are all in good and seaworthy condition without need for repair and if inspected would be
certified in class without notations of any kind. Our estimates are based on information available from various industry sources,
including:
• |
reports by industry analysts and data providers that focus on our industry and related dynamics affecting vessel values; |
• |
news and industry reports of similar vessel sales; |
• |
news and industry reports of sales of vessels that are not similar to our vessels where we have made certain adjustments in an attempt to derive information that can be used as part of our estimates; |
• |
approximate market values for our vessels or similar vessels that we have received from shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated; |
• |
offers that we may have received from potential purchasers of our vessels; and |
• |
vessel sale prices and values of which we are aware through both formal and informal communications with shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers. |
As we obtain information
from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values
are highly volatile; as such, our estimates may not be indicative of the current or future charter-free market value of our vessels
or prices that we could achieve if we were to sell them. The market values of our vessels have declined and may further decrease,
and we may incur losses when we sell vessels or we may be required to write down their carrying value, which may adversely affect
our earnings”.
Drybulk Vessels | |
DWT | | |
Year Built | | |
Date of Acquisition | | |
Purchase Price (in
million USD) | | |
Carrying Value as of
6/30/2015 (in million USD) | | |
Fair Market Value as of
6/30/2015 (in million USD) | | |
Carrying Value as of
12/31/2014 (in million USD) | | |
Fair Market Value as of
12/31/2014 (in million USD) | |
Free Maverick | |
| 23,994 | | |
| 1998 | | |
| 09/01/08 | | |
$ | 39.6 | | |
$ | 23.4 | | |
$ | 3.5 | | |
$ | 24.5 | | |
$ | 6.5 | |
Free Neptune | |
| 30,838 | | |
| 1996 | | |
| 08/25/09 | | |
$ | 11.0 | | |
$ | 7.0 | | |
$ | 4.0 | | |
$ | 7.2 | | |
$ | 7.5 | |
Total | |
| 54,832 | | |
| | | |
| | | |
$ | 50.6 | | |
$ | 30.4 | | |
$ | 7.5 | | |
$ | 31.7 | | |
$ | 14 | |
Important Measures for Analyzing Results
of Operations
We believe that the
important measures for analyzing trends in the results of our operations consist of the following:
• | Ownership days. We define ownership days as the total number
of calendar days in a period during which each vessel in the fleet was owned by us, including days of vessels in lay-up. Ownership
days are an indicator of the size of the fleet over a period and affect both the amount of revenues earned and the amount of expenses
that we incur during that period. |
• | Available days. We define available days as the number
of ownership days less the aggregate number of days that our vessels are off-hire due to major repairs, dry-dockings or special
or intermediate surveys or days of vessels in lay-up. The shipping industry uses available days to measure the number of ownership
days in a period during which vessels are actually capable of generating revenues. |
• | Operating days. We define operating days as the number
of available days in a period less the aggregate number of days that vessels are off-hire due to any reason, including unforeseen
circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels
could actually generate revenues. |
• |
Fleet utilization. We calculate fleet utilization by dividing the number of operating days during a period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company’s efficiency properly operating its vessels and minimizing the amount of days that its vessels are off-hire for any unforeseen reason. |
• |
Off-hire. The period a vessel is unable to perform the services for which it is required under a charter. Off-hire periods typically include days spent undergoing repairs and dry-docking, whether or not scheduled. |
• |
Time charter. A time charter is a contract for the use of a vessel for a specific period of time during which the charterer pays substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses. The vessel owner pays the vessel operating expenses, which include crew wages, insurance, technical maintenance costs, spares, stores and supplies and commissions on gross voyage revenues. Time charter rates are usually fixed during the term of the charter. Prevailing time charter rates do fluctuate on a seasonal and year-to-year basis and may be substantially higher or lower from a prior time charter agreement when the subject vessel is seeking to renew the time charter agreement with the existing charterer or enter into a new time charter agreement with another charterer. Fluctuations in time charter rates are influenced by changes in spot charter rates. |
|
|
• |
Voyage charter. A voyage charter is an agreement to charter the vessel for an agreed per-ton amount of freight from specified loading port(s) to specified discharge port(s). In contrast to a time charter, the vessel owner is required to pay substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses, in addition to the vessel operating expenses. |
|
|
• |
Time charter equivalent (TCE). The time charter equivalent, or TCE, equals voyage revenues minus voyage expenses divided by the number of operating days during the relevant time period, including the trip to the loading port. TCE is a non-GAAP, standard seaborne transportation industry performance measure used primarily to compare period-to-period changes in a seaborne transportation company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed during a specific period. |
• |
Adjusted EBITDA represents net earnings
before taxes, depreciation and amortization, (gain)/loss on derivative instruments, stock-based compensation expense, interest
and finance cost net, gain on debt extinguishment, provision and write-offs of insurance claims and bad debts, gain on settlement
of payable, loss on settlement of liability through stock issuance and dry-docking costs. Effective as of January 1, 2014, the
Company follows the direct expense method of accounting for special survey and dry-docking costs whereby such costs are expensed
in the period incurred and not amortized until the next dry-docking. Under the laws of the Marshall Islands, we are not subject
to tax on international shipping income. However, we are subject to registration and tonnage taxes, which have been included in
vessel operating expenses. Accordingly, no adjustment for taxes has been made for purposes of calculating Adjusted EBITDA. Adjusted
EBITDA is a non-GAAP measure and does not represent and should not be considered as an alternative to net income or cash flow from
operations, as determined by U.S. GAAP, and our calculation of Adjusted EBITDA may not be comparable to that reported by other
companies. The shipping industry is capital intensive and may involve significant financing costs. The Company uses Adjusted EBITDA
because it presents useful information to management regarding the Company’s ability to service and/or incur indebtedness
by excluding items that we do not believe are indicative of our core operating performance, and therefore is an alternative measure
of our performance. The Company also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities
analysts, investors and other interested parties in the evaluation of companies in our industry. Adjusted EBITDA has limitations
as an analytical tool, however, and should not be considered in isolation or as a substitute for analysis of the Company’s
results as reported under U.S. GAAP. Some of these limitations are: (i) Adjusted EBITDA does not reflect changes in, or cash requirements
for, working capital needs; and (ii) although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such capital
expenditures.
|
Performance Indicators
(All amounts in tables in thousands of U.S. dollars except
for fleet data and average daily results)
The following performance measures were
derived from our unaudited condensed consolidated financial statements for the six months ended June 30, 2015 and 2014 included
elsewhere in this analysis. The historical data included below is not necessarily indicative of our future performance.
| |
Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Adjusted EBITDA (1) | |
$ | (15,255 | ) | |
$ | (8,294 | ) |
Fleet Data: | |
| | | |
| | |
Average number of vessels (2) | |
| 3.5 | | |
| 6.26 | |
Ownership days (3) | |
| 640 | | |
| 1,133 | |
Available days (4) | |
| 296 | | |
| 424 | |
Operating days (5) | |
| 285 | | |
| 361 | |
Fleet utilization (6) | |
| 96.3 | % | |
| 85.1 | % |
Average Daily Results: | |
| | | |
| | |
Average TCE rate (7) | |
$ | (246 | ) | |
$ | 4,604 | |
Vessel operating expenses (8) | |
| 5,213 | | |
| 6,420 | |
Management fees (9) | |
| 872 | | |
| 742 | |
General and administrative expenses (10) | |
| 2,816 | | |
| 1,552 | |
Total vessel operating expenses (11) | |
| 6,084 | | |
| 7,162 | |
| (1) | Adjusted EBITDA represents net earnings before taxes, depreciation and amortization, (gain)/loss
on derivative instruments, stock-based compensation expense, interest and finance cost net, gain on debt extinguishment, provision
and write-offs of insurance claims and bad debts, gain on settlement of payable, loss on settlement of liability through stock
issuance and dry-docking costs. Effective as of January 1, 2014, the Company follows the direct expense method of accounting
for special survey and dry-docking costs whereby such costs are expensed in the period incurred and not amortized until the next
dry-docking. Under the laws of the Marshall Islands, we are not subject to tax on international shipping income. However,
we are subject to registration and tonnage taxes, which have been included in vessel operating expenses. Accordingly, no adjustment
for taxes has been made for purposes of calculating Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and does not represent
and should not be considered as an alternative to net income or cash flow from operations, as determined by U.S. GAAP, and our
calculation of Adjusted EBITDA may not be comparable to that reported by other companies. The shipping industry is capital intensive
and may involve significant financing costs. The Company uses Adjusted EBITDA because it presents useful information to management
regarding the Company’s ability to service and/or incur indebtedness by excluding items that we do not believe are indicative
of our core operating performance, and therefore is an alternative measure of our performance. The Company also believes that Adjusted
EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the
evaluation of companies in our industry. Adjusted EBITDA has limitations as an analytical tool, however, and should not be considered
in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP. Some of these limitations
are: (i) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation
and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted
EBITDA does not reflect any cash requirements for such capital expenditures. |
| |
Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
| |
( U.S. dollars in thousands) | |
| |
| | |
| |
Net income/(loss) | |
$ | (21,828 | ) | |
$ | 570 | |
Depreciation and amortization | |
| 2,331 | | |
| 2,573 | |
Stock-based compensation expense | |
| 484 | | |
| - | |
Loss on derivative instruments | |
| - | | |
| 19 | |
Interest and finance costs, net of interest income | |
| 974 | | |
| 1,231 | |
Gain on settlement of payable | |
| (273 | ) | |
| - | |
Loss due to capital lease write-off | |
| 3,058 | | |
| - | |
Provision and write-offs of insurance claims and bad debt | |
| (1 | ) | |
| (54 | ) |
Gain on debt extinguishment | |
| - | | |
| (16,057 | ) |
Dry-docking costs | |
| - | | |
| 3,424 | |
Adjusted EBITDA | |
$ | (15,255 | ) | |
$ | (8,294 | ) |
| (2) | Average number of vessels is the number of vessels that
constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet
during the period divided by the number of calendar days in the period. |
| (3) | Ownership days are the total number of days in a period
during which the vessels in our fleet have been owned by us, including days of vessels in lay-up. Ownership days are an indicator
of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during
a period. |
| (4) | Available days are the number of ownership days less the
aggregate number of days that our vessels are off-hire due to major repairs, dry dockings or special or intermediate surveys or
days of vessels in lay-up. The shipping industry uses available days to measure the number of ownership days in a period
during which vessels are actually capable of generating revenues. |
| (5) | Operating days are the number of available days less the
aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry
uses operating days to measure the aggregate number of days in a period during which vessels could actually generate revenues. |
(6) |
We calculate fleet utilization by dividing the number of our fleet’s operating days during a period by the number of available days during the period. The shipping industry uses fleet utilization to measure a company’s efficiency in properly operating its vessels and minimizing the amount of days that its vessels are off-hire for any unforeseen reasons. |
(7) |
TCE is a non-GAAP measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing operating revenues (net of voyage expenses and commissions) by operating days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the periods: |
| |
Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
| |
(U.S. dollars in thousands, except | |
| |
per diem amounts) | |
| |
| | |
| |
Operating revenues | |
$ | 766 | | |
$ | 2,240 | |
Voyage expenses and commissions | |
| (836 | ) | |
| (578 | ) |
Net operating revenues | |
| (70 | ) | |
| 1,662 | |
Operating days | |
| 285 | | |
| 361 | |
Time charter equivalent daily rate | |
$ | (246 | ) | |
$ | 4,604 | |
(8)Average daily vessel operating expenses,
which includes crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs (excluding dry-docking
costs), is calculated by dividing vessel operating expenses by ownership days for the relevant time periods:
| |
Six Months Ended | |
| |
June 30, | |
| |
2015 | | |
2014 | |
| |
(U.S. dollars in thousands, except per diem amounts) | |
| |
| | |
| |
Vessel operating expenses (excluding dry-docking costs) | |
$ | 3,336 | | |
$ | 7,274 | |
Ownership days | |
| 640 | | |
| 1,133 | |
Daily vessel operating expenses | |
$ | 5,213 | | |
$ | 6,420 | |
(9) Daily management
fees are calculated by dividing total management fees (excluding stock-based compensation expense) paid on ships owned by ownership
days for the relevant time period.
(10) Average
daily general and administrative expenses are calculated by dividing general and administrative expenses (excluding stock-based
compensation) by ownership days for the relevant period.
(11) Total vessel
operating expenses, or TVOE, is a measurement of our total expenses associated with operating our vessels. TVOE is the sum of vessel
operating expenses and management fees. Daily TVOE is calculated by dividing TVOE by fleet ownership days for the relevant time
period.
Results of Operations
Six Months Ended June 30, 2015
as Compared to Six Months Ended June 30, 2014
REVENUES - Operating
revenues for the six months ended June 30, 2015 were $766 compared to $2,240 for the six months ended June 30, 2014. The decrease
of $1,474 is mainly attributable to the facts that: a) M/V Free Jupiter , M/V Free Impala, and M/V Free Hero - M/V
Free Goddess were sold on September 16, 2014, September 24, 2014 and on May 20, 2015, respectively. The Company’s
subsidiaries have entered into long-term bareboat agreements for the M/V Free Hero and M/V Free Goddess with purchase
options at a daily hire rate of $1,100 per vessel. The vessels have been renamed to Fiorello and Figaro, respectively
and b) the charter rates during the six months ended June 30, 2015 kept decreasing affecting negatively our revenues.
VOYAGE EXPENSES AND
COMMISSIONS - Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and
various expenses, were $750 for the six months ended June 30, 2015, as compared to $445 for the six months ended June 30, 2014.
The variance in voyage expenses reflects mainly the increased replenishment of bunkers to the owners’ account during the
six months ended June 30, 2015. For the six months ended June 30, 2015, commissions charged amounted to $86, as compared to $133
for the six months ended June 30, 2014. The decrease in commissions is due to the decrease of operating revenues for the six months
ended June 30, 2015 compared to the six months ended June 30, 2014. The commission fees represent commissions paid to the Managers,
other affiliated companies associated with family members of our CEO, and unaffiliated third parties relating to vessels chartered
during the relevant periods.
OPERATING EXPENSES
- Vessel operating expenses, which include dry-docking costs, crew cost, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, totaled $3,336 in the six months ended June 30, 2015, as compared to $10,698 in the six months
ended June 30, 2014. The decrease in operating expenses was due to the fact that: (a) dry-docking costs of approximately $3,500
were expensed in the six months ended June 30, 2014 and (b) less vessels were owned in our fleet during the six months ended June
30, 2015 resulting in the reduction of ownership days of our fleet to 640 days compared to 1,133 days, respectively, in the same
period of 2014.
DEPRECIATION AND AMORTIZATION
- For the six months ended June 30, 2015, depreciation expense was at $2,331 as compared to $2,573 in the six months ended
June 30, 2014. The decrease was due to the sale of the vessels referred in the “REVENUES” paragraph above.
MANAGEMENT FEES - Management fees for the
six months ended June 30, 2015 totaled $558 as compared to $841in the six months ended June 30, 2014. The $283 decrease
in management fees reflects the reduction of the vessels managed in our fleet.
GENERAL AND ADMINISTRATIVE
EXPENSES - General and administrative expenses, which include, among other things, legal, audit, audit-related expenses, travel
expenses, communications expenses, stock-based compensation charges and services fees and expenses charged by Free Bulkers, totaled
$2,286 as compared to $1,758. The increase of $528 was mainly due to the stock-based compensation charge of $484 related to the
issuance of an aggregate of 28,267 shares of the Company’s common stock to officers, directors and employees as an incentive
for their commitment and hard work during adverse market conditions and to the issuance of an aggregate of 1,066 shares of its
common stock to its non-executive members of its Board of Directors in payment of $80 in unpaid Board fees for the second and third
quarters of 2014.
PROVISION AND WRITE-OFFS
OF INSURANCE CLAIMS AND BAD DEBTS - For the six months ended June 30, 2015 and 2014, the amounts were $1 and $54, respectively,
which reflected the provision for write-off of various long outstanding accounts receivable.
LOSS ON SALE OF VESSELS
– For the six months ended June 30, 2015, as a result of the sale and lease back of the M/V Free Hero and the M/V
Free Goddess renamed to Fiorello and Figaro, respectively, the Company recognized a gain of $950 and a loss
of $8,570 in the accompanying unaudited interim condensed consolidated statement of operations for the six months ended June 30,
2015, respectively.
FINANCING COSTS -
Financing costs amounted to $974 for the six months ended June 30, 2015 and $1,231 for the six months ended June 30,
2014. The decrease of the interest and financing costs incurred for the six months ended June 30, 2015 as compared to the same
period in 2014 was mainly attributed to the reduced outstanding bank debt from $59,687 to $17,598 resulting from the settlement
of the Credit Suisse loan in May 2014 and the aggregate payment of $6,000 to reduce outstanding indebtedness with NBG.
LOSS DUE TO CAPITAL
LEASE WRITE-OFF – For the six months ended June 30, 2015, the Company recognized a loss of $3,058 and removed the related
lease obligations as of June 30, 2015, as a result of the settlement agreement on September 9, 2015, that was executed by the Company
and the owners of M/V Nemorino with regards to disputes that arose in connection with the receipt, on April 3, 2015 of a
Notice of Termination of the bareboat charter dated September 11, 2014 which led to claims and counter-claims and also the receipt
by the Company of a notice of Arbitration from the vessel’s owners on July 21, 2015.
GAIN/(LOSS) ON INTEREST
RATE SWAPS - The Company is exposed to interest rate fluctuations associated with its variable rate borrowings and its objective
is to manage the impact of such fluctuations on earnings and cash flows of its borrowings. In this respect, the Company partially
used interest rate swaps to manage net exposure to interest rate fluctuations related to its borrowings.
The Company
was party of two interest rate swap agreements, which were fully unwound on February 3, 2014. The total of the change in fair value
and settlements for the six months ended June 30, 2015 and 2014 aggregate to losses of $nil and $19, respectively, which is separately
reflected in “Loss on derivative instruments” in the accompanying unaudited interim condensed consolidated statements
of operations.
NET INCOME / (LOSS)
– Net loss for the six months ended June 30, 2015 was $21,828 as compared to net income of $570 for the six months ended
June 30, 2014. The decrease of $22,398 for the six months ended June 30, 2015 was due to: (a) the gain on debt extinguishment
of $16,057, booked in the six months ended June 30, 2014, as a result of the settlement of the Credit Suisse loan in May 2014,
(b) the loss due to provision for claim of $3,058 recorded in the six months ended June 30 ,2015 and (c) the charter rates during
the six months ended June 30, 2015, kept decreasing affecting negatively the Company’s revenues.
Liquidity and Capital Resources
The Company has historically
financed its capital requirements from sales of equity securities, operating cash flows and long-term borrowings. The Company has
primarily used its funds for capital expenditures to maintain its fleet, comply with international shipping standards and environmental
laws and regulations, and fund working capital requirements.
As a result of the
historically low charter rates for drybulk vessels which have been affecting the Company for over five years, and the resulting
material adverse impact on the Company’s results from operations, the accompanying unaudited interim condensed consolidated
financial statements have been prepared on a going concern basis. The Company has incurred
a net loss of $21,828 and net income of $570 during the six months ended June 30, 2015, and 2014, respectively. The Company’s
cash flow projections for the remaining of 2015, indicate that cash on hand will not be sufficient to cover debt repayments scheduled
as of June 30, 2015 and operating expenses and capital expenditure requirements for at least twelve months from the balance
sheet date. As of June 30, 2015 and December 31, 2014, the Company had working capital deficits of $30,227 and $30,849, respectively.
All of the above raises substantial doubt regarding the Company’s ability to continue as a going concern. Management plans
to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their
business plan. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary
financing to meet its obligations and repay its liabilities arising from normal course of business operations when they come due
and to generate profitable operations in the future.
In January and April
2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach
of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s
deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to
the National Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation.
The Company’s loan facility and deposits have been transferred to NBG. On February 22, 2014, the Company and certain
of its subsidiaries entered into terms with NBG for settlement of its obligations arising from the loan agreement with NBG.
Pursuant to the terms, NBG agreed to accept a cash payment of $22,000 no later than December 31, 2014, in full and final settlement
of all of the Company’s obligations to NBG and NBG would forgive the remaining outstanding balance of approximately
$4,700. On September 17, 2014 the Company made a payment of $2,700 to reduce outstanding indebtedness with NBG. On September 24,
2014, the Company sold the M/V Free Impala, a 1997-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of
$3,600 and the vessel was delivered to her new owners. Subsequently, the amount of $3,300 had been used to reduce outstanding indebtedness
with NBG, which had a mortgage on the vessel. The agreed settlement of the Company’s obligations, arising from the loan agreement
with NBG mentioned above, was not realized and negotiations have resumed for a new agreement. In June 2015, the Company received
notification from NBG that the Company has not paid the aggregate amount of $11,271 constituting repayment installments, accrued
loan and default interest due on June 16, 2015. On June 18, 2015, the Company received from NBG a reservation of rights letter
stating that the Bank may take any actions and may exercise all of their rights and remedies referred in the security documents.
If the Company is
not able to reach an agreement with NBG, this could lead to the acceleration of the outstanding debt under its debt agreement.
The Company’s failure to satisfy its covenants under its debt agreement and any consequent acceleration of its outstanding
indebtedness would have a material adverse effect on the Company’s business operations, financial condition and liquidity.
Generally accepted
accounting principles require that long-term debt be classified as a current liability when a covenant violation gives the lender
the right to call the debt at the balance sheet date, absent a waiver. As a result of the actual breach existing under the Company’s
credit facility with NBG acceleration of such debt by its lender could result. Accordingly, as of June 30, 2015, the Company is
required to reclassify its long term debt as current liability on its consolidated balance sheet since the Company has not received
waiver in respect to the breach discussed above.
The Company is currently
exploring several alternatives aiming to manage its working capital requirements and other commitments, including offerings of
securities through structured financing agreements, sale and lease back of certain vessels, disposition of certain vessels in its
current fleet and additional reductions in operating and other costs.
The accompanying unaudited
interim condensed consolidated financial statements as of June 30, 2015, were prepared assuming that the Company would continue
as a going concern despite its significant losses and working capital deficit. Accordingly, the financial statements did not include
any adjustments relating to the recoverability and classification of recorded asset amounts, the amounts and classification of
liabilities, or any other adjustments that might result in the event the Company is unable to continue as a going concern, except
for the classification of all debt as current.
Cash Flows
Six Months Ended June 30, 2015 as
Compared to Six Months Ended June 30, 2014
OPERATING ACTIVITIES
- Net cash used in operating activities decreased by $8,981 to $4,430 for the six months ended June 30, 2015, as compared
to $13,411 for the six months ended June 30, 2014.The decrease reflected the less vessels owned and operative in our fleet
during the six months ended June 30, 2015.
INVESTING ACTIVITIES
- Net cash provided by investing activities for the six months ended June 30, 2015 and 2014 was $978 and $3,465 from the proceeds
of the sale and lease back of the M/V Free Hero and M/V Free Goddess on May 20, 2015 and the proceeds of the sale
of M/V Free Knight on February 18, 2014, respectively.
FINANCING ACTIVITIES
- Net cash provided by financing activities for the six months ended June 30, 2015 was $3,478, as compared to $2,620 for the
six months ended June 30, 2014, as a result of the proceeds from the convertible notes the Company issued during the six months
ended June 30, 2015.
Bank Loan – current portion
As of June 30, 2015, the Company’s bank debt is as follows:
| |
NBG | |
December 31, 2014 | |
$ | 17,598 | |
Additions | |
$ | - | |
Payments | |
$ | - | |
June 30, 2015 | |
$ | 17,598 | |
The Company’s
credit facility with NBG bears interest at LIBOR plus a margin of 4%, and is secured by mortgage on the financed vessel (M/V Free
Neptune) and assignments of vessel’s earnings and insurance coverage proceeds. It also includes affirmative and negative
financial covenants of the borrower, including maintenance of operating accounts, average cash balances to be maintained with the
lending bank and minimum ratios for the fair value of the collateral vessel compared to the outstanding loan balance. The borrower
is restricted under its respective loan agreement from incurring additional indebtedness, changing the vessel’s flag without
the lender’s consent or distributing earnings.
The weighted average
interest rate for the six months ended June 30, 2015 and 2014 was 3.2% and 3.3%, respectively. Interest expense incurred amounted
to $557 and $981 for the six months ended June 30, 2015 and 2014, respectively, and is included in “Interest and Finance
Costs” in the accompanying unaudited interim condensed consolidated statements of operations.
NBG Facility (fka FBB Facility)
In January and April
2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach
of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s
deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to
the National Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation.
The Company’s loan facility and deposits have been transferred to NBG. On February 22, 2014, the Company and certain
of its subsidiaries entered into terms with NBG for settlement of its obligations arising from the loan agreement with NBG.
Pursuant to the terms, NBG agreed to accept a cash payment of $22,000 no later than December 31, 2014, in full and final settlement
of all of the Company’s obligations to NBG and NBG would forgive the remaining outstanding balance of approximately
$4,700. On September 17, 2014 the Company made a payment of $2,700 to reduce outstanding indebtedness with NBG. On September 24,
2014, the Company sold the M/V Free Impala, a 1997-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of
$3,600. Subsequently, the amount of $3,300 had been used to reduce outstanding indebtedness with NBG, which had a mortgage on the
vessel. The agreed settlement of the Company’s obligations, arising from the loan agreement with NBG mentioned above, was
not realized and negotiations have resumed for a new agreement. In June 2015, the Company received notification from NBG that the
Company has not paid the aggregate amount of $11,271 constituting repayment installments, accrued loan and default interest due
on June 16, 2015. On June 18, 2015, the Company received from NBG a reservation of rights letter stating that the Bank may take
any actions and may exercise all of their rights and remedies referred in the security documents.
Loan Covenants
As of December 31,
2014 and June 30, 2015, the Company was in breach of certain of its financial covenants for its loan agreement with NBG, including
the loan-to-value ratio, interest cover ratio, minimum liquidity requirements and leverage ratio. Thus, in accordance with guidance
related to classification of obligations that are callable by the creditor, the Company has classified all of the related long-term
debt amounting to $17,598 as current at June 30, 2015.
NBG (fka FBB) loan agreement:
|
· |
Average corporate liquidity: the Company is required to maintain an average corporate liquidity of at least $3,000; |
| · | Leverage
ratio: the corporate guarantor’s leverage ratio shall not at any time exceed 55%; |
| · | Ratio
of EBITDA to net interest expense shall not be less than 3; and |
| · | Value
to loan ratio: the fair market value of the financed vessels shall be at least (a) 115% for the period July 1, 2010
to June 30, 2011 and (b) 125% thereafter. |
The covenants described above are tested
annually on December 31st.