RISK FACTORS
An investment in our securities involves a high degree of risk. Before deciding
to invest in our securities, you should carefully consider the risks described below and all of the other information contained or incorporated by reference into this prospectus. These risks and uncertainties are not the only risks and
uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occurs, our business, financial condition, results
of operations and future growth prospects could be materially adversely affected. In that case, you may lose all or part of your investment in the securities.
Risks Relating to Our Industry
The market values of our vessels may decrease, which could limit the amount of
funds that we can borrow or trigger certain financial covenants under our loan agreements, and we may incur an impairment or, if we sell vessels following a decline in their market value, a loss.
The fair market values of our vessels are related to prevailing freight charter rates. While the fair
market value of vessels and the freight charter market have a very close relationship as the charter market moves from trough to peak, the time lag between the effect of charter rates on market values of ships can vary. A decrease in the market
value of our vessels could require us to raise additional capital in order to remain compliant with our loan covenants and could result in the loss of our vessels and adversely affect our earnings and financial condition.
The fair market value of our vessels may increase or decrease, and we expect the market values to
fluctuate depending on a number of factors including:
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prevailing level of charter rates;
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general economic and market conditions affecting the shipping industry;
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types and sizes of vessels;
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supply and demand for vessels;
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other modes of transportation;
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governmental and other regulations; and
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technological advances.
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In addition, as vessels grow older, they generally decline in value. If the fair market value of our
vessels declines, we may not be in compliance with certain covenants in our loan agreements, and our lenders could accelerate our indebtedness or require us to pay down our indebtedness to a level where we are again in compliance with our loan
covenants. If any of our loans are accelerated, we may not be able to refinance our debt or obtain additional funding. We expect that we will enter into more loan agreements in connection with our future acquisitions of vessels. For more
information regarding our current loan facilities, please see "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Loan Arrangements – Credit Facilities" in our Report on Form 20-F filed with the Commission
on March 25, 2019.
In addition, if vessel values decline, we may have to record an impairment adjustment in our
financial statements, which could adversely affect our financial results. Furthermore, if we sell one or more of our vessels at a time when vessel prices have fallen, the sale price may be less than the vessel's carrying value on our consolidated
financial statements, resulting in a loss on sale or an impairment loss being recognized, leading to a reduction in earnings.
Charter hire rates for drybulk vessels are volatile and have declined
significantly since their historic highs and may remain at low levels or decrease in the future, which may adversely affect our earnings, revenue and profitability, and our ability to comply with our loan covenants.
The dramatic downturn in recent years in the drybulk charter market, from which we derive
substantially all of our revenues, has severely affected the drybulk shipping industry and has harmed our business. The Baltic Dry Index, or BDI, declined from a high of 11,793 in May 2008 to a low of 290 in February 2016, which represents a
decline of 98%. In 2018, the BDI ranged from a low of 948 on April 6, 2018, to a high of 1,774 on July 24, 2018, and during 2019 up to April 5, 2019, the BDI has ranged from a low of 595 on February 11, 2019 to a high of 1,282 on January 2, 2019.
The decline and volatility in charter rates has been due to various factors, including the
over-supply of drybulk vessels, the lack of trade financing for purchases of commodities carried by sea, which resulted in a significant decline in cargo shipments, and trade disruptions caused by natural or other disasters, such as resulted from
the recent dam collapse in Brazil. Drybulk charter rates remain at depressed levels and may decline further. These circumstances have had a number of adverse consequences from time to time for drybulk shipping, including, among other developments:
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decrease in available financing for vessels;
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no active secondhand market for the sale of vessels;
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charterers seeking to renegotiate the rates for existing time charters;
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widespread loan covenant defaults in the drybulk shipping industry due to the substantial decrease in vessel values; and
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declaration of bankruptcy by some operators, charterers and vessel owners.
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The degree of charter hire rate volatility among different types of drybulk vessels has varied
widely. If we enter into a charter when charter hire rates are low, our revenues and earnings will be adversely affected and we may not be able to successfully charter our vessels at rates sufficient to allow us to operate our business profitably
or meet our obligations. Furthermore, if low charter rates in the drybulk market continue or decline further for any significant period, this could have an adverse effect on our vessel values and ability to comply with the financial covenants in
our loan agreements. In such a situation, unless our lenders were willing to provide waivers of covenant compliance or modifications to our covenants, our lenders could accelerate our debt and we could face the loss of our vessels.
We are mostly dependent on spot charters and any decrease in spot charter rates
in the future may adversely affect our earnings.
We currently operate the majority of our vessels in the spot market, exposing us to fluctuations in spot
market charter rates. Furthermore, we may employ any additional vessels that we may acquire in the spot market.
Although the number of vessels in our fleet that participate in the spot market will vary from time
to time, we anticipate that a significant portion of our fleet will participate in this market. As a result, our financial performance will be significantly affected by conditions in the drybulk spot market and only our vessels that operate under
fixed-rate time charters may, during the period such vessels operate under such time charters, provide a fixed source of revenue to us.
Historically, the drybulk markets have been volatile as a result of the many conditions and factors
that can affect the price, supply of and demand for drybulk capacity. Weak global economic trends may further reduce demand for transportation of drybulk cargoes over longer distances, which may materially affect our revenues, profitability and
cash flows. The spot charter market may fluctuate significantly based upon supply of and demand for vessels and cargoes. The successful operation of our vessels in the competitive spot charter market depends upon, among other things, obtaining
profitable spot charters and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unladen to pick up cargo. The spot market is very volatile, and, in the past, there have been periods when spot rates have
declined below the operating cost of vessels. If future spot charter rates decline, then we may be unable to operate our vessels trading in the spot market profitably or to meet our other obligations, including payments on indebtedness.
Furthermore, as charter rates for spot charters are fixed for a single voyage, which may last up to several weeks, during periods in which spot charter rates are rising, we will generally experience delays in realizing the benefits from such
increases.
An over-supply of drybulk vessel capacity may prolong or further depress the
current low charter rates and, in turn, adversely affect our profitability.
The market supply of drybulk vessels had increased due to the high level of new deliveries in the
last years. Drybulk newbuildings were delivered in significant numbers starting at the beginning of 2006 and continued to be delivered in significant numbers through 2017. In addition, the drybulk newbuilding orderbook, which extends to 2022,
equaled approximately 11.2% of the existing world drybulk fleet as of March 15, 2019, according to Karatzas Marine Advisors, and the orderbook may increase further in proportion to the existing fleet. An over-supply of drybulk vessel capacity could
prolong the period during which low charter rates prevail. Factors that influence the supply of drybulk vessel capacity include:
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number of new vessel deliveries;
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scrapping rates of older vessels;
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number of vessels that are out of service;
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changes in environmental and other regulations that may limit the useful life of vessels; and
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port or canal congestion.
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If drybulk vessel capacity increases but the demand for vessel capacity does not increase or increases at a slower rate,
charter rates could materially decline, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If economic conditions throughout the world decline, it will negatively impact our
results of operations, financial condition and cash flows, and could cause the market price of our common shares to decline.
The world economy is facing a number of actual and potential challenges, including current
political instability in the Middle East and the South China Sea region and other geographic countries and areas, geopolitical events such as the withdrawal of the U.K. from the European Union, or “Brexit”, terrorist or other attacks, and war (or
threatened war) or international hostilities, such as those between the United States and North Korea. Such events may contribute to economic instability in global financial markets or cause a decrease in worldwide demand for certain goods and,
thus, shipping. We cannot predict how long current market conditions will last.
The European Union, or EU, and other parts of the world have recently been or are currently in a
recession and continue to exhibit weak economic trends. Moreover, there is uncertainty related to certain European member countries' ability to refinance their sovereign debt, including Greece. As a result, the credit markets in the United States
and Europe have experienced significant contraction, deleveraging and reduced liquidity, and the U.S. federal and state governments and European authorities have implemented a broad variety of governmental action and new regulation of the
financial markets and may implement additional regulations in the future. As a result, global economic conditions and global financial markets have been, and continue to be, volatile. Furthermore, credit markets and the debt and equity capital
markets have been distressed and the uncertainty surrounding the future of the global credit markets has resulted in reduced access to credit worldwide.
In addition, the recent economic slowdown in the Asia Pacific region, particularly in China, may
exacerbate the effect of the weak economic trends in the rest of the world. Before the global economic financial crisis that began in 2008, China had one of the world's fastest growing economies in terms of gross domestic product, or GDP, which
had a significant impact on shipping demand. The quarterly year-over-year growth rate of China's GDP was approximately 6.4% for the year ended December 31, 2018, decreasing from 6.9% in 2017 and continuing to remain below pre-2008 levels. It is
possible that China and other countries in the Asia Pacific region will continue to experience slowed or even negative economic growth in the near future. Moreover, the current economic slowdown in the economies of the EU and in certain Asian
countries may further adversely affect economic growth in China and elsewhere. Our results of operations and ability to grow our fleet could be impeded by a continuing or worsening economic downturn in any of these countries or geographic
regions.
Furthermore, governments may turn to trade barriers to protect their domestic industries against
foreign imports, thereby depressing shipping demand. In particular, as indicated, the United States is seeking to implement more protective trade measures. The current U.S. President was elected on a platform promoting trade protectionism. The
outcome of the 2016 presidential election have thus created significant uncertainty about the future relationship between the United States and China and other exporting countries with respect to trade policies, treaties, government regulations
and tariffs. On January 23, 2017, the U.S. President signed an executive order withdrawing the United States from the Trans-Pacific Partnership, a global trade agreement intended to include the United States, Canada, Mexico, Peru and a number of
Asian countries. In March 2018, the U.S. President announced tariffs on imported steel and aluminum into the United States that could have a negative impact on international trade generally. Most recently, in January 2019, the United States
announced sanctions against Venezuela, which may have an effect on its oil output and in turn affect global oil supply. Protectionist developments, or the perception that they may occur, may have a material adverse effect on global economic
conditions, and may significantly reduce global trade. Moreover, increasing trade protectionism may cause an increase in (i) the cost of goods exported from regions globally, particularly the Asia-Pacific region, (ii) the length of time required
to transport goods and (iii) the risks associated with exporting goods. Such increases may further reduce the quantity of goods to be shipped, shipping time schedules, voyage costs and other associated costs, which could have an adverse impact on
our charterers’ business, operating results and financial condition and could thereby affect their ability to make timely charter hire payments to us and to renew and increase the number of their time charters with us. This could have a material
adverse effect on our business, results of operations, financial condition and cash flows.
We face risks attendant to the trends in the global economy, such as changes in interest rates,
instability in the banking and securities markets around the world, the risk of sovereign defaults, reduced levels of growth, and trade protectionism, among other factors. Major market disruptions and the current adverse changes in market
conditions and regulatory climate worldwide may adversely affect our business or impair our ability to borrow under our loan agreements or any future financial arrangements. We cannot predict how long the current market conditions will last.
However, these recent and developing economic and governmental factors, together with depressed charter rates and vessel values, may have a material adverse effect on our results of operations, financial condition or cash flows and the trading
price of our common shares. In the absence of available financing, we may also be unable to complete vessel acquisitions, take advantage of business opportunities or respond to competitive pressures.
Risks associated with operating ocean-going vessels could affect our business
and reputation, which could adversely affect our revenues and expenses.
The operation of an ocean-going vessel carries inherent risks. These risks include the possibility of:
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crew strikes and/or boycotts;
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environmental accidents;
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cargo and property losses or damage; and
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business interruptions caused by mechanical failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather
conditions.
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Any of these circumstances or events could increase our costs or lower our revenues.
Rising fuel prices may adversely affect our profits.
The cost of fuel is a significant factor in negotiating charter rates. As a result, an increase in
the price of fuel may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by members
of the Organization of the Petroleum Exporting Countries and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns and regulations. Furthermore, fuel may become
much more expensive in the future, including as a result of the imposition of sulfur oxide emissions limits in 2020 under new regulations adopted by the International Maritime Organization, or the IMO, which may reduce the profitability and
competitiveness of our business versus other forms of transportation, such as truck or rail.
Upon redelivery of vessels at the end of a period of time or voyage time charter, we may be obligated
to repurchase bunkers on board at prevailing market prices, which could be materially higher than fuel prices at the inception of the charter period. In addition, fuel is a significant, if not the largest, expense that we would incur with respect
to vessels operating on voyage charter.
The majority of our vessels are chartered on the spot charter market, either through trip charter
contracts or voyage charter contracts. Voyage charter contracts generally provide that the vessel owner bears the cost of fuel in the form of bunkers, which is a material operating expense. We do not intend to hedge our fuel costs, and, therefore,
an increase in the price of fuel may affect in a negative way our profitability and our cash flows.
Our revenues are subject to seasonal fluctuations, which could affect our
operating results and ability to service our debt or pay dividends.
We operate our vessels in markets that have historically exhibited seasonal variations in demand and,
as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results. The drybulk shipping market is typically stronger in the fall and winter months in anticipation of increased consumption of
coal and other raw materials in the northern hemisphere during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel schedules and supplies of certain commodities. As a result, our revenues may be
weaker during the fiscal quarters ending June 30 and September 30, and, conversely, our revenues may be stronger in fiscal quarters ending December 31 and March 31. This seasonality should not affect our operating results if our vessels are
employed on period time charters, but because the majority of our vessels are employed in the spot market, seasonality may materially affect our operating results and our ability to pay dividends, if any, in the future.
Our vessels may call on ports located in or may operate in countries that are
subject to restrictions imposed by the United States, the European Union or other governments that could result in fines or other penalties imposed on us and may adversely affect our reputation and the market price of our common shares.
During the year ended December 31, 2018, none of our vessels called on ports located in countries
subject to sanctions and embargoes imposed by the U.S. government and other authorities or countries identified by the U.S. government or other authorities as state sponsors of terrorism; however, our vessels may call on ports in these countries
from time to time in the future on our charterers' instructions. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such
sanctions and embargo laws and regulations may be amended or strengthened over time.
We believe that we are currently in compliance with all applicable sanctions and embargo laws and
regulations. In order to maintain compliance, we monitor and review the movement of our vessels on a daily basis.
All or most of our future charters shall include provisions and trade exclusion clauses prohibiting
the vessels from calling on ports where there is an existing U.S. embargo. Furthermore, as of the date hereof, neither the Company nor its subsidiaries have ever entered into or have any future plans to enter into, directly or indirectly, any
contracts, agreements or other arrangements with the governments of Iran, Syria or Sudan or any entities controlled by the governments of these countries, including any entities organized in these countries.
Due to the nature of our business and the evolving nature of the foregoing sanctions and embargo
laws and regulations, there can be no assurance that we will be in compliance at all times in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in
fines, penalties or other sanctions that could severely impact our ability to access the U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or refrain from
investing, in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state
sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our common shares may adversely affect the price at which our common shares trade. Moreover, our charterers may violate applicable sanctions and
embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely
affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in
operations associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their governments.
Sulfur regulations to reduce air pollution from ships are likely to require
retrofitting of vessels and may cause us to incur significant costs.
In October 2016, the IMO set January 1, 2020 as the implementation date for vessels to comply with
its low sulfur fuel oil requirement, which cuts sulfur levels from the current level of 3.5% to 0.5%. The interpretation of "fuel oil used on board" includes use in main engine, auxiliary engines and boilers. Shipowners may comply with this
regulation by (i) using 0.5% sulfur fuels on board, which is likely to be available around the world by 2020 but likely at a higher cost; (ii) installing scrubbers for cleaning of the exhaust gas; or (iii) by retrofitting vessels to be powered by
liquefied natural gas (LNG), which may not be a viable option due to the lack of supply network and high costs involved in this process. In anticipation of the 2020 implementation we have agreed to install scrubbers on 50% of our current fleet in
cooperation with first-class time charterers who will employ the vessels on period charters. As part of these agreements, the charterers will cover the installation costs. Furthermore, we plan to make necessary preparations for the remaining 50% of
our fleet to burn low sulfur fuel (0.5% or 0.1%). We have further commenced developing ship specific implementation plans for safeguarding the smooth transition to the usage of compliance fuels for such vessels that will not be equipped with
scrubbers. Costs of compliance with these regulatory changes may be significant and may have a material adverse effect on our future performance, results of operations, cash flows and financial position.
We are subject to regulation and liability under environmental laws that could
require significant expenditures and affect our cash flows and net income.
Our business and the operation of our vessels are materially affected by government regulation in
the form of international conventions, national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the country or countries of their registration, including those governing oil spills,
discharges to air and water, ballast water management, and the handling and disposal of hazardous substances and wastes. These requirements include, but are not limited to, EU regulations, the U.S. Oil Pollution Act of 1990, or OPA, the U.S.
Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Air Act, including its amendments of 1977 and 1990, or the CAA, the U.S. Clean Water Act, or the CWA, the U.S. Maritime Transportation
Security Act of 2002, or the MTSA, and regulations of the IMO, including, but not limited to, the International Convention on Civil Liability for Oil Pollution Damage of 1969, as from time to time amended and generally referred to as CLC, the IMO
International Convention for the Prevention of Pollution from Ships of 1973, as from time to time amended and generally referred to as MARPOL, including the designation of emission control areas, or ECAs, thereunder, the IMO International
Convention for the Safety of Life at Sea of 1974, as from time to time amended and generally referred to as SOLAS, the IMO International Convention on Load Lines of 1966, as from time to time amended and generally referred to as the LL
Convention, the International Convention on Civil Liability for Bunker Oil Pollution Damage, generally referred to as the Bunker Convention, the IMO's International Management Code for the Safe Operation of Ships and for Pollution Prevention,
generally referred to as the ISM Code, the International Convention for the Control and Management of Ships' Ballast Water and Sediments, generally referred to as the BWM Convention, and the International Ship and Port Facility Security Code, or
ISPS. We may also incur additional costs in order to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to the 0.5% sulfur cap on marine fuels, air emissions including greenhouse gases,
the management of ballast water, maintenance and inspection, development and implementation of emergency procedures and insurance coverage or other financial assurance of our ability to address pollution incidents. These costs could have a
material adverse effect on our business, results of operations, cash flows and financial condition and our available cash. Because such conventions, laws and regulations are often revised, we cannot predict the ultimate cost of complying with
such conventions, laws and regulations or the impact thereof on the resale price or useful life of vessels we may acquire in the future. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or
increase the cost of our doing business and which may materially adversely affect our operations.
Regulations relating to ballast water discharge coming into effect during
September 2019 may adversely affect our revenues and profitability.
The IMO has imposed updated guidelines for ballast water management systems specifying the maximum
amount of viable organisms allowed to be discharged from a vessel’s ballast water. Depending on the date of the IOPP renewal survey, existing vessels constructed before September 8, 2017 must comply with the updated D-2 standard on or after
September 8, 2019. For most vessels, compliance with the D-2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. Ships constructed on or after September 8, 2017 are to comply with the D-2
standards on or after September 8, 2017. Currently none of our vessels comply with the updated guideline and costs of compliance may be substantial and adversely affect our revenues and profitability. In anticipation of the September 2019
implementation, we have entered into a commercial agreement for the installation of ballast water treatment systems in eight of our vessels.
Furthermore, United States regulations are currently changing. Although the 2013 Vessel General
Permit, or VGP, program and U.S. National Invasive Species Act, or NISA, are currently in effect to regulate ballast discharge, exchange and installation, the Vessel Incidental Discharge Act, or VIDA, which was signed into law on December 4, 2018,
requires that the U.S. Coast Guard develop implementation, compliance, and enforcement regulations regarding ballast water within two years. The new regulations could require the installation of new equipment, which may cause us to incur
substantial costs.
Increased inspection procedures, tighter import and export controls and new
security regulations could increase costs and disrupt our business.
International shipping is subject to security and customs inspection and related procedures in
countries of origin, destination and trans-shipment points. Since the events of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security, such as the MTSA. These security procedures can result in delays in
the loading, discharging or trans-shipment and the levying of customs duties, fines or other penalties against exporters or importers and, in some cases, vessels. Future changes to the existing security procedures may be implemented that could
affect the drybulk sector. These changes have the potential to impose additional financial and legal obligations on vessels and, in certain cases, to render the shipment of certain types of goods uneconomical or impractical. These additional
costs could reduce the volume of goods shipped, resulting in a decreased demand for vessels and have a negative impact on our business, revenues and customer relations.
Acts of piracy on ocean-going vessels have increased in frequency, which could
adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such
as the South China Sea, Strait of Malacca, Arabian Sea, Red Sea, Gulf of Aden off the coast of Somalia, Indian Ocean and Gulf of Guinea. Sea piracy incidents continue to occur, particularly in the South China Sea, the Indian Ocean, and
increasingly in the Gulf of Guinea and Strait of Malacca, with drybulk vessels particularly vulnerable to such attacks. If piracy attacks result in regions in which our vessels are deployed being characterized as "war risk" zones by insurers, as
the Gulf of Aden temporarily was in May 2008, or if our vessels are deployed in Joint War Committee "war and strikes" listed areas, premiums payable for insurance coverage could increase significantly and such insurance coverage may be more
difficult to obtain. In addition, crew and security equipment costs, including costs which may be incurred to employ onboard security armed guards, could increase in such circumstances. Furthermore, while we believe the charterer remains liable
for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until the vessel is released. A charterer may also claim that a vessel seized by pirates was not "on-hire" for a certain number of
days and is therefore entitled to cancel the charter party, a claim that we would dispute. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, any detention
hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance for our vessels could have a material adverse impact on our business, financial condition and results of operations.
The operation of drybulk vessels has particular operational risks.
The operation of drybulk vessels has certain unique risks. With a drybulk vessel, the cargo itself
and its interaction with the vessel can be an operational risk. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk vessels are often subjected to battering treatment
during discharging operations with grabs, jackhammers (to pry encrusted cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during discharging procedures may affect a
vessel's seaworthiness while at sea. Hull fractures in drybulk vessels may lead to the flooding of the vessels' holds. If a drybulk vessel suffers flooding in its forward holds, the bulk cargo may become so dense and waterlogged that its pressure
may buckle the vessel's bulkheads, leading to the loss of a vessel. If we are unable to adequately maintain our vessels, we may be unable to prevent these events. Any of these circumstances or events could negatively impact our business,
financial condition, and results of operations.
If any of our vessels fails to maintain its class certification or fails any
annual survey, intermediate survey, or special survey, or if any scheduled class survey takes longer or is more expensive than anticipated, this could have a material adverse impact on our financial condition and results of operations.
The hull and machinery of every commercial vessel must be certified by a classification
society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the SOLAS.
A vessel must undergo annual, intermediate and special surveys. The vessel's machinery may be on a
continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. At the beginning, in between and in the end of this cycle, every vessel is required to undergo inspection of her underwater parts that
usually includes dry-docking. These surveys and dry-dockings can be costly and can result in delays in returning a vessel to operation.
If any vessel does not maintain its class, the vessel will not be allowed to carry cargo between
ports and cannot be employed or insured. Any such inability to carry cargo or be employed, or any related violation of our loan covenants, could have a material adverse impact on our financial condition and results of operations.
Because seafaring employees we employ are covered by industry-wide collective
bargaining agreements, failure of industry groups to renew those agreements may disrupt our operations and adversely affect our earnings.
We employ a large number of seafarers. All of the seafarers employed on the vessels in our fleet
are covered by industry-wide collective bargaining agreements that set basic standards. We cannot assure you that these agreements will be renewed as necessary or will prevent labor interruptions. Any labor interruptions could disrupt our
operations and harm our financial performance.
Maritime claimants could arrest or attach one or more of our vessels, which could
interrupt our cash flows.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may
be entitled to a maritime lien against a vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or
more of our vessels could interrupt our cash flow and require us to pay large sums of funds to have the arrest lifted, which would have a material adverse effect on our financial condition and results of operations.
In addition, in some jurisdictions, such as South Africa, under the "sister ship" theory of
liability, a claimant may arrest both the vessel which is subject to the claimant's maritime lien and any "associated" vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert "sister ship" liability
against one of our vessels for claims relating to another of our vessels.
Governments could requisition our vessels during a period of war or emergency,
which could negatively impact our business, financial condition, results of operations, and available cash.
A government could requisition for title or hire one or more of our vessels. Requisition for title
occurs when a government takes control of a vessel and becomes the owner. Also, a government could requisition a vessel for hire. Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at
dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of our vessels could have a material adverse effect on our financial condition and results of operations.
The shipping industry has inherent operational risks that may not be adequately
covered by our insurances. Furthermore, because we obtain some of our insurances through protection and indemnity associations, we may also be retrospectively subject to calls or premiums in amounts based not only on our own claim records, but
also on the claim records of all other members of the protection and indemnity associations.
We procure insurances for our fleet against risks commonly insured against by vessel owners and
operators. Our current insurances include hull and machinery insurance, war risks insurance, demurrage and defense insurance and protection and indemnity insurance (which includes environmental damage and pollution insurance). We do not expect to
maintain for all of our vessels insurance against loss of hire, which covers business interruptions that result from the loss of use of a vessel. We may not be adequately insured against all risks or our insurers may not pay a particular claim.
Even if our insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a loss. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable
rates for our fleet. Our insurance policies also contain deductibles, limitations and exclusions which, although we believe are standard in the shipping industry, may nevertheless increase our costs. If our insurances are not enough to cover
claims that may arise, the deficiency may have a material adverse effect on our financial condition and results of operations. We may also be retrospectively subject to calls, or premiums, in amounts based not only on our own claim records but
also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could result in
significant expenses to us.
Risks Relating to Our Company
We have depended on an entity affiliated with our principal shareholder for
financing.
We have relied on
Jelco for funding for vessel acquisitions and general corporate purposes
during
2015 through 2019 to date. This has included convertible notes and loan facilities, as further described in this prospectus under “Certain Relationships and Related Party Transactions – Convertible Notes”. We cannot assure you that in the
future we will be able to rely on Jelco for financing on similar terms or at all. Any inability to secure financing in the future from Jelco could negatively affect our liquidity position and ability to fund our ongoing operations.
If we fail to manage our planned growth properly, we may not be able to
successfully expand our market share.
Our fleet currently consists of ten Capesize vessels, and we may acquire additional vessels in the
future. Our ability to manage our growth will primarily depend on our ability to:
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generate excess cash flow so that we can invest without jeopardizing our ability to cover current and foreseeable working capital needs, including debt
service;
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finance our operations through equity offerings or otherwise, for our existing and new operations;
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locate and acquire suitable vessels;
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identify and consummate acquisitions or joint ventures;
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integrate any acquired businesses or vessels successfully with our existing operations;
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hire, train and retain qualified personnel and crew to manage and operate our growing business and fleet; and
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expand our customer base.
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Growing any business by acquisitions presents numerous risks such as obtaining acquisition
financing on acceptable terms or at all, undisclosed liabilities and obligations, difficulty in obtaining additional qualified personnel, managing relationships with customers and suppliers and integrating newly acquired operations into existing
infrastructures. We may not be successful in executing our growth plans and we may incur significant additional expenses and losses in connection therewith.
Purchasing and operating secondhand vessels, such as our current fleet, may result
in increased operating costs and vessel off-hire, which could adversely affect our financial condition and results of operations.
All ten of the vessels in our fleet are secondhand vessels. Our inspection of these or other
secondhand vessels prior to purchase does not provide us with the same knowledge about their condition and the cost of any required or anticipated repairs that we would have had if these vessels had been built for and operated exclusively by us.
We have not received in the past, and do not expect to receive in the future, the benefit of warranties on any secondhand vessels we acquire.
As the vessels in our fleet or other secondhand vessels we may acquire age, they may become less
fuel efficient and more costly to maintain and will not be as advanced as recently constructed vessels due to improvements in design, technology and engineering, including improvements required to comply with government regulations. Rates for
cargo insurance, paid by charterers, also increase with the age of a vessel, making older vessels less desirable to charterers.
In addition, charterers actively discriminate against hiring older vessels. RightShip, the ship
vetting service founded by Rio Tinto and BHP-Billiton, has become a major vetting service in the drybulk shipping industry, which ranks the suitability of vessels based on a scale of one to five stars. There are carriers that may not charter a
vessel that RightShip has vetted with fewer than three stars. Therefore, a potentially deteriorated star rating for our vessels may affect their commercial operation and profitability and vessels in our fleet with lower ratings may experience
challenges in securing charters. Effective as of January 1, 2018, RightShip's age trigger for a dry cargo inspection for vessels over 8,000 dwt changed from 18 years to 14 years, after which an annual acceptable RightShip inspection will be
required. RightShip may downgrade any vessel over 18 years of age that has not completed a satisfactory inspection by RightShip, in the same manner as any other vessel over 14 years of age, to two stars, which significantly decreases its chances
of entering into a charter. Therefore, since one of our drybulk carriers is 18 years of age, we may not be able to operate this vessel profitably during the remainder of its useful life. All the vessels in our fleet have five star risk ratings
from RightShip.
Governmental regulations, safety or other equipment standards related to the age or condition of
vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage. As our vessels age, market conditions may not justify those expenditures
or enable us to operate our vessels profitably during the remainder of their useful lives.
In addition, unless we maintain cash reserves for vessel replacement, we may be unable to replace
the vessels in our fleet upon the expiration of their useful lives. We estimate the useful life of our vessels to be 25 years from the date of initial delivery from the shipyard. Our cash flows and income are dependent on the revenues we earn by
chartering our vessels to customers. If we are unable to replace the vessels in our fleet upon the expiration of their useful lives, our business, financial condition and results of operations will be materially adversely affected. Any reserves
set aside for vessel replacement would not be available for other cash needs or dividends.
Newbuilding projects are subject to risks that could cause delays.
We may enter into newbuilding contracts in connection with our vessel acquisition strategy.
Newbuilding construction projects are subject to risks of delay inherent in any large construction project from numerous factors, including shortages of equipment, materials or skilled labor, unscheduled delays in the delivery of ordered
materials and equipment or shipyard construction, failure of equipment to meet quality and/or performance standards, financial or operating difficulties experienced by equipment vendors or the shipyard, unanticipated actual or purported change
orders, inability to obtain required permits or approvals, design or engineering changes and work stoppages and other labor disputes, adverse weather conditions or any other events of force majeure. A shipyard's failure to deliver a vessel on
time may result in the delay of revenue from the vessel. Any such failure or delay could have a material adverse effect on our operating results.
We may acquire additional vessels, and if those vessels are not delivered on time
or are delivered with significant defects, our earnings and financial condition could suffer.
We may acquire further vessels in the future. The delivery of these vessels could be delayed or
certain events may arise which could result in us not taking delivery of a vessel, such as a total loss of a vessel, a constructive loss of a vessel, or substantial damage to a vessel prior to delivery. A delay in the delivery of any vessels to
us, the failure of the contract counterparty to deliver a vessel at all, or us not taking delivery of a vessel could cause us to breach our obligations under a related time charter or could otherwise adversely affect our financial condition and
results of operations. In addition, the delivery of any vessel with substantial defects could have similar consequences.
Substantial debt levels could limit our flexibility to obtain additional financing
and pursue other business opportunities.
As of December 31, 2018, we had $218 million of outstanding debt, excluding unamortized financing
fees and the convertible notes issued to Jelco. Moreover, we anticipate that we will incur significant future indebtedness in connection with the acquisition of additional vessels, although there can be no assurance that we will be successful in
identifying further vessels or securing such debt financing. Significant levels of debt could have important consequences to us, including the following:
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our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be impaired or such
financing may be unavailable on favorable terms, or at all;
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we may need to use a substantial portion of our cash from operations to make principal and interest payments on our bank debt and financing liabilities,
reducing the funds that would otherwise be available for operations, future business opportunities and any future dividends to our shareholders;
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our debt level could make us more vulnerable to competitive pressures or a downturn in our business or the economy generally than our competitors with less
debt; and
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our debt level may limit our flexibility in responding to changing business and economic conditions
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Our ability to service our indebtedness will depend upon, among other things, our future financial
and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control, as well as the interest rates applicable to our outstanding
indebtedness. If our operating income is not sufficient to service our indebtedness, we will be forced to take actions, such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets,
restructuring or refinancing our debt or seeking additional equity capital. We may not be able to effect any of these remedies on satisfactory terms, or at all. In addition, a potential lack of liquidity in the debt and equity markets could
hinder our ability to refinance our debt or obtain additional financing on favorable terms in the future. For more information regarding our current loan arrangements, please see "Prospectus Summary –Business Strategy & Strengths–Borrowing
Activities" herein and Item 5. " Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Loan Arrangements" in our annual report for the year ended December 31, 2018 on Form 20-F filed with the Commission on March 25,
2019, or the Annual Report, which is incorporated by reference herein.
We are exposed to volatility in the USD London Interbank Offered Rate, or LIBOR,
which could affect our profitability, earnings and cash flow.
LIBOR has historically been volatile, with the spread between LIBOR and the prime lending rate
widening significantly at times. These conditions are the result of the disruptions in the international credit markets. Because the interest rates borne by our outstanding indebtedness fluctuate with changes in LIBOR, if this volatility were to
occur, it would affect the amount of interest payable on our debt which, in turn, could have an adverse effect on our profitability, earnings and cash flow.
Furthermore, historically interest in most loan agreements in our industry has been based on
published LIBOR rates. Recently, however, there is uncertainty relating to the LIBOR calculation process, which may result in the phasing out of LIBOR in the future. As a result, lenders have insisted on provisions that entitle the lenders, in
their discretion, to replace published LIBOR as the basis for the interest calculation with their cost-of-funds rate. If we are required to agree to such a provision in future financing agreements, our lending costs could increase significantly,
which would have an adverse effect on our profitability, earnings and cash flow.
In addition, the banks currently reporting information used to set LIBOR will likely stop such
reporting after 2021, when their commitment to reporting information ends. The Alternative Reference Rate Committee, a committee convened by the Federal Reserve that includes major market participants, has proposed an alternative rate to replace
U.S. Dollar LIBOR: the Secured Overnight Financing Rate, or “SOFR.” The impact of such a transition away from LIBOR could be significant for us because of our substantial indebtedness.
In order to manage our exposure to interest rate fluctuations, we may from time to time use
interest rate derivatives to effectively convert some of our floating rate debt obligations to fixed-rate obligations. The use of interest rate derivatives may affect our results through mark to market valuation of these derivatives. Also,
adverse movements in interest rate derivatives may require us to post cash as collateral, which may impact our free cash position. Entering into swaps and derivatives transactions is inherently risky and presents various possibilities for
incurring significant expenses. The derivatives strategies that we employ in the future may not be successful or effective, and we could, as a result, incur substantial additional interest costs and recognize losses on such arrangements in our
financial statements. Such risk may have an adverse effect on our financial condition and results of operations.
Our loan agreements and other financing arrangements contain, and we expect
that other future loan agreements and other financing arrangements will contain, restrictive covenants that may limit our liquidity and corporate activities, which could limit our operational flexibility and have an adverse effect on our
financial condition and results of operations. In addition, because of the presence of cross-default provisions in our loan agreements and other financing arrangements, a default by us under one loan could lead to defaults under multiple loans.
Our loan agreements and other financing arrangements contain, and we expect that other future loan
agreements and other financing arrangements will contain, customary covenants and event of default clauses, financial covenants, restrictive covenants and performance requirements, which may affect operational and financial flexibility. Such
restrictions could affect, and in many respects limit or prohibit, among other things, our ability to pay dividends, incur additional indebtedness, create liens, sell assets, or engage in mergers or acquisitions. These restrictions could limit
our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities. There can be no assurance that such restrictions will not adversely affect our ability to finance our future
operations or capital needs.
As a result of these restrictions, we may need to seek permission from our lenders and other
financing counterparties in order to engage in some corporate actions. Our lenders' and other financing counterparties' interests may be different from ours and we may not be able to obtain their permission when needed. This may prevent us from
taking actions that we believe are in our best interests, which may adversely impact our revenues, results of operations and financial condition.
A failure by us to meet our payment and other obligations, including our financial covenants and
any security coverage requirements, could lead to defaults under our financing arrangements. Likewise, a decrease in vessel values or adverse market conditions could cause us to breach our financial covenants or security requirements (the market
values of drybulk vessels have generally experienced high volatility). In the event of a default that we cannot remedy, our lenders and other financing counterparties could then accelerate their indebtedness and foreclose on the respective
vessels in our fleet. The loss of any of our vessels could have a material adverse effect on our business, results of operations and financial condition.
In the past, we obtained waivers and deferrals of most major financial covenants under our loan
facilities with our lenders until the second quarter of 2019. Furthermore, in February and March 2019, we have received approval from the credit committees of certain of our lenders to amend the applicable thresholds or further defer the
application date of certain financial covenants and security requirements of our credit facilities until March 2020. This approval is subject to completion of definitive documentation. As of the date of this prospectus, we comply with all
applicable financial covenants under our existing loan facilities. However, there can be no assurance that we will obtain similar waivers and deferrals from our lenders in the future if needed, as we have obtained in the past. For more information
regarding our current loan facilities, see please see
"Prospectus Summary –Business Strategy & Strengths–Borrowing Activities” herein or
"Item 5. Operating and
Financial Review and Prospects – B. Liquidity and Capital Resources – Loan Arrangements" of our Annual Report.
Because of the presence of cross-default provisions in our loan agreements, a default by us under a
loan and the refusal of any one lender to grant or extend a waiver could result in the acceleration of our indebtedness under our other loans. A cross-default provision means that if we default on one loan, we would then default on our other
loans containing a cross-default provision.
The failure of our counterparties to meet their obligations under our charter
agreements could cause us to suffer losses or otherwise adversely affect our business.
The ability and willingness of each of our counterparties to perform its obligations under charter
agreements with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the drybulk shipping industry and the industries in which our counterparties
operate and the overall financial condition of the counterparties. From time to time, those counterparties may account for a significant amount of our chartering activity and revenues. In addition, in challenging market conditions, there have
been reports of charterers renegotiating their charters or defaulting on their obligations under charter agreements that were concluded during times when markets were stronger, and so our customers may fail to pay charter hire or attempt to
renegotiate charter rates. Should a counterparty fail to honor its obligations under agreements with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure in the spot market or on time
charters could be at lower rates. If our charterers fail to meet their obligations to us or attempt to renegotiate our charter agreements, we could suffer significant losses, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Rising crew costs may adversely affect our profits.
Crew costs are expected to be a significant expense for us. Recently, the limited supply of and
increased demand for highly skilled and qualified crew, due to the increase in the size of the global shipping fleet, has created upward pressure on crewing costs. Increases in crew costs may adversely affect our profitability if we are not able
to increase our rates.
We may not be able to attract and retain key management personnel and other
employees in the shipping industry, which may negatively affect the effectiveness of our management and our results of operations.
Our success will depend to a significant extent upon the abilities and efforts of our management
team, including our ability to retain key members of our management team and the ability of our management to recruit and hire suitable employees. The loss of any of these individuals could adversely affect our business prospects and financial
condition. Difficulty in hiring and retaining personnel could adversely affect our results of operations.
Our vessels may suffer damage, and we may face unexpected repair costs, which
could adversely affect our cash flow and financial condition.
If our vessels suffer damage, they may need to be repaired at a shipyard facility. The costs of
repairs are unpredictable and can be substantial. The loss of earnings while our vessels are being repaired and repositioned, as well as the actual cost of these repairs, would decrease our earnings and reduce the amount of any dividends in the
future. We may not have insurance that is sufficient to cover all or any of these costs or losses and may have to pay repair costs not covered by our insurance.
We are exposed to U.S. dollar and foreign currency fluctuations and devaluations
that could harm our reported revenue and results of operations.
We generate all of our revenues and incur the majority of our operating expenses in U.S. dollars,
but we currently incur many of our general and administrative expenses in currencies other than the U.S. dollar, primarily the euro. Because such portion of our expenses is incurred in currencies other than the U.S. dollar, our expenses may from
time to time increase relative to our revenues as a result of fluctuations in exchange rates, particularly between the U.S. dollar and the euro, which could affect the amount of net income that we report in future periods. We may use financial
derivatives to operationally hedge some of our currency exposure. Our use of financial derivatives involves certain risks, including the risk that losses on a hedged position could exceed the nominal amount invested in the instrument and the risk
that the counterparty to the derivative transaction may be unable or unwilling to satisfy its contractual obligations, which could have an adverse effect on our results.
We maintain cash with a limited number of financial institutions, including
financial institutions that may be located in Greece, which will subject us to credit risk.
We maintain all of our cash with a limited number of financial institutions, including institutions
that are located in Greece. These financial institutions located in Greece may be subsidiaries of international banks or Greek financial institutions. Economic conditions in Greece have been, and continue to be, severely disrupted and volatile,
and as a result of sovereign weakness, Moody’s Investor Services, Inc. has over the past years downgraded the bank financial strength ratings, as well as the deposit and debt ratings, of several Greek banks to reflect their weakening stand-alone
financial strength and the anticipated additional pressures stemming from the country’s challenged economic prospects.
We are a holding company and we depend on the ability of our subsidiaries to
distribute funds to us in order to satisfy financial obligations or to pay dividends.
We are a holding company and our subsidiaries, which are all wholly-owned by us either directly or
indirectly, conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our wholly-owned subsidiaries. As a result, our ability to make dividend payments depends on our
subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by the covenants in our loan agreements, a claim or other action by a third party, including a creditor, and the
laws of Bermuda, the British Virgin Islands, Hong Kong, Liberia, Malta and the Republic of the Marshall Islands, where our vessel-owning subsidiaries are incorporated, which regulate the payment of dividends by companies. If we are unable to
obtain funds from our subsidiaries, we may not be able to satisfy our financial obligations.
In the highly competitive international shipping industry, we may not be able to
compete for charters with new entrants or established companies with greater resources, which may adversely affect our results of operations.
We employ our vessels in a highly competitive market that is capital intensive and highly
fragmented. Competition arises primarily from other vessel owners, some of whom have substantially greater resources than we do. Competition for the transportation of drybulk cargoes by sea is intense and depends on price, location, size, age,
condition and the acceptability of the vessel and its operators to the charterers. Due in part to the highly fragmented market, competitors with greater resources could enter the drybulk shipping industry and operate larger fleets through
consolidations or acquisitions and may be able to offer lower charter rates and higher quality vessels than we are able to offer. Although we believe that no single competitor has a dominant position in the markets in which we compete, we are
aware that certain competitors may be able to devote greater financial and other resources to their activities than we can, resulting in a significant competitive threat to us. We cannot give assurances that we will continue to compete
successfully with our competitors or that these factors will not erode our competitive position in the future.
Due to our limited fleet diversification, adverse developments in the maritime
drybulk shipping industry would adversely affect our business, financial condition, and operating results.
We depend primarily on the transportation of drybulk commodities. Our relative lack of
diversification could make us vulnerable to adverse developments in the maritime drybulk shipping industry, which would have a significantly greater impact on our business, financial condition and operating results than it would if we maintained
more diverse assets or lines of business.
We may be subject to litigation that, if not resolved in our favor and not
sufficiently insured against, could have a material adverse effect on us.
We may be, from time to time, involved in various litigation matters. These matters may include,
among other things, contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic tort claims, employment matters, governmental claims for taxes or duties, and other litigation that arises in the
ordinary course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the potential
costs to resolve them may have a material adverse effect on us. Insurance may not be applicable or sufficient in all cases or insurers may not remain solvent, which may have a material adverse effect on our financial condition.
Because we obtain some of our insurances through protection and indemnity
associations, we may also be retrospectively subject to calls or premiums in amounts based not only on our own claim records, but also on the claim records of all other members of the protection and indemnity associations.
We may be retrospectively subject to calls, or premiums, in amounts based not only on our claim
records but also on the claim records of all other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could
result in significant expenses to us, which could have a material adverse effect on our business, results of operations and financial condition and our ability to pay dividends in the future.
Failure to comply with the U.S. Foreign Corrupt Practices Act of 1977, or FCPA,
could result in fines, criminal penalties, and an adverse effect on our business.
We operate throughout the world, including countries with a reputation for corruption. We are
committed to doing business in accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics which is consistent and in full compliance with the FCPA. We are subject, however, to the risk that we, our
affiliated entities or our or their respective officers, directors, employees and agents may take action determined to be in violation of such anti-corruption laws, including the FCPA. Any such violation could result in substantial fines,
sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our
reputation and ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
We depend on our commercial and technical managers to operate our business and our
business could be harmed if our managers fail to perform their services satisfactorily.
Pursuant to our management agreements, V.Ships provides us with technical, general administrative
and support services (including vessel maintenance, crewing, purchasing, shipyard supervision, assistance with regulatory compliance, accounting related to vessels and provisions). Fidelity provides us with commercial management services for
our vessels and Seanergy Management provides us with certain other management services. Our operational success depends significantly upon V.Ships', Fidelity's and Seanergy Management's satisfactory performance of these services. Our business
would be harmed if V.Ships, Fidelity or Seanergy Management failed to perform these services satisfactorily. In addition, if our management agreements with any of V.Ships, Fidelity or Seanergy Management were to be terminated or if their terms
were to be altered, our business could be adversely affected, as we may not be able to immediately replace such services, and even if replacement services were immediately available, the terms offered could be less favorable than those under our
existing management agreements.
Our ability to compete for and enter into new period and spot charters and to expand our
relationships with our existing charterers will depend largely on our relationship with our commercial manager, Fidelity, and its reputation and relationships in the shipping industry. If Fidelity suffers material damage to its reputation or
relationships, it may harm our ability to:
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renew existing charters upon their expiration;
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obtain financing on commercially acceptable terms;
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maintain satisfactory relationships with our charterers and suppliers; and
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successfully execute our business strategies.
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If our ability to do any of the things described above is impaired, it could have a material adverse
effect on our business, financial condition and results of operations.
Our managers are each privately held companies and there is little or no publicly
available information about them.
The ability of V.Ships, Fidelity and Seanergy Management to render management services will depend
in part on their own financial strength. Circumstances beyond our control could impair their financial strength, and because each is a privately held company, information about their financial strength is not available. As a result, we and our
shareholders might have little advance warning of financial or other problems affecting them even though their financial or other problems could have a material adverse effect on us.
Management fees will be payable to our technical manager regardless of our
profitability, which could have a material adverse effect on our business, financial condition and results of operations.
Pursuant to our technical management agreements with V.Ships, we paid a monthly fee of $8,000 per
vessel in 2018 and we have been paying a monthly fee of about $8,200 per vessel starting January 1, 2019 in exchange for V.Ships’ provision of technical, support and administrative services. The management fees do not cover expenses such as
voyage expenses, vessel operating expenses, maintenance expenses and crewing costs, for which we reimburse the technical manager. The management fees are payable whether or not our vessels are employed and regardless of our profitability, and we
have no ability to require our technical managers to reduce the management fees if our profitability decreases, which could have a material adverse effect on our business, financial condition and results of operations.
The majority of the members of our shipping committee are appointees nominated by
Jelco, which could create conflicts of interest detrimental to us.
Our board of directors has created a shipping committee, which has been delegated exclusive
authority to consider and vote upon all matters involving shipping and vessel finance, subject to certain limitations. Jelco has the right to appoint two of the three members of the shipping committee and as a result effectively controls all
decisions with respect to our shipping operations that do not involve a transaction with our Sponsor. Mr. Stamatios Tsantanis, Ms. Christina Anagnostara and Mr. Elias Culucundis currently serve on our shipping committee.
We may be classified as a passive foreign investment company, which could result
in adverse U.S. federal income tax consequences to U.S. holders of our common shares.
A foreign corporation will be treated as a "passive foreign investment company", or PFIC, for U.S.
federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of "passive income" or (2) at least 50% of the average value of the corporation's assets produce or are held for the
production of those types of "passive income". For purposes of these tests, "passive income" includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are
received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute "passive income". U.S. shareholders of a PFIC are
subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the
PFIC.
Based upon our current and anticipated method of operations, we do not believe that we should be a
PFIC with respect to any taxable year. In this regard, we intend to treat our gross income from time charters as active services income, rather than rental income. Accordingly, our income from our time chartering activities should not constitute
"passive income", and the assets that we own and operate in connection with the production of that income should not constitute passive assets. There is substantial legal authority supporting this position, including case law and U.S. Internal
Revenue Service, or IRS, pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. However, it should be noted that there is also authority which
characterizes time charter income as rental income rather than services income for other tax purposes. Accordingly, no assurance can be given that the IRS or a court of law will accept this position, and there is a risk that the IRS or a court of
law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if the nature and extent of our operations change.
If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders
would face adverse U.S. federal income tax consequences and certain information reporting requirements. Under the PFIC rules, unless those shareholders make an election available under the United States Internal Revenue Code of 1986 as amended,
or the Code (which election could itself have adverse consequences for such shareholders), such shareholders would be liable to pay U.S. federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess
distributions and upon any gain from the disposition of their common shares, as if the excess distribution or gain had been recognized ratably over the shareholder's holding period of the common shares. Similar consequences would apply to holders
of our warrants. See "Tax Considerations – U.S. Federal Income Tax Consequences – U.S. Federal Income Taxation of U.S. Holders - Passive Foreign Investment Company Rules" for a more comprehensive discussion of the U.S. federal income tax
consequences to U.S. shareholders if we are treated as a PFIC.
We may have to pay tax on U.S. source income, which would reduce our earnings.
Under the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such
as us and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States, exclusive of certain U.S. territories and possessions, ("U.S. source gross shipping income") may
be subject to a 4% U.S. federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the applicable Treasury Regulations promulgated thereunder.
We did not qualify for exemption from the 4% tax under Section 883 for our 2018 taxable year as we
did not satisfy one of the ownership tests described in "Item 10.E. Tax Considerations – United States Federal Income Tax Consequences – Exemption of Operating Income from United States Federal Income Taxation" for such taxable year. The ownership
tests require us, inter alia, to establish or substantiate sufficient ownership of our common shares by one or more "qualified" shareholders. For our 2018 taxable year, we had U.S. source gross shipping income, on which we were subject to a U.S
federal tax of $33,080.
Some of our charter parties contain clauses that permit us to seek re
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mbursement from charterers of any U.S. tax paid. We have sought re
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mbu
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sement and have secured payment from
some of our charterers for the 2018 taxable year and are in the process of securing payment from the remaining charterers.
Due to the factual nature of the issues involved, we can give no assurances on the tax-exempt
status of ourselves or that of any of our subsidiaries for our 2019 or subsequent taxable year. If we or our subsidiaries are not entitled to exemption under Section 883 for any such taxable year, we or our subsidiaries could be subject for those
years to a 4% U.S. federal income tax on any shipping income such companies derived during the year that is attributable to the transport of cargoes to or from the United States. The imposition of this taxation would have a negative effect on our
business and would result in decreased earnings available for distribution to our shareholders.
We may be subject to tax in jurisdictions in which we or our vessel owning
subsidiaries are incorporated or operate.
In addition to the tax consequences discussed herein, we may be subject to tax in one or more other
jurisdictions where we or our vessel owning subsidiaries are incorporated or conduct activities. We are subject to a corporate flat tax for our subsidiaries in Malta for the period from May 23, 2018, to December 31, 2018, and could be subject to
additional taxation in the future in Malta or other jurisdictions where our subsidiaries are incorporated or do business. The amount of any such tax imposed upon our operations or on our subsidiaries’ operations may be material and could have an
adverse effect on our earnings.
We are a "foreign private issuer", which could make our common shares less
attractive to some investors or otherwise harm our share price.
We are a "foreign private issuer", as such term is defined in Rule 405 under the Securities Act of
1933, as amended, or the Security Act. As a "foreign private issuer" the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange
Act. We are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence. In addition, our officers and directors are exempt from the reporting and
"short-swing" profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Our exemption from the rules of Section 16 of the Exchange Act regarding sales of common
shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject to the Exchange Act. Moreover, we are exempt from the proxy rules, and proxy statements that we distribute will not be
subject to review by the Commission. Accordingly, there may be less publicly available information concerning us than there is for other U.S. public companies. These factors could make our common shares less attractive to some investors or
otherwise harm our share price.
The Public Company Accounting Oversight Board inspection of our independent
accounting firm could lead to adverse findings in our auditors' reports and challenges to the accuracy of our published audited consolidated financial statements.
Auditors of U.S. public companies are required by law to undergo periodic Public Company Accounting
Oversight Board, or PCAOB, inspections that assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. For several years certain European Union countries,
including Greece, did not permit the PCAOB to conduct inspections of accounting firms established and operating in such European Union countries, even if they were part of major international firms. Accordingly, unlike for most U.S. public
companies, the PCAOB was prevented from evaluating our auditor's performance of audits and its quality control procedures, and, unlike shareholders of most U.S. public companies, we and our shareholders were deprived of the possible benefits of
such inspections. Since 2015, Greece agreed to allow the PCAOB to conduct inspections of accounting firms operating in Greece. In the future, such PCAOB inspections could result in findings in our auditors' quality control procedures, question
the validity of the auditor's reports on our published consolidated financial statements and the effectiveness of our internal control over financial reporting, and cast doubt upon the accuracy of our published audited financial statements.
We conduct business in China, where the legal system is not fully developed and
has inherent uncertainties that could limit the legal protections available to us.
Some of our vessels may be chartered to Chinese customers and from time to time on our charterers'
instructions, our vessels may call on Chinese ports. Such charters and voyages may be subject to regulations in China that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the
Chinese government new taxes or other fees. Applicable laws and regulations in China may not be well publicized and may not be known to us or our charterers in advance of us or our charterers becoming subject to them, and the implementation of
such laws and regulations may be inconsistent. Changes in Chinese laws and regulations, including with regards to tax matters, or changes in their implementation by local authorities could affect our vessels if chartered to Chinese customers as
well as our vessels calling to Chinese ports and could have a material adverse impact on our business, financial conditions and results of operations.
Changing laws and evolving reporting requirements could have an adverse effect on
our business.
Changing laws, regulations and standards relating to reporting requirements, including the European
Union General Data Protection Regulation, or GDPR, may create additional compliance requirements for us. To maintain high standards of corporate governance and public disclosure, we have invested in, and continue to invest in, reasonably
necessary resources to comply with evolving standards.
GDPR broadens the scope of personal privacy laws to protect the rights of European Union citizens
and requires organizations to report on data breaches within 72 hours and be bound by more stringent rules for obtaining the consent of individuals on how their data can be used. Non-compliance with GDPR may expose entities to significant fines
or other regulatory claims which could have an adverse effect on our business, and results of operations.
A cyber-attack could materially disrupt our business.
We rely on information
technology systems and networks in our operations and administration of our business. Our business operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks, or to steal
data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to unauthorized release of information or alteration of information in our systems. Any such attack or other breach of our
information technology systems could have a material adverse effect on our business and results of operations.
In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any
reason could disrupt our business and could result in decreased performance and increased operating costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any
significant breach of security could adversely affect our business and results of operations.
Risks Relating to the Offering and the Ownership of our Common Shares
The market price of our common shares has been and may in the future be subject
to significant fluctuations. Further, there is no guarantee of a continuing public market to resell our common shares or warrants.
Our common shares commenced trading on the Nasdaq Global Market on October 15, 2008. Since December
21, 2012 and December 13, 2016, respectively, our common shares and Class A Warrants have traded on the Nasdaq Capital Market. We intend to apply to list the Class B Warrants offered hereunder on the Nasdaq Capital Market, but the Class C
Warrants and the pre-funded warrants will not be listed. We cannot assure you that an active and liquid public market for our common shares and Class A Warrants will continue or that an active and liquid public market for our Class B Warrants
offered hereunder will develop.
The market price of our common shares has been and may in the future be subject to significant
fluctuations as a result of many factors, some of which are beyond our control. Among the factors that have in the past and could in the future affect our share price are:
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quarterly variations in our results of operations;
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changes in market valuations of similar companies and stock market price and volume fluctuations generally;
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changes in earnings estimates or the publication of research reports by analysts;
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speculation in the press or investment community about our business or the shipping industry generally;
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strategic actions by us or our competitors such as acquisitions or restructurings;
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the thin trading market for our common shares, which makes it somewhat illiquid;
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regulatory developments;
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additions or departures of key personnel;
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general market conditions; and
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domestic and international economic, market and currency factors unrelated to our performance.
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The stock markets in general, and the markets for drybulk shipping and shipping stocks in
particular, have experienced extreme volatility that has sometimes been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common shares.
Additionally, there is no guarantee of a continuing public market to resell our common shares. Our
common shares now trade on the Nasdaq Capital Market. We cannot assure you that an active and liquid public market for our common shares will continue.
We have broad discretion in the use of the net proceeds from this offering and
may use the net proceeds in ways with which you disagree.
Our management will have broad discretion in the application of the net proceeds from this offering
and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our securities. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the
opportunity, as part of your investment decision, to assess whether the net proceeds are being used appropriately. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse
effect on our business, cause the price of our securities to decline. Pending the application of these funds, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
Warrants are speculative in nature and there is no assurance that they will ever
be profitable for holders of our warrants to exercise the warrants.
The warrants offered in this offering do not confer any rights of common share ownership on their
holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire common shares at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the Class B
Warrants may exercise their right to acquire common shares and pay an exercise price of $ per share (110% of the unit price in this offering), prior to three years from the date of issuance, after which date any unexercised warrants will
expire and have no further value, and holders of the Class C Warrants may exercise their right to acquire common shares and pay an exercise price of $ per share (110% of the unit price in this offering), prior to six months from the date of
issuance, after which date any unexercised warrants will expire and have no further value. Commencing on the date of issuance, holders of pre-funded warrants may exercise their right to acquire common shares and pay an exercise price of $0.01,
representing the unpaid portion of the exercise price. Moreover, following this offering, the market value of the warrants is uncertain and there can be no assurance that the market value of the warrants will equal or exceed the offering price.
There can be no assurance that the market price of the common shares will ever equal or exceed the exercise price of the warrants, and consequently, whether it will ever be profitable for holders of the warrants to exercise the warrants.
The declaration and payment of dividends will always be subject to the
discretion of our board of directors and will depend on a number of factors. Our board of directors may not declare dividends in the future.
The declaration, timing and amount of any dividend is subject to the discretion of our board of
directors and will be dependent upon our earnings, financial condition, market prospects, capital expenditure requirements, investment opportunities, restrictions in our loan agreements, the provisions of Marshall Islands law affecting the
payment of dividends to shareholders, overall market conditions and other factors. Our board of directors may not declare dividends in the future.
Marshall Islands law generally prohibits the payment of dividends if the company is insolvent or would
be rendered insolvent upon payment of such dividend, and dividends may be declared and paid out of our operating surplus. Dividends may also be declared or paid out of net profits for the fiscal year in which the dividend is declared and for the
preceding fiscal year. We may be unable to pay dividends in the anticipated amounts or at all.
Anti-takeover provisions in our amended and restated articles of incorporation
and second amended and restated bylaws could make it difficult for shareholders to replace or remove our current board of directors or could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely
affect the market price of our common shares.
Several provisions of our amended and restated articles of incorporation and second amended and
restated bylaws could make it difficult for shareholders to change the composition of our board of directors in any one year, preventing them from changing the composition of our management. In addition, the same provisions may discourage, delay
or prevent a merger or acquisition that shareholders may consider favorable.
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authorize our board of directors to issue "blank check" preferred shares without shareholder approval;
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provide for a classified board of directors with staggered, three-year terms;
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require a super-majority vote in order to amend the provisions regarding our classified board of directors;
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permit the removal of any director from office at any time, with or without cause, at the request of the shareholder group entitled to designate such
director; and
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prevent our board of directors from dissolving the shipping committee or altering the duties or composition of the shipping committee without an affirmative
vote of not less than 80% of the board of directors.
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These anti-takeover provisions could substantially impede the ability of shareholders to benefit
from a change in control and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium.
Issuance of preferred shares may adversely affect the voting power of our
shareholders and have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common shares.
Our amended and restated articles of incorporation currently authorize our board of directors to
issue preferred shares in one or more series and to determine the rights, preferences, privileges and restrictions, with respect to, among other things, dividends, conversion, voting, redemption, liquidation and the number of shares constituting
any series without shareholders' approval. If our board of directors determines to issue preferred shares, such issuance may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable. The issuance of preferred
shares with voting and conversion rights may also adversely affect the voting power of the holders of common shares. This could substantially impede the ability of public shareholders to benefit from a change in control and, as a result, may
adversely affect the market price of our common shares and your ability to realize any potential change of control premium.
Jelco and Comet Shipholding Inc. are able to control the outcome of all matters
requiring a shareholder vote, and their interests could conflict with the interests of our other shareholders.
Jelco and Comet
Shipholding Inc., or Comet,
both companies affiliated with our Sponsor, currently collectively own approximately 1,117,582, or approximately 39.8%, of our outstanding common shares. Jelco may also acquire up to 2,867,776 additional
common shares upon conversion of the convertible notes issued to it by the Company, in which case our Sponsor would own approximately 70.2% of our outstanding common shares, based on the number of common shares outstanding as of April
5
, 2019. As a result, Jelco and Comet may be able to control the outcome of all matters requiring a shareholder vote. This concentration of ownership may delay,
deter or prevent acts that would be favored by our other shareholders or deprive shareholders of an opportunity to receive a premium for their shares as part of a sale of our business, and it is possible that the interests of our Sponsor may in
some cases conflict with our interests and the interests of our other holders of shares. For example, conflicts of interest may arise between us, on one hand, and our Sponsor or affiliated entities, on the other hand, which may result in the
transactions on terms not determined by market forces. Any such conflicts of interest could adversely affect our business, financial condition and results of operations, and the trading price of our common shares. In addition, this concentration
of share ownership may adversely affect the trading price of our shares because investors may perceive disadvantages in owning shares in a company with controlling shareholders.
We may issue additional common shares or other equity securities without
shareholder approval, which would dilute our existing shareholders' ownership interests and may depress the market price of our common shares.
We may issue additional common shares or other equity securities of equal or senior rank in the
future without shareholder approval in connection with, among other things, future vessel acquisitions, the repayment of outstanding indebtedness, and the conversion of convertible financial instruments.
Our issuance of additional common shares or other equity securities of equal or senior rank in these
situations would have the following effects:
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our existing shareholders' proportionate ownership interest in us would decrease;
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the proportionate amount of cash available for dividends payable on our common shares could decrease;
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the relative voting strength of each previously outstanding common share could be diminished; and
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the market price of our common shares could decline.
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In addition, we may issue additional common shares upon any conversion of our outstanding convertible
notes issued to Jelco or upon exercise of our outstanding class A warrants or the Representative's Warrants issued to Maxim Group LLC, or Maxim in connection with our public offering in December 2016.
Beginning 30 days after the issuance date and thereafter during the term of the Class C Warrants we
are offering in this prospectus, the warrant holders have the right to exercise the Class C Warrants on a cashless basis under certain circumstances. We have the right to satisfy this obligation in cash if we have the cash to do so. If the price of
our common shares declines below the offering price between 30 days and six months after this offering, the number of common shares issuable upon such cashless exercise of Class C Warrants will increase. If the price of our common shares were to
fall to $ per share at any time more than 30 days, and less than six months after this offering, and holders of all of the Class C Warrants were to exercise the warrants on a cashless basis, they could have issued to them up to common shares
as a result of these further cashless exercises, and as satisfied through the issuance of additional common shares, the issuance of those shares would be dilutive to our shareholders.
As of April 5, 2019, Jelco had the right to acquire 281,481 common shares upon exercise of a
conversion option pursuant to the convertible note dated March 12, 2015, as amended, issued by the Company to Jelco, 1,567,777 common shares upon exercise of a conversion option pursuant to the revolving convertible note dated September 7, 2015, as
amended, issued by the Company to Jelco and 1,018,518 common shares upon exercise of a conversion option pursuant to the convertible note dated September 27, 2017, as amended, issued by the Company to Jelco. Under each of the convertible notes,
Jelco may, at its option, convert the principal amount under the note at any time into common shares at a conversion price of $13.50 per share. Our issuance of additional common shares in such instance would cause the proportionate ownership
interest in us of our existing shareholders, other than Jelco, to decrease; the relative voting strength of each previously outstanding common share held by our existing shareholders, other than the converting noteholder, to decrease; and the
market price of our common shares could decline.
As of April 5, 2019, we had 11,500,000 class A warrants outstanding to purchase an aggregate of
766,666 common shares and two Representative's Warrants outstanding to purchase an aggregate of 37,666 common shares. Each class A warrant is exercisable for one common share at an exercise price of $30.00 per share and expires in December 2021.
The Representative's Warrants have an exercise price equal to $28.13 per common share and expire in December 2019. Our issuance of additional common shares upon the exercise of the class A warrants or Representative's Warrants would cause the
proportionate ownership interest in us of our existing shareholders, other than the exercising warrant holders, to decrease; the relative voting strength of each previously outstanding common share held by our existing shareholders to decrease; and
the market price of our common shares could decline.
We are incorporated in the Republic of the Marshall Islands, which does not
have a well-developed body of corporate law, which may negatively affect the ability of shareholders to protect their interests.
Our corporate affairs are governed by our Amended and Restated Articles of Incorporation, our
Second Amended and Restated Bylaws and by the Marshall Islands Business Corporations Act, or the BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few
judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the laws of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Shareholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the
State of Delaware and other states with substantially similar legislative provisions, shareholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a U.S. jurisdiction.
Additionally, the Republic of the Marshall Islands does not have a legal provision for bankruptcy or
a general statutory mechanism for insolvency proceedings. As such, in the event of a future insolvency or bankruptcy, our shareholders and creditors may experience delays in their ability to recover for their claims after any such insolvency or
bankruptcy. Further, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding involving us or any of our subsidiaries, bankruptcy laws other than those of the United States could apply. If we become
a debtor under U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would
become a debtor in the United States, or that a U.S. bankruptcy court would be entitled to, or accept, jurisdiction over such a bankruptcy case, or that courts in other countries that have jurisdiction over us and our operations would recognize a
U.S. bankruptcy court’s jurisdiction if any other bankruptcy court would determine it had jurisdiction.
It may not be possible for investors to serve process on or enforce U.S. judgments against us.
We and all of our subsidiaries are incorporated in jurisdictions outside the U.S. and substantially all of our assets and those of our subsidiaries are located outside the U.S. In addition, most of our directors and officers are
non-residents of the U.S., and all or a substantial portion of the assets of these non-residents are located outside the U.S. As a result, it may be difficult or impossible for U.S. investors to serve process within the U.S. upon us, our
subsidiaries or our directors and officers or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our
assets or the assets of our subsidiaries are located (1) would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or
(2) would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.
This discussion contains forward-looking statements that involve risks, uncertainties, and
assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. See the sections entitled "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors".
We are Seanergy Maritime Holdings Corp., an international shipping company specializing in the
worldwide seaborne transportation of drybulk commodities, primarily iron ore and coal. We believe we have established a reputation in the international drybulk shipping industry for operating and maintaining vessels with high standards of
performance, reliability and safety. Our management team is comprised of executives with extensive experience operating large and diversified fleets, and who have strong relationships to a growing number of international charterers.
Our fleet was acquired at a historically low point in the shipping cycle. In 2015, we acquired eight
modern drybulk vessels (six Capesize and two Supramax vessels). In 2016 and 2017 we acquired a further three Capesize drybulk vessels. In October and November 2018, we sold our two Supramax vessels and purchased an additional Capesize vessel,
following which we became the only pure-play Capesize shipping company listed in the U.S. capital markets. We refer to the ten vessels that we presently operate as our Fleet. Since March 2015, we have invested approximately $300 million to acquire
our Fleet.
We manage our vessels' operations, insurances, claims and bunkering and have the general supervision
of our third-party technical and commercial managers. Pursuant to technical management agreements with our vessel owning subsidiaries, V. Ships, an independent third party, provides technical management for our vessels that includes general
administrative and support services, such as crewing and other technical management, accounting related to vessels and provisions. Fidelity, an independent third party, provides commercial management services for all of the vessels in our fleet
pursuant to a commercial management agreement with Seanergy Management Corp., our wholly-owned ship managing subsidiary. Seanergy Management Corp., or Seanergy Management, our wholly owned subsidiary, provides us with certain other management
services.
In a registered direct offering that was completed on August 10, 2016, we sold 78,666 of our common
shares to an unaffiliated institutional investor at a public offering price of $62.25 per share, for aggregate gross proceeds of $4.9 million. The net proceeds from the sale of the common shares, after deducting placement agent fees and related
offering expenses, were approximately $4.1 million.
On September 26, 2016, we entered into two memoranda of agreements with an unaffiliated third party
for the purchase of
Lordship
and
Knightship
,
two secondhand Capesize vessels, for an aggregate purchase price of $41.5 million. We paid an initial security deposit in the amount of $4.2 million, which was funded through a loan facility provided by Jelco, or the First Jelco Loan Facility.
The balance of the purchase price of
Lordship
was funded with $8.2 million from the First Jelco Loan Facility, $7.5 million from a loan
facility with Northern Shipping Fund III LP, or the NSF Loan Facility and $3.0 million of cash on hand. The balance of the purchase price of
Knightship
was funded with $18.7 million from the NSF Loan Facility.
In a registered direct offering that was completed on November 23, 2016, we sold 87,000 common
shares to unaffiliated institutional investors at a public offering price of $41.25 per share, for aggregate gross proceeds of $3.6 million. The net proceeds from the sale of the common shares, after deducting fees and expenses, were
approximately $3.2 million.
On December 15, 2016, we issued an aggregate of 51,520 of our common shares to certain of our
directors, officers and employees pursuant to the Plan.
On December 21, 2016, we completed a public offering of 753,332 of our common shares and class A
warrants to purchase 766,666 common shares, which included the exercise of an over-allotment option. In connection with the offering, we issued to Maxim, the underwriter, Representative's Warrants to purchase 37,666 of our common shares. We
received net proceeds of $14.9 million in connection with the consummation of the offering.
On April 10, 2017, we issued 8,333 of our common shares in a private placement to a third-party
service provider as compensation.
Between February 3, 2017 and April 27, 2017, we sold 185,475 of our common shares for an aggregate
amount of approximately $2.6 million gross proceeds in a public at-the-market offering pursuant to the Equity Distribution Agreement, dated February 3, 2017, between us and Maxim Group LLC. On June 27, 2017, we and Maxim mutually terminated the
Equity Distribution Agreement.
On May 31, 2017, we
acquired the
Partnership
, from an unaffiliated third
party. The acquisition of the vessel was financed with proceeds from (i) the
Partnership
loan facility dated May 24, 2017 provided by Jelco, or the
Second Jelco Loan Facility
and (ii) a loan facility provided by
ATB. This acquisition was made pursuant to a memorandum of agreement between our vessel-owning subsidiary and the seller, dated March 28, 2017.
On September 25, 2017, in order to partially fund the refinancing of our Natixis facility, we
amended and restated the ATB Loan Facility, increasing the loan amount of the facility by an additional tranche of $16.5 million, the Amended and Restated ATB Loan Facility.
On September 27, 2017, we issued a $13.75 million convertible note to Jelco. As part of the
transaction, Jelco received customary registration rights with respect to all common shares beneficially owned by Jelco also providing for customary registration rights for all Jelco notes. Of the $13.75 million drawn down under the note, $4.75
million was used to make a mandatory prepayment under the Second Jelco Loan Facility, $7.7 million was used to
partially fund the refinancing
of a previous loan facility with Natixis and the balance was used for general corporate purposes
.
On April 10, 2018, we entered into a $2.0 million loan facility with Jelco for working capital
purposes, or the Third Jelco Loan Facility. We drew down the $2.0 million on April 12, 2018. The facility, as amended in June 2018, in August 2018 and January 2019, bears fixed interest of 10% per annum. The Third Jelco Loan Facility was
refinanced in March 2019, and our obligations and all security thereunder were unconditionally discharged.
On June 11, 2018, we entered into a $24.5 million term loan facility with Blue Ocean maritime
lending funds managed by EnTrustPermal (Wilmington Trust) in order to partially fund the refinancing of our $32 million NSF facility. On June 13, 2018, our lender, NSF, entered into a deed of release and fully discharged the $16 million balance
of our secured term loan facility. The first-priority mortgage over the
Lordship
and all other securities granted by the vessel-owning
subsidiary or over the
Lordship
in favour of NSF were irrevocably and unconditionally released pursuant to the deed of release.
On June 28, 2018, we entered into a sale and leaseback agreement with Hanchen, for the purpose of
refinancing the outstanding indebtedness under the $32 million NSF facility. On June 28, 2018, our lender, NSF, entered into a deed of release and fully discharged the $16 million balance of our secured term loan facility. The first-priority
mortgage over the
Knightship
and all other securities created in favour of NSF were irrevocably and unconditionally released pursuant to the
deed of release. Under the terms of the sale and leaseback agreement, the
Knightship
was sold for $26.5 million and leased back on a bareboat
basis for a period of 8 years.
On August 31, 2018 we entered into an agreement to acquire the
Fellowship
, a modern secondhand Capesize vessel from an unaffiliated third party, built in 2010 at Daewoo Shipbuilding in South Korea with a cargo-carrying capacity of
approximately 180,000 dwt for a gross purchase price of $28.7 million. The delivery of the new vessel took place on November 22, 2018. The acquisition costs of the
Fellowship
were funded with proceeds from an amended and restated term loan facility with UniCredit and by cash on hand.
On September 20, 2018, we entered into two separate definitive agreements with unaffiliated third
parties for the sale of our only two Supramax vessels, the 2010-built
Gladiatorship
and the 2011-built
Guardianship
. The aggregate gross sale price was $22.7 million. The
Gladiatorship
was delivered to its new owner on October 11, 2018 and the
Guardianship
was delivered to its new owner on November 19, 2018. Following these
transactions, we became the only pure-play Capesize shipping company listed in the U.S. capital markets.
On November 7, 2018 we entered into a $23.5 million sale and leaseback agreement for the
Championship
with Cargill for the purpose of refinancing the outstanding indebtedness of the
Championship
under a previous loan facility with ATB. Pursuant to the agreement, the
Championship
was sold and chartered back on a sub-bareboat basis and subsequently entered into a five-year time charter with Cargill. The refinancing has released approximately $7.8 million of liquidity for the Company that was used to partially finance the
acquisition price of the
Fellowship
. As part of this agreement 120,000 shares were issued to Cargill.
On February 13, 2019, we entered into a new loan facility with ATB in order to refinance the
existing indebtedness over the
Partnership
under the then existing ATB Loan Facility and for general working capital purposes and more
specifically for the financing of installation of open loop scrubber systems on the
Squireship
and
Premiership
.
Effective at the opening of trading on March 20, 2019, we effected a one-for-fifteen reverse split of
our common shares.
On March 26, 2019, we entered into a $7.0 million loan facility with Jelco, the proceeds of which
were utilized to (i) refinance the Third Jelco Loan Facility and (ii) for general corporate purposes. We drew down the entire $7.0 million on March 27, 2019.
For more information regarding our current loan facilities and convertible notes, please see
"Prospectus Summary—Recent Developments" herein and "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Loan Arrangements " in our Annual Report, which is incorporated by reference herein.
We believe that we possess a number of strengths that provide us with a competitive advantage in the
drybulk shipping market, including the following:
|
·
|
Focus on Capesize Vessels.
Our fleet currently
consists of ten modern-design Capesize vessels that are expected to be fully compliant with upcoming environmental and safety regulations We expect our focus on a single type of vessel within the drybulk space to result in superior
operational efficiency and commercial performance in this market. We believe that our focus on the Capesize market will attract a broad shareholder base aiming to gain direct exposure to the favorable fundamentals of iron ore and coal
transportation, while minimizing their exposure to the rest of the drybulk market that may be influenced from a much wider range of commodities. According to Karatzas Marine Advisors, seaborne transportation for iron ore and coal has
increased by 2.2% in 2016, 4.6% in 2017 and 1.5% in 2018. In addition, the newbuilding orderbook for Capesize vessels currently represents approximately 4.15% of the current fleet, a significant reduction from the average size of the
newbuilding orderbook of the fleet for the last 10 years.
|
|
·
|
Focus on Quality and Commercially Competitive Tonnage.
Our
fleet consists of modern-design Capesize vessels with large cargo carrying capacity that are expected to be fully compliant with existing and upcoming environmental and safety regulations. We believe our modern-design vessels, which
were built at reputable Korean and Japanese shipyards, are preferred by charterers over older vessels, as since they require lower maintenance and typically have lower operating expenses than older vessels.
|
|
·
|
Experienced Management.
Our Company's leadership has
considerable depth of shipping industry expertise. Mr. Tsantanis, our Chairman and Chief Executive Officer, brings more than 20 years of experience in shipping and finance and has held senior management positions in prominent shipping
companies prior to leading our Company. Mr. Gyftakis, our Chief Financial Officer, has more than 13 years of experience in senior positions in the shipping finance industry. The Company's Chief Operations Officer, Chief Technical
Officer and General Counsel have a combined experience of 54 years in senior positions.
|
|
·
|
Access to off- market sale and purchase opportunities and
ability of prompt execution promptly.
Based on our successful past track record, the strength and expertise of our management team, our commercial expertise and reputation in the marketplace, as well as on our transparent and
public corporate structure, we believe that we are well-positioned to source off-market opportunities to acquire off-market secondhand vessels and to build on our strong track record of executing such transactions. As a result, our
Company may be able to acquire vessels on more favorable terms than what would be obtained without access to such opportunities.
|
|
·
|
Access to Attractive Chartering Opportunities.
The
Company's senior management in combination with Fidelity, our commercial manager, has established strong global relationships with international miners, charterers and brokers. We believe that our relationships with these counterparties
should provide us with access to attractive chartering opportunities. Furthermore, we aim to maintain our fleet at a level that meets or exceeds stringent industry standards as we believe that owning a modern and well-maintained fleet
provides us with a competitive advantage in securing favorable time and spot charter employment. However, it is possible that the daily rates we receive on future time and spot charters may be lower depending on market fluctuations. As
a demonstration of our ability to source attractive employment opportunities, five of our vessels have entered into long-term T/Cs with durations of three to five years two of which have already commenced and the remaining three will
commence in the third and/or fourth quarter of 2019. As part of the agreements, the charterers have agreed to cover the costs of installing exhaust gas cleaning systems, or scrubbers, on our vessels in order to ensure compliance with
the IMO Sulphur limit Global Sulphur Cap rules that will be in effect after January 1, 2020. We believe that the willingness of our charterers to invest in our vessels is a testament to the attractive employment opportunities enjoyed by
our fleet. It should be noted that despite our management team’s deep industry expertise and high-quality fleet, we expect the daily rates obtained on future time and spot charters to still be subject to market fluctuations.
|
|
·
|
Maintain Best in Class Fleet Management, without Related
Party Transactions.
We believe that high-quality technical and commercial management confer advantages in terms of reduced operating expenses and improved commercial prospects for our vessels. We currently outsource the
technical and commercial management of our fleet to V.Ships and Fidelity respectively, who are both reputable third-party service providers with proven track records. Our management team actively monitors, and controls vessel operating
expenses incurred by the independent technical managers, as well as prospective commercial opportunities for our vessels, by overseeing their activities.
|
Our strategy is centered on managing our fleet in accordance with world-class standards to produce
strong cash flows and to further expand our fleet to build our position as a reliable provider of international seaborne transportation services for drybulk commodities. The key elements of our business strategy include:
Fleet Composition
Expanding
Our Fleet Through Opportunistic Acquisitions and Disposals
. We aim to acquire high-quality Capesize vessels through timely acquisitions at prices that are attractive when compared to the vessels' future earnings potential. We currently
view the Capesize vessel class as providing the highest returns in the drybulk space given existing vessel price levels. In evaluating acquisitions, we consider and analyze, among other things, our expectation of fundamental developments in the
drybulk shipping industry sector, the level of liquidity in the resale and charter market, vessel condition and technical specifications, expected remaining useful life, as well as the overall strategic positioning of our fleet and customers. For
vessels acquired with charters attached, we also consider the credit quality of the charterer and duration and terms of the contracts in place
|
·
|
Assembling a Modern-design Capesize Fleet with Critical Mass
.
In today's competitive world, shipping companies with larger fleets can benefit from economies of scale by reducing operating expenses per vessel due to volume price discounting; larger fleets also command the preference of the
charterers as they can benefit from such economies of scale themselves. More importantly, shipping companies with larger fleets have greater access to financing on competitive terms from shipping banks and lessors, as well as from
institutional investors and the capital markets.
|
Fleet Deployment
|
·
|
Revenue Upside Potential through Spot Market Exposure
.
We believe our current fleet is positioned to capture increasing vessel revenues because of an expected upward trend in spot charter rates. Currently our entire fleet is employed in the spot market or under index-linked time charters
that allow us to benefit from market improvements. The BCI TCE has increased significantly in 2018 by 649% from a record low level of $2,166 per day during March 2016 to $16,213 per day in December 2018. Despite a seasonal softening
seen in earnings in the first quarter of 2019, it is expected that the positive trend established in the previous 3 years will continue going forward. The average daily BCI TCE of the last fifteen years from March 2004 until March 2019
is $37,200. As spot charter rates revert to long-term average levels, we may shift towards employing a greater proportion of our fleet under long term fixed-rate contracts in order to minimize downside risk. Because the spot market is
volatile, there can be no assurance that the recent improvements in the drybulk charter market will continue.
|
As of the date of this prospectus, we operate a fleet of ten Capesize drybulk vessels with a
combined cargo-carrying capacity of approximately 1,748,581 dwt and an average age of approximately 10 years. The following table lists the vessels in our fleet as of the date of this prospectus:
The following table lists the vessels in our fleet as of April
5
, 2019:
Vessel Name
|
Year Built
|
Dwt
|
Flag
|
Yard
|
Type of Employment
|
Fellowship
|
2010
|
179,701
|
MI
|
Daewoo
|
Spot
|
Championship (1)
|
2011
|
179,238
|
MI
|
Sungdong
|
T/C Index Linked(2)
|
Partnership
|
2012
|
179,213
|
MI
|
Hyundai
|
T/C Index Linked(3)
|
Knightship
(4)
|
2010
|
178,978
|
LIB
|
Hyundai
|
Spot
|
Lordship
|
2010
|
178,838
|
LIB
|
Hyundai
|
T/C Index Linked(5)
|
Gloriuship
|
2004
|
171,314
|
MI
|
Hyundai
|
Spot
|
Leadership
|
2001
|
171,199
|
BA
|
Koyo-Imabari
|
Spot
|
Geniuship
|
2010
|
170,058
|
MI
|
Sungdong
|
Spot
|
Premiership
|
2010
|
170,024
|
IoM
|
Sungdong
|
Spot
|
Squireship
|
2010
|
170,018
|
LIB
|
Sungdong
|
Spot
|
(1)
|
In November 2018, we entered into a financing arrangement with Cargill according to which this vessel was sold and leased back on a
bareboat basis for a five-year-period. We have a purchase obligation at the end of the five-year period and we further have the option to repurchase the vessel at any time during the bareboat charter.
|
(2)
|
This vessel is being chartered by Cargill. The vessel was delivered to the charterer on November 7, 2018 for a period of employment
of 60 months, with an additional period of about 16 to about 18 months at the charterer’s option. The net daily charter hire is calculated at an index linked rate based on the BCI TCE. In addition, the time charter provides us with the
option to convert the index linked rate to a fixed rate for a period of between 3 and 12 months priced at the then prevailing Capesize FFA for the selected period.
|
(3)
|
This vessel is being chartered by Uniper and was delivered to the charterer on December 11, 2018 in direct continuation of the
vessel's previous time charter, for a period of minimum five months to maximum eight months. The net daily charter hire is calculated at an index linked rate based on the BCI TCE. In addition, the time charter provides us an option for any
period of time, no less than three months, during the hire to be converted into a fixed rate time charter, with a rate corresponding to the prevailing value of the respective Capesize FFA.
|
(4)
|
In June 2018, we entered into a financing arrangement with AVIC according to which this vessel was sold and leased back on a bareboat
basis from AVIC's affiliate, Hanchen for an eight- year period. We have a purchase obligation at the end of the eight- year period and we further have the option to repurchase the vessel at any time following the second anniversary of the
bareboat charter.
|
(5)
|
This vessel is being chartered by Oldendorff and was delivered to the charterer on June 28, 2017, in direct continuation of the
vessel's previous time charter, for a period of about 18 months to about 22 months. The net daily charter hire is calculated at an index linked rate based on the BCI TCE. In addition, the time charter provides us with the option to convert
the index linked rate to a fixed rate for a period of between 3 and 12 months priced at the then prevailing Capesize FFA for the selected period.
|
Key to Flags:
BA – Bahamas, IoM – Isle of Man, LIB – Liberia, MI – Marshall Islands.
We manage our vessel's operations, insurances and bunkering and have the general supervision of our
third-party technical and commercial managers.
V.Ships, an independent third party, provides technical management for our vessels that includes
general administrative and support services, such as crewing and other technical management, accounting related to vessels and provisions. Pursuant to our technical management agreements with V.Ships, we paid a monthly fee of $8,000 per vessel in
2018 and we are paying a monthly fee of about $8,200 per vessel since January 1, 2019 in exchange for V.Ships providing these technical, support and administrative services. The management fees do not cover expenses such as voyage expenses, vessel
operating expenses, maintenance expenses and crewing costs, which are reimbursed by us to V.Ships. The technical management agreements are for an indefinite period until terminated by either party, giving the other notice in writing, in which event
the applicable agreement shall terminate after one month from the date upon which such notice is received.
Seanergy Management has entered into a commercial management agreement with Fidelity, an independent
third party, pursuant to which Fidelity provides commercial management services for all of the vessels in our fleet. Fidelity serves as a commercial broker for Capesize vessels exclusively to us. Under the commercial management agreement, we have
agreed to pay the following fees to Fidelity, (i) an annual fee of EUR 120,000 net payable in twelve equal monthly payments and (ii) commission fees equal to 0.15% calculated on the collected gross hire/freight/demurrage payable when the relevant
hire/freight/demurrage is collected. The fees under (i) and (ii) are capped at $300,000 per year. The commercial management agreement may be terminated by either party upon giving one-month prior written notice to the other party
or by mutual written agreement without prior notice
.
Seanergy Management, our wholly owned subsidiary, provides us with certain other management services.
We have established a shipping committee. The purpose of the shipping committee is to consider and
vote upon all matters involving shipping and vessel finance in order to accelerate the pace of our decision making in respect of shipping business opportunities, such as the acquisition of vessels or companies. The shipping industry often demands
very prompt review and decision-making with respect to business opportunities. In recognition of this, and in order to best utilize the experience and skills that our directors bring to us, our board of directors has delegated all such matters to
the shipping committee. Transactions that involve the issuance of our securities or transactions that involve a related party, however, shall not be delegated to the shipping committee but instead shall be considered by the entire board of
directors. The shipping committee consists of three directors. In accordance with the amended and restated charter of the shipping committee, two of the directors on the shipping committee are nominated by Jelco and one of the directors on the
shipping committee is nominated by a majority of our board of directors and is an independent member of the board of directors. The members of the shipping committee are Mr. Stamatios Tsantanis and Ms. Christina Anagnostara, who are Jelco's
nominees, and Mr. Elias Culucundis, who is the nominee of the board of directors.
In order to assure the continued existence of the shipping committee, our board of directors has
agreed that the shipping committee may not be dissolved and that the duties or composition of the shipping committee may not be altered without the affirmative vote of not less than 80% of our board of directors. In addition, the duties of our
chief executive officer may not be altered without a similar vote. These duties and powers include voting the shares of stock that Seanergy owns in its subsidiaries. In addition to these agreements, we have amended certain provisions in our
articles of incorporation and by-laws to incorporate these requirements.
As a result of these various provisions, in general, all shipping-related decisions will be made by
Jelco's appointees to our board of directors unless 80% of the board members vote to change the duties or composition of the shipping committee.
Our strategy is to employ the majority of our vessels on the spot charter market, either through
voyage charter contracts and fixed-rate time charter contracts that are generally short term in nature, or through index-linked time charters where the daily time charter rates are based on the daily performance of the BCI TCE Vessel earnings in
the spot market are volatile and fluctuate on a seasonal and year-to-year basis. Fluctuations derive from imbalances in the availability of cargoes for shipment and the number of vessels available at any given time to transport these cargoes.
Vessels operating in the spot market generate revenue that is less predictable than those under time charters, but may enable us to capture increased profit margins during periods of improvements in drybulk vessel charter rates. Downturns in the
drybulk industry would result in a reduction in profit margins, and could lead to losses.
Three of our vessels are currently employed under time charters which have a daily charter hire based
on the BCI TCE, while we have also committed three additional vessels in similar chartering arrangements that will commence in the third
and/or fourth
quarter of
2019. In the future, we may opportunistically look to employ more of our vessels under time charter contracts with a fixed rate should the time-charter rates prevailing in the market align with our long-term return objectives.
Charter hire rates fluctuate by varying degrees among drybulk vessel size categories. The volume and
pattern of trade in a small number of commodities (major bulks) affect demand for larger vessels. Therefore, charter rates and vessel values of larger vessels often show greater volatility. Conversely, trade in a greater number of commodities
(minor bulks) drives demand for smaller drybulk vessels. Accordingly, charter rates and vessel values for those vessels are subject to less volatility.
Charter hire rates paid for drybulk vessels are primarily a function of the underlying balance
between vessel supply and demand, although at times other factors may play a role. Furthermore, the pattern seen in charter rates is broadly mirrored across the different charter types and the different drybulk vessel categories. However, because
demand for larger drybulk vessels is affected by the volume and pattern of trade in a relatively small number of commodities, charter hire rates (and vessel values) of larger ships tend to be more volatile than those for smaller vessels.
In the time charter market, rates vary depending on the length of the charter period and vessel
specific factors such as age, speed and fuel consumption.
In the voyage charter market, rates are influenced by cargo size, commodity, port dues and canal
transit fees, as well as commencement and termination regions. In general, a larger cargo size is quoted at a lower rate per ton than a smaller cargo size. Routes with costly ports or canals generally command higher rates than routes with low
port dues and no canals to transit. Voyages with a load port within a region that includes ports where vessels usually discharge cargo or a discharge port within a region with ports where vessels load cargo also are generally quoted at lower
rates, because such voyages generally increase vessel utilization by reducing the unloaded portion (or ballast leg) that is included in the calculation of the return charter to a loading area.
Within the drybulk shipping industry, the charter hire rate references most likely to be monitored
are the freight rate indices issued by the Baltic Exchange. These references are based on actual charter hire rates under charters entered into by market participants as well as daily assessments provided to the Baltic Exchange by a panel of major
shipbrokers.
We operate in markets that are highly competitive and based primarily on supply and demand. We
compete for charters on the basis of price, vessel location, size, age and condition of the vessel, as well as on its reputation. Fidelity negotiates the terms of our charters (whether voyage charters, period time charters, bareboat charters or
pools) based on market conditions. We compete primarily with other owners of drybulk vessels, many of which may have more resources than us and may operate vessels that are newer, and therefore more attractive to charterers than vessels we may
operate. Ownership of drybulk vessels is highly fragmented and is divided among publicly listed
companies
, state-controlled companies and independent drybulk
vessel owners. We compete primarily with owners of drybulk vessels in the Capesize class sizes. Some of our publicly listed competitors include Diana Shipping Inc. (NYSE: DSX), Genco Shipping & Trading Limited (NYSE: GNK), Safe Bulkers Inc.
(NYSE: SB), Scorpio Bulkers Inc. (NYSE: SALT), Star Bulk Carriers Corp. (NASDAQ: SBLK), Golden Ocean Group Ltd. (NASDAQ: GOGL).
Our customers include or have included national, regional and international companies. Customers
individually accounting for more than 10% of our revenues during the years ended December 31, 2018, 2017 and 2016 were:
Customer
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
A
|
|
|
26
|
%
|
|
|
17
|
%
|
|
|
-
|
|
B
|
|
|
21
|
%
|
|
|
-
|
|
|
|
18
|
%
|
C
|
|
|
11
|
%
|
|
|
17
|
%
|
|
|
-
|
|
D
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
%
|
Coal, iron ore and grains, which are the major bulks of the drybulk shipping industry, are somewhat
seasonal in nature. The energy markets primarily affect the demand for coal, with increases during hot summer periods when air conditioning and refrigeration require more electricity and towards the end of the calendar year in anticipation of the
forthcoming winter period. The demand for iron ore tends to decline in the summer months because many of the major steel users, such as automobile makers, reduce their level of production significantly during the summer holidays. Grain trades are
completely seasonal as they are driven by the harvest within a climate zone. Because three of the five largest grain producers (the United States of America, Canada and the European Union) are located in the northern hemisphere and the other two
(Argentina and Australia) are located in the southern hemisphere, harvests occur throughout the year and grains transportation requires drybulk shipping accordingly.
Environmental and Other Regulations in the Shipping Industry
Government regulation and laws significantly affect the ownership and operation of our fleet. We are
subject to international conventions and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate or are registered relating to safety and health and environmental protection including the
storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws, regulations and other requirements
entails significant expense, including vessel modifications and implementation of certain operating procedures.
A variety of government and private entities subject our vessels to both scheduled and unscheduled
inspections. These entities include the local port authorities (applicable national authorities such as the United States Coast Guard, or “USCG”, harbor master or equivalent), classification societies, flag state administrations (countries of
registry), terminal operators and charterers. Certain of these entities require us to obtain permits, licenses, certificates and other authorizations for the operation of our vessels. Failure to maintain necessary permits or approvals could require
us to incur substantial costs or result in the temporary suspension of the operation of one or more of our vessels.
Increasing environmental concerns have created a demand for vessels that conform to stricter
environmental standards. We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with United States and
international regulations. We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations
necessary for the conduct of our operations. However, because such laws and regulations frequently change and may impose increasingly stricter requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of
these requirements on the resale value or useful lives of our vessels. In addition, a future serious marine incident that causes significant adverse environmental impact could result in additional legislation or regulation that could negatively
affect our profitability.
International Maritime Organization
The IMO, the United Nations agency for maritime safety and the prevention of pollution by vessels,
has adopted the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto, collectively referred to as MARPOL 73/78 and herein as “MARPOL”, adopted the International Convention
for the Safety of Life at Sea of 1974, or SOLAS Convention, and the International Convention on Load Lines of 1966, or LL Convention. MARPOL establishes environmental standards relating to oil leakage or spilling, garbage management, sewage, air
emissions, the handling and disposal of noxious liquids and the handling of harmful substances in packaged forms. MARPOL is applicable to drybulk, tanker and LNG carriers, among other vessels, and is broken into six Annexes, each of which
regulates a different source of pollution. Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances carried in bulk in liquid or in packaged form, respectively; Annexes IV and V relate to sewage and garbage
management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately adopted by the IMO in September of 1997.
In 2013, the IMO’s Marine Environmental Protection Committee, or the MEPC, adopted a resolution
amending MARPOL Annex I Condition Assessment Scheme, or CAS. These amendments became effective on October 1, 2014 and require compliance with the 2011 International Code on the Enhanced Programme of Inspections during Surveys of Bulk Carriers and
Oil Tankers, or ESP Code, which provides for enhanced inspection programs. We may need to make certain financial expenditures to comply with these amendments.
Air Emissions
In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution from vessels.
Effective May 2005, Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from all commercial vessel exhausts and prohibits “deliberate emissions” of ozone depleting substances (such as halons and chlorofluorocarbons), emissions of
volatile compounds from cargo tanks, and the shipboard incineration of specific substances. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur
emissions, as explained below. Emissions of “volatile organic compounds” from certain vessels, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls, or PCBs)
are also prohibited. We believe that all our vessels are currently compliant in all material respects with these regulations.
The MEPC, adopted amendments to Annex VI regarding emissions of sulfur oxide, nitrogen oxide,
particulate matter and ozone depleting substances, which entered into force on July 1, 2010. The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained
in any fuel oil used on board ships. On October 27, 2016, at its 70th session, the MEPC agreed to implement a global 0.5% m/m sulfur oxide emissions limit (reduced from 3.50%) starting from January 1, 2020. This limitation can be met by using
low-sulfur compliant fuel oil, alternative fuels, or certain exhaust gas cleaning systems. Once the cap becomes effective, ships will be required to obtain bunker delivery notes and International Air Pollution Prevention, or IAPP, Certificates
from their flag states that specify sulfur content. Additionally, at MEPC 73, amendments to Annex VI to prohibit the carriage of bunkers above 0.5% sulfur on ships were adopted and will take effect on March 1, 2020. These regulations subject
ocean-going vessels to stringent emissions controls and may cause us to incur substantial costs.
Sulfur content standards are even stricter within certain “Emission Control Areas”, or ECAs. As of
January 1, 2015, ships operating within an ECA were not permitted to use fuel with sulfur content in excess of 0.1%. Amended Annex VI establishes procedures for designating new ECAs. Currently, the IMO has designated four ECAs, including specified
portions of the Baltic Sea area, North Sea area, North American area and United States Caribbean area. Ocean-going vessels in these areas will be subject to stringent emission controls and may cause us to incur additional costs. If other ECAs are
approved by the IMO, or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the U.S. Environmental Protection Agency, or EPA, or the states where we operate,
compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.
Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for
marine diesel engines, depending on their date of installation. At the MEPC meeting held in 2014, amendments to Annex VI were adopted which address the date on which Tier III Nitrogen Oxide (NOx) standards in ECAs will go into effect. Under the
amendments, Tier III NOx standards apply to ships that operate in the North American and U.S. Caribbean Sea ECAs designed for the control of NOx produced by vessels with a marine diesel engine installed and constructed on or after January 1, 2016.
Tier III requirements could apply to areas that will be designated for Tier III NOx in the future. At MEPC 70 and MEPC 71, the MEPC approved the North Sea and Baltic Sea as ECAs for nitrogen oxide for ships built after January 1, 2021. The EPA
promulgated equivalent (and in some senses stricter) emissions standards in late 2009.
As determined at the MEPC 70, the new Regulation 22A of MARPOL Annex VI became effective as of March
1, 2018 and requires ships above 5,000 gross tonnage to collect and report annual data on fuel oil consumption to an IMO database, with the first year of data collection commencing on January 1, 2019. The IMO intends to use such data as the first
step in its roadmap (through 2023) for developing its strategy to reduce greenhouse gas emissions from ships, as discussed further below.
As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for
ships. All ships are now required to develop and implement Ship Energy Efficiency Management Plans, or SEEMPS, and new ships must be designed in compliance with minimum energy efficiency levels per capacity mile as defined by the Energy Efficiency
Design Index, or EEDI. Under these measures, by 2025, all new ships built will be 30% more energy efficient than those built in 2014.
We may incur costs to comply with these revised standards. Additional or new conventions, laws and
regulations may be adopted that could require the installation of expensive emission control systems and could adversely affect our business, results of operations, cash flows and financial condition.
Safety Management System Requirements
The SOLAS Convention was amended to address the safe manning of vessels and emergency training
drills. The Convention of Limitation of Liability for Maritime Claims, or the LLMC, sets limitations of liability for a loss of life or personal injury claim or a property claim against ship owners. We believe that our vessels are in substantial
compliance with SOLAS and LLMC standards.
Under Chapter IX of the SOLAS Convention, or the International Safety Management Code for the Safe
Operation of Ships and for Pollution Prevention, or the ISM Code, our operations are also subject to environmental standards and requirements. The ISM Code requires the party with operational control of a vessel to develop an extensive safety
management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. We
rely upon the safety management system that we and our technical management team have developed for compliance with the ISM Code.
The failure of a vessel owner or
bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
The ISM Code requires that vessel operators obtain a safety management certificate for each vessel
they operate. This certificate evidences compliance by a vessel’s management with the ISM Code requirements for a safety management system. No vessel can obtain a safety management certificate unless its manager has been awarded a document of
compliance, issued by each flag state, under the ISM Code.
We have obtained applicable documents of compliance for our offices and safety management certificates
for all of our vessels for which the certificates are required by the IMO. The document of compliance and safety management certificate are renewed as required.
Amendments to the SOLAS Convention Chapter VII apply to vessels transporting dangerous goods and
require those vessels be in compliance with the International Maritime Dangerous Goods Code, or IMDG Code. Effective January 1, 2018, the IMDG Code includes (1) updates to the provisions for radioactive material, reflecting the latest provisions
from the International Atomic Energy Agency, (2) new marking, packing and classification requirements for dangerous goods, and (3) new mandatory training requirements.
The IMO has also adopted the International Convention on Standards of Training, Certification and
Watchkeeping for Seafarers, or STCW. As of February 2017, all seafarers are required to meet the STCW standards and be in possession of a valid STCW certificate. Flag states that have ratified SOLAS and STCW generally employ the classification
societies, which have incorporated SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance.
Furthermore, recent action by the IMO’s Maritime Safety Committee and United States agencies indicate
that cybersecurity regulations for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats. For example, cyber-risk management systems must be incorporated by ship-owners and
managers by 2021. This might cause companies to create additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. The impact of such regulations is hard to predict at this time.
Pollution Control and Liability Requirements
The IMO has negotiated international conventions that impose liability for pollution in international
waters and the territorial waters of the signatories to such conventions. For example, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, in 2004. The BWM
Convention entered into force on September 9, 2017. The BWM Convention requires ships to manage their ballast water to remove, render harmless, or avoid the uptake or discharge of new or invasive aquatic organisms and pathogens within ballast
water and sediments. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits, and require all ships to carry a
ballast water record book and an international ballast Water management certificate.
On December 4, 2013, the IMO Assembly passed a resolution revising the application dates of BWM
Convention so that the dates are triggered by the entry into force date and not the dates originally in the BWM Convention. This, in effect, designates all vessels delivered before the entry into force date as “existing vessels” and allows for the
installation of ballast water management systems on such vessels at the first International Oil Pollution Prevention, or IOPP, renewal survey following entry into force of the convention. The MEPC adopted updated guidelines for approval of ballast
water management systems (G8) at MEPC 70. At MEPC 71, the schedule regarding the BWM Convention’s implementation dates was also discussed and amendments were introduced to extend the date existing vessels are subject to certain ballast water
standards. Ships over 400 gross tons generally must comply with a “D-1 standard”, requiring the exchange of ballast water only in open seas and away from coastal waters. The “D-2 standard” specifies the maximum amount of viable organisms allowed
to be discharged, and compliance dates vary depending on the IOPP renewal dates. Depending on the date of the IOPP renewal survey, existing vessels must comply with the D-2 standard on or after September 8, 2019. For most ships, compliance with the
D-2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. Ballast Water Management systems, which include systems that make use of chemical, biocides, organisms or biological mechanisms, or
which alter the chemical or physical characteristics of the Ballast Water, must be approved in accordance with IMO Guidelines (Regulation D-3). Costs of compliance with these regulations may be substantial.
Once mid-ocean ballast exchange ballast water treatment requirements become mandatory under the BWM
Convention, the cost of compliance could increase for ocean carriers and may have a material effect on our operations. However, many countries already regulate the discharge of ballast water carried by vessels from country to country to prevent the
introduction of invasive and harmful species via such discharges. The U.S., for example, requires vessels entering its waters from another country to conduct mid-ocean ballast exchange, or undertake some alternate measure, and to comply with
certain reporting requirements.
The IMO also adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage,
or the Bunker Convention, to impose strict liability on ship owners (including the registered owner, bareboat charterer, manager or operator) for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The
Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding
the amount calculated in accordance with the LLMC). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction
where the events or damages occur.
Ships are required to maintain a certificate attesting that they maintain adequate insurance to cover
an incident. In jurisdictions such as the United States where the Bunker Convention has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or on a strict-liability basis.
Anti‑Fouling Requirements
In 2001, the IMO adopted the International Convention on the Control of Harmful Anti‑fouling Systems
on Ships, or the “Anti‑fouling Convention”. The Anti‑fouling Convention, which entered into force on September 17, 2008, prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of
vessels. Vessels of over 400 gross tons engaged in international voyages will also be required to undergo an initial survey before the vessel is put into service or before an International Anti‑fouling System Certificate is issued for the first
time; and subsequent surveys when the anti‑fouling systems are altered or replaced. We have obtained Anti‑fouling System Certificates for all of our vessels that are subject to the Anti‑fouling Convention.
Compliance Enforcement
Noncompliance with the ISM Code or other IMO regulations may subject the ship owner or bareboat
charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. The USCG and European Union authorities have indicated that vessels
not in compliance with the ISM Code by applicable deadlines will be prohibited from trading in U.S. and European Union ports, respectively. As of the date of this prospectus, each of our vessels is ISM Code certified.
However, there can be no assurance that such certificates will be maintained in the future
.
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations might have on our operations.
United States Regulations
The U.S. Oil Pollution Act of 1990 and the Comprehensive Environmental Response, Compensation and
Liability Act
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime
for the protection and cleanup of the environment from oil spills. OPA affects all “owners and operators” whose vessels trade or operate within the U.S., its territories and possessions or whose vessels operate in U.S. waters, which includes the
U.S.’s territorial sea and its 200 nautical mile exclusive economic zone around the U.S. The U.S. has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous
substances other than oil, except in limited circumstances, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person owning, operating or chartering by demise, the vessel. Both OPA and
CERCLA impact our operations.
Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and
strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their
vessels, including bunkers (fuel). OPA defines these other damages broadly to include:
(i)
injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
(ii)
injury to, or economic losses resulting from, the destruction of real and personal property;
(iii)
loss of subsistence use of natural resources that are injured, destroyed or lost;
(iv)
net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or
natural resources;
(v)
lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
(vi)
net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from
fire, safety or health hazards, and loss of subsistence use of natural resources.
OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup
costs. Effective December 21, 2015, the USCG adjusted the limits of OPA liability for non-tank vessels, edible oil tank vessels, and any oil spill response vessels, to the greater of $1,100 per gross ton or $939,800 (subject to periodic adjustment
for inflation). These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person
acting pursuant to a contractual relationship), or a responsible party's gross negligence or willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the
responsible party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water
Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for
cleanup, removal and remedial costs, as well as damages for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing the same, and health assessments or health effects studies. There is no
liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 million for vessels
carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat
of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability also does
not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.
OPA and CERCLA each preserve the right to recover damages under existing law, including maritime tort
law. OPA and CERCLA both require owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be
subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We comply and plan to comply going forward with the USCG’s
financial responsibility regulations by providing applicable certificates of financial responsibility.
The 2010
Deepwater Horizon
oil spill in the Gulf of Mexico resulted in additional regulatory initiatives or statutes, including higher liability caps under OPA, new regulations regarding offshore oil and gas drilling, and a pilot
inspection program for offshore facilities. However, several of these initiatives and regulations have been or may be revised. For example, the U.S. Bureau of Safety and Environmental Enforcement’s , or BSEE, revised Production Safety Systems
Rule, or PSSR, effective on December 27, 2018, modified and relaxed certain environmental and safety protections under the 2016 PSSR. Additionally, the BSEE released proposed changes to the Well Control Rule, which could roll back certain reforms
regarding the safety of drilling operations, and the U.S. President proposed leasing new sections of U.S. waters to oil and gas companies for offshore drilling, expanding the U.S. waters that are available for such activity over the next five
years. The effects of these proposals are currently unknown. Compliance with any new requirements of OPA and future legislation or regulations applicable to the operation of our vessels could negatively impact the cost of our operations and
adversely affect our business.
OPA specifically permits individual states to impose their own liability regimes with regard to oil
pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA and some states have enacted legislation providing for unlimited liability for oil spills. Many U.S. states
that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more
stringent than U.S. federal law. Moreover, some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters, although in some cases, states which have enacted this type of legislation have not
yet issued implementing regulations defining vessel owners’ responsibilities under these laws. The Company intends to comply with all applicable state regulations in the ports where the Company’s vessels call.
We currently maintain pollution liability coverage insurance in the amount of $1 billion per incident
for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage, that could have an adverse effect on our business and results of operation.
Other United States Environmental Initiatives
The U.S. Clean Air Act of 1970 (including its amendments of 1977 and 1990), or CAA, requires the EPA
to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. The CAA requires states to adopt State Implementation Plans, or SIPs, some of which regulate emissions resulting from vessel loading and
unloading operations which may affect our vessels.
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil, hazardous substances and ballast
water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal,
remediation and damages and complements the remedies available under OPA and CERCLA. In 2015, the EPA expanded the definition of “waters of the United States”, or WOTUS, thereby expanding federal authority under the CWA. Following litigation on
the revised WOTUS rule, in December 2018, the EPA and Department of the Army proposed a revised, limited definition of “waters of the United States”. In February 2018, the Army Corps of Engineers and EPA finalized a rule that would establish an
applicability date of February 2020 for the 2015 Rule defining “waters of the United States”, but two district courts subsequently enjoined and vacated this rule. On March 8, 2019, the U.S. Federal Government withdrew its notices of appeal before
the U.S. Courts of Appeals regarding lower court decisions enjoining and vacating the agencies’ 2018 Applicability Date Rule. The effect of this proposal on U.S. environmental regulations is still unknown.
The EPA and the USCG have also enacted rules relating to ballast water discharge, compliance with
which requires the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial costs, and/or otherwise restrict
our vessels from entering U.S. Waters. The EPA will regulate these ballast water discharges and other discharges incidental to the normal operation of certain vessels within United States waters pursuant to the Vessel Incidental Discharge Act, or
VIDA, which was signed into law on December 4, 2018 and will replace the 2013 Vessel General Permit, or VGP, program (which authorizes discharges incidental to operations of commercial vessels and contains numeric ballast water discharge limits for
most vessels to reduce the risk of invasive species in U.S. waters, stringent requirements for exhaust gas scrubbers, and requirements for the use of environmentally acceptable lubricants) and current Coast Guard ballast water management
regulations adopted under the U.S. National Invasive Species Act, or NISA, such as mid-ocean ballast exchange programs and installation of approved USCG technology for all vessels equipped with ballast water tanks bound for U.S. ports or entering
U.S. waters. VIDA establishes a new framework for the regulation of vessel incidental discharges under Clean Water Act (CWA), requires the EPA to develop performance standards for those discharges within two years of enactment, and requires the
U.S. Coast Guard to develop implementation, compliance, and enforcement regulations within two years of EPA’s promulgation of standards. Under VIDA, all provisions of the 2013 VGP and USCG regulations regarding ballast water treatment remain in
force and effect until the EPA and U.S. Coast Guard regulations are finalized. Non-military, non-recreational vessels greater than 79 feet in length must continue to comply with the requirements of the VGP, including submission of a Notice of
Intent, or NOI, or retention of a PARI form and submission of annual reports. We have submitted NOIs for our vessels where required. Compliance with the EPA, U.S. Coast Guard and state regulations could require the installation of ballast water
treatment equipment on our vessels or the implementation of other port facility disposal procedures at potentially substantial cost or may otherwise restrict our vessels from entering U.S. waters.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit
ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding
and abetting the discharge of a polluting substance may also lead to criminal penalties. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship
is in danger. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. Regulation (EU) 2015/757 of the European Parliament and of the Council of 29 April 2015 (amending EU Directive
2009/16/EC) governs the monitoring, reporting and verification of carbon dioxide emissions from maritime transport, and, subject to some exclusions, requires companies with ships over 5,000 gross tonnage to monitor and report carbon dioxide
emissions annually starting on January 1, 2018, which may cause us to incur additional expenses.
The European Union has adopted several regulations and directives requiring, among other things, more
frequent inspections of high-risk ships, as determined by type, age, and flag as well as the number of times the ship has been detained. The European Union also adopted and extended a ban on substandard ships and enacted a minimum ban period and a
definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty
payments for organizations that failed to comply. Furthermore, the EU has implemented regulations requiring vessels to use reduced sulfur content fuel for their main and auxiliary engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC)
introduced requirements parallel to those in Annex VI relating to the sulfur content of marine fuels. In addition, the EU imposed a 0.1% maximum sulfur requirement for fuel used by ships at berth in EU ports.
International Labour Organization
The International Labor Organization, or the ILO, is a specialized agency of the UN that has adopted
the Maritime Labor Convention 2006, or MLC 2006. A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. We believe
that all our vessels are in substantial compliance with and are certified to meet MLC 2006.
Greenhouse Gas Regulation
Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto
Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions with targets
extended through 2020. International negotiations are continuing with respect to a successor to the Kyoto Protocol, and restrictions on shipping emissions may be included in any new treaty. In December 2009, more than 27 nations, including the
U.S. and China, signed the Copenhagen Accord, which includes a non-binding commitment to reduce greenhouse gas emissions. The 2015 United Nations Climate Change Conference in Paris resulted in the Paris Agreement, which entered into force on
November 4, 2016 and does not directly limit greenhouse gas emissions from ships. On June 1, 2017, the U.S. President announced that the United States intends to withdraw from the Paris Agreement. The timing and effect of such action has yet to
be determined, but the Paris Agreement provides for a four-year exit process.
At MEPC 70 and MEPC 71, a draft outline of the structure of the initial strategy for developing a
comprehensive IMO strategy on reduction of greenhouse gas emissions from ships was approved. In accordance with this roadmap, in April 2018, nations at the MEPC 72 adopted an initial strategy to reduce greenhouse gas emissions from ships. The
initial strategy identifies “levels of ambition” to reducing greenhouse gas emissions, including (1) decreasing the carbon intensity from ships through implementation of further phases of the EEDI for new ships; (2) reducing carbon dioxide
emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 emission levels; and (3) reducing the total annual greenhouse emissions by at least 50% by
2050 compared to 2008 while pursuing efforts towards phasing them out entirely. The initial strategy notes that technological innovation, alternative fuels and/or energy sources for international shipping will be integral to achieve the overall
ambition. These regulations could cause us to incur additional substantial expenses.
The EU made a unilateral commitment to reduce overall greenhouse gas emissions from its member states
from 20% of 1990 levels by 2020. The EU also committed to reduce its emissions by 20% under the Kyoto Protocol’s second period from 2013 to 2020. As of January 2018, large ships calling at EU ports have been required to collect and publish data on
carbon dioxide emissions and other information.
In the United States, the EPA issued a finding that greenhouse gases endanger the public health and
safety, adopted regulations to limit greenhouse gas emissions from certain mobile sources, and proposed regulations to limit greenhouse gas emissions from large stationary sources. However, in March 2017, the U.S. President signed an executive
order to review and possibly eliminate the EPA’s plan to cut greenhouse gas emissions. The EPA or individual U.S. states could enact environmental regulations that could negatively affect our operations.
Any passage of climate control legislation or other regulatory initiatives by the IMO, the EU, the
U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol or Paris Agreement, that restricts emissions of greenhouse gases could require us to make significant expenditures which we
cannot predict with certainty at this time. Even in the absence of climate control legislation, our business may be indirectly affected to the extent that climate change may result in sea level changes or certain weather events.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001 in the United States, there have been a variety of
initiatives intended to enhance vessel security such as the U.S. Maritime Transportation Security Act of 2002, or MTSA. To implement certain portions of the MTSA, the USCG issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of the United States and at certain ports and facilities, some of which are regulated by the EPA.
Similarly, Chapter XI-2 of the SOLAS Convention imposes detailed security obligations on vessels and
port authorities and mandates compliance with the International Ship and Port Facilities Security Code, or the ISPS Code. The ISPS Code is designed to enhance the security of ports and ships against terrorism. To trade internationally, a vessel
must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel’s flag state. Ships operating without a valid certificate may be detained, expelled from, or refused entry at port until
they obtain an ISSC. The various requirements, some of which are found in the SOLAS Convention, include, for example, on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related
information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status; on-board installation of ship security alert systems, which do not sound on the vessel
but only alert the authorities on shore; the development of vessel security plans; ship identification number to be permanently marked on a vessel’s hull; a continuous synopsis record kept onboard showing a vessel's history including the name of
the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship's identification number, the port at which the ship is registered and the name of the registered owner(s) and their
registered address; and compliance with flag state security certification requirements.
The USCG regulations, intended to align with international maritime security standards, exempt
non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid ISSC that attests to the vessel’s compliance with the SOLAS Convention security requirements and the ISPS Code. Future security measures could have a
significant negative financial impact on us. We intend to comply with the various security measures addressed by MTSA, the SOLAS Convention and the ISPS Code.
The cost of vessel security measures has also been affected by the escalation in the frequency of
acts of piracy against ships, notably off the coast of Somalia, including the Gulf of Aden and Arabian Sea area. Substantial loss of revenue and other costs may be incurred as a result of detention of a vessel or additional security measures, and
the risk of uninsured losses could significantly and negatively affect our business. Costs may be incurred in taking additional security measures in accordance with Best Management Practices to Deter Piracy, notably those contained in the BMP5
industry standard.
Inspection by Classification Societies
The hull and machinery of every commercial vessel must be classed by a classification society
authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and SOLAS. Most insurance underwriters
make it a condition for insurance coverage and lending that a vessel be certified “in class” by a classification society which is a member of the International Association of Classification Societies, the IACS. The IACS has adopted harmonized
Common Structural Rules, or the Rules, which apply to oil tankers and bulk carriers constructed on or after July 1, 2015. The Rules attempt to create a level of consistency between IACS Societies. All of our vessels are certified as being “in
class” by all the applicable Classification Societies (e.g., American Bureau of Shipping, Lloyd's Register of Shipping, Bureau Veritas).
A vessel must undergo annual surveys, intermediate surveys, drydockings and special surveys. In lieu
of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydocked every 30 to 36 months for inspection of
the underwater parts of the vessel. If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and
uninsurable which could cause us to be in violation of certain covenants in our loan agreements. Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on our financial condition
and results of operations.
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical failure, physical damage,
collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, piracy incidents, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster,
including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon shipowners, operators and bareboat charterers of any
vessel trading in the exclusive economic zone of the United States for certain oil pollution accidents in the United States, has made liability insurance more expensive for shipowners and operators trading in the United States market. We carry
insurance coverage as customary in the shipping industry. However, not all risks can be insured, specific claims may be rejected and we might not be always able to obtain adequate insurance coverage at reasonable rates.
Hull & Machinery and War Risks Insurance
We maintain marine hull and machinery and war risks insurances, which include the risk of actual or
constructive total loss, for all of our vessels. Each of our vessels is covered up to at least fair market value with deductibles of $150,000 per vessel per incident. We also maintain increased value coverage for our vessels. Under this
increased value coverage, in the event of total loss of a vessel, we will be able to recover the sum insured under the increased value policy in addition to the sum insured under the hull and machinery policy. Increased value insurance also covers
excess liabilities which are not recoverable under our hull and machinery policy by reason of under insurance.
Protection and Indemnity Insurance
Protection and indemnity insurance, provided by mutual protection and indemnity associations, or
P&I Associations, covers our third-party liabilities in connection with our shipping activities. This includes third-party liability and other related expenses of injury or death of crew, passengers and other third parties, loss or damage to
cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances, and salvage, towing and other related costs, including wreck removal. Protection and indemnity insurance
is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations, or “clubs”.
Our coverage is limited to approximately $3.1 billion, except for oil pollution liabilities which is
limited to $1 billion. The 13 P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. The
International Group’s website states that the Pool provides a mechanism for sharing all claims in excess of US$ 10 million up to, currently, approximately US$ 8.2 billion. As a member of a P&I Association, which is a member of the
International Group, we are subject to calls payable to the associations based on our claim records as well as the claim records of all other members of the individual associations and members of the shipping pool of P&I Associations comprising
the International Group.
Permits and Authorizations
We are required by various governmental and quasi-governmental agencies to obtain certain permits,
licenses and certificates with respect to our vessels. The kinds of permits, licenses and certificates required depend upon several factors, including the commodity transported, the waters in which the vessel operates, the nationality of the
vessel's crew and the age of a vessel. We believe that we have obtained all permits, licenses and certificates currently required to permit our vessels to operate as planned. Additional laws and regulations, environmental or otherwise, may be
adopted which could limit our ability to do business or increase the cost of us doing business in the future.
Property, Plants and Equipment
We do not own any real estate property. As of April 2018, we
moved into new office spaces under a five-year lease term, with an option to extend the lease term for another five years
.
We have previously reported that between 2010 and 2017 certain of our then shareholders, including
our former Chairman that served between 2008 to 2010, had brought suits in Greece against certain other shareholders of the Company, our former Chief Financial Officer, and such Chairman’s immediate successor to the board of directors. The
plaintiffs withdrew their suits filed in 2010 and 2014 and therefore these are now closed.
The hearing of the only two remaining suits that were filed in 2017 against, amongst other, the
former Chairman’s immediate successor, took place on November 15, 2018 and the court’s decision is now expected to be issued. These suits seek damages from the defendants (including our former Chairman) for alleged willful misconduct that
purportedly caused the plaintiffs damage both by way of diminution of the value of their shares in the Company and harm to their reputations. Our former Chairman has advised us that he does not believe the action has any merit.
Neither we nor our Directors nor our current Chairman is named in any of these 2017 actions. We have
also notified our insurance underwriters of these actions, and our underwriters are advancing a portion of the defendants' legal expenses.
Various claims, suits, and complaints, including those involving government regulations and product
liability, arise in the ordinary course of the shipping business. Other than the proceedings mentioned above, we are not a party to any material litigation where claims or counterclaims have been filed against us other than routine legal
proceedings incidental to our business.