NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation and General Information
The accompanying condensed consolidated financial statements include the accounts of Eagle Bulk Shipping Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or similar terms). The Company is engaged in the ocean transportation of dry bulk cargoes worldwide through the ownership, charter and operation of dry bulk vessels. The Company’s fleet is comprised of Supramax and Ultramax dry bulk carriers and the Company operates its business in one business segment.
As of June 30, 2017, the Company owned and operated a modern fleet of 46 oceangoing vessels, 38 Supramax and 8 Ultramax vessels with a combined carrying capacity of 2,600,542 dwt and an average age of approximately 7.7 years
excluding vessels held for sale
.
Additionally, the Company chartered-in a 37,000 dwt newbuilding Japanese vessel that was delivered in October 2014 for seven years with an option for one additional year. On May 10, 2017, the Company signed an agreement to cancel this existing time charter contract. The Company agreed to pay a lump sum termination fee of $1.5 million relating to the cancellation. At the same time, the Company entered into an agreement with the same lessor, effective April 28, 2017, to charter in a 61,400 dwt, 2013 built Japanese vessel for approximately four years (having the same redelivery dates as the aforementioned canceled charter) with options for two additional years. The hire rate for the first four years is $12,800 per day and the hire rate for the first optional year is $13,800 per day and $14,300 per day for the second optional year. The $1.5 million early termination fee was accounted for as a reduction of fair value below time charters acquired in the condensed consolidated balance sheet as of June 30, 2017.
For the three and six-month periods ended June 30, 2017 and 2016, the Company’s charterers did not individually account for more than 10% of the Company’s gross charter revenue during those periods.
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and the rules and regulations of the SEC which apply to interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes normally included in consolidated financial statements prepared in conformity with U.S. GAAP. They should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K, filed with the SEC on March 31, 2017.
The accompanying condensed consolidated financial statements are unaudited and include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its condensed consolidated financial position and results of operations for the interim periods presented. Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to current period's presentation. Specifically, reclassifications were made in the prior year's condensed consolidated statement of operations for three and six-month periods ended June 30, 2016 to combine the captions loss on vessels held for sale of $115,000 and loss on sale of vessels of $286,210. The unrealized loss on derivatives on the condensed consolidated statement of cash flows for the six months ended June 30, 2016 has been separately presented in the adjustments to reconcile net loss to net cash used in operating activities.
The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year.
We adopted the provisions of Accounting Standard Update (“ASU”) 2015-11 “Simplifying the Measurement of Inventory”, issued by the Financial Accounting Standards Board (“FASB”) as of January 1, 2017. Accordingly, we report our bunker inventory at lower of cost and net realizable value. There is no impact on the condensed consolidated financial statements because of the adoption of the new accounting standard.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company are useful lives of fixed assets, the period of amortization, asset impairment, and stock-based compensation.
Note 2. Equity Offerings
On December 13, 2016, the Company entered into a Stock Purchase Agreement with certain investors (the “Investors”), pursuant to which the Company agreed to issue to the Investors in a private placement exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act (the “December Private Placement”) approximately 22.2 million shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $4.50 per share, for aggregate gross proceeds of $100.0 million. On January 20, 2017, the Company closed the previously announced December Private Placement for aggregate net proceeds of $96.0 million. The Company principally used the proceeds to acquire two Ultramax vessels and for a portion of the payments required to acquire the Greenship Vessels (as defined in "Note 5 Debt - Ultraco Debt Facility" to the condensed consolidated financial statements).
Note 3. New Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers. This update provides further guidance on applying collectability criterion to assess whether the contract is valid and represents a substantive transaction on the basis whether a customer has the ability and intention to pay the promised consideration. The requirements of this standard include an increase in required disclosures. Management has assembled an internal project team and
is currently analyzing contracts with our customers covering
the significant streams
of the Company's annual revenues under the provisions of the new standard as well as changes
necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting. Management
will apply the modified retrospective transition method and will recognize
the cumulative effect of adopting this standard as an adjustment to the opening balance of retained earnings as of January 1, 2018. Prior periods will not be retrospectively adjusted. The Company continues to make progress in its implementation and assessment of the new revenue standard. While the assessment is still ongoing, based on the progress made to date, the Company expects that the
timing of recognition of revenue for certain ongoing charter contracts will be impacted as well as the timing of recognition of certain voyage related costs. The Company is also evaluating the presentation of revenue in its condensed consolidated statement of operations after the adoption of ASU 2014-09
.
In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. A lessee will be required to recognize on the balance sheet the assets and liabilities for leases with lease terms of more than 12 months. Accounting by lessors will remain largely unchanged from current U.S. GAAP. The requirements of this standard include an increase in required disclosures. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The Company is currently evaluating the effect that adopting this standard will have on our financial statements and related disclosures. Management expects that the Company will recognize increases in reported amounts for vessel and other fixed assets and related lease liabilities upon adoption of the new standard. Refer to “Note 7. Commitments and Contingencies” to the condensed consolidated financial statements for disclosure about the Company’s time charter and lease commitments as of June 30, 2017.
Note 4. Vessels
Vessel and Vessel Improvements
As of June 30, 2017, the Company’s owned operating fleet consisted of 46 dry bulk vessels.
On November 14, 2016, the Company, through its subsidiary Eagle Bulk Shipco LLC, signed a memorandum of agreement to acquire a 2017 built 64,000 dwt SDARI-64 Ultramax dry bulk vessel constructed at Chengxi Shipyard Co., Ltd for $17.9 million. The Company took delivery of the vessel, the Singapore Eagle, on January 11, 2017.
On January 6, 2017, the Company sold the vessel Redwing for $5.8 million, after brokerage commissions and associated selling expenses, and recorded a net gain of approximately $0.1 million.The vessel was classified as an asset held for sale as of December 31, 2016. A portion of the proceeds was used towards repayment of the term loan under the First Lien Facility (as defined herein).
On February 28, 2017, Ultraco, a wholly-owned subsidiary of the Company, entered into a framework agreement with Greenship Bulk Manager Pte. Ltd., as Trustee-Manager of Greenship Bulk Trust, a Norwegian OTC-listed entity (the "Greenship Sellers"), for the purchase of nine modern sister vessels built between 2012 and 2015, the Greenship Vessels (the "Greenship Purchase Agreement"). The aggregate purchase price for the nine Greenship Vessels is $153.0 million. The allocated purchase price for each Greenship Vessel is $17.0 million. The Company took delivery of six of the nine Greenship Vessels during the second quarter and is expected to take delivery of the remaining Greenship Vessels in the third quarter of 2017. As of June 30, 2017, the Company paid a deposit of $20.8 million towards the delivery of the remaining three Greenship Vessels.
On March 15, 2017, the Company sold the vessel Sparrow for $4.8 million after brokerage commissions and associated selling expenses, and recorded a net gain of approximately $1.8 million. The vessel was classified as an asset held for sale as of March 31, 2017. A portion of the proceeds was used towards repayment of the term loan under the First Lien Facility.
On May 31, 2017, the Company signed a memorandum of agreement to sell the vessel Woodstar for $7.8 million after brokerage commissions and associated selling expenses. The vessel is expected to be delivered to the buyers in the third quarter of 2017. The Company expects to recognize a gain of $0.2 million. A portion of the proceeds will be used towards repayment of the term loan under the First Lien Facility (as defined in "Note 5 Debt" to the condensed consolidated financial statements). As of June 30, 2017, the Company reported the carrying amount of the vessel as a current asset in its condensed consolidated balance sheet.
On June 15, 2017, the Company signed a memorandum of agreement to sell the vessel Wren for $7.6 million after brokerage commissions and associated selling expenses. The vessel is expected to be delivered to the buyers in the fourth quarter of 2017. The Company expects to recognize a gain of $0.05 million. A portion of the proceeds will be used towards repayment of the term loan under the First Lien Facility. Please refer to “Note 5 Debt—First Lien Facility” to the condensed consolidated financial statements. As of June 30, 2017, the Company reported the carrying amount of the vessel as a current asset in its condensed consolidated balance sheet.
Vessel and vessel improvements consist of the following:
Vessels and Vessel Improvements, at December 31, 2016
|
|
$
|
567,592,950
|
|
Advance paid for purchase of Singapore Eagle at December 31, 2016
|
|
|
1,926,886
|
|
Purchase of Vessels and Vessel Improvements
|
|
|
121,331,815
|
|
Transfer to vessels held for sale
|
|
|
(15,210,204
|
)
|
Vessel depreciation expense
|
|
|
(13,461,924
|
)
|
Vessels and Vessel Improvements, at June 30, 2017
|
|
$
|
662,179,523
|
|
Note 5. Debt
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
First Lien Facility
|
|
$
|
203,805,750
|
|
|
$
|
209,099,000
|
|
Debt issuance costs - First Lien
|
|
|
(3,891,794
|
)
|
|
|
(4,746,682
|
)
|
First Lien Facility, net of debt issuance costs
|
|
|
199,913,956
|
|
|
|
204,352,318
|
|
Second Lien Facility
|
|
|
72,305,062
|
|
|
|
67,327,843
|
|
Debt discount and Debt issuance costs - Second Lien Facility
|
|
|
(13,689,557
|
)
|
|
|
(15,736,617
|
)
|
Second Lien Facility, net of Debt issuance costs and debt discount
|
|
|
58,615,505
|
|
|
|
51,591,226
|
|
Ultraco Debt Facility
|
|
|
40,000,000
|
|
|
|
—
|
|
Debt discount and debt issuance costs - Ultraco debt facility
|
|
|
(1,493,000
|
)
|
|
|
—
|
|
|
|
|
38,507,000
|
|
|
|
—
|
|
Total debt
|
|
$
|
297,036,461
|
|
|
$
|
255,943,544
|
|
First Lien Facility
On March 30, 2016, Eagle Shipping LLC, a limited liability company organized under the laws of the Marshall Islands (“Eagle Shipping”), as borrower, and certain of its subsidiaries that were guarantors of the Company’s obligations under the Company’s senior secured credit facility (the “Exit Financing Facility”), as guarantors, entered into an Amended and Restated First Lien Loan Agreement (the “A&R First Lien Loan Agreement”) with the lenders thereunder (the “First Lien Lenders”) and ABN AMRO Capital USA LLC, as agent and security trustee for the lenders. The A&R First Lien Loan Agreement amends and restates the Exit Financing Facility in its entirety, provides for Eagle Shipping to be the borrower in the place of the Company, and further provides for a waiver of any and all events of default occurring as a result of the voluntary OFAC Disclosure (as defined in “Note 7
Commitments and Contingencies - Legal Proceedings” to the condensed consolidated financial statements). The A&R First Lien Loan Agreement provides for a term loan
in the amount of $201,468,750 after giving effect to the entry into the A&R First Lien Loan Agreement and the Second Lien Loan Agreement (as defined below) as well as a $50,000,000 revolving credit facility, of which $10,000,000 was undrawn as of March 30, 2016 (the term loan, together with the revolving credit facility, the “First Lien Facility”). The First Lien Facility matures on October 15, 2019. An aggregate fee of $600,000 was paid to the agent and First Lien Lenders in connection with the First Lien Facility on March 30, 2016
.
As of June 30, 2017, Eagle Shipping’s total availability in the revolving credit facility under the First Lien Facility was $25,000,000.
The A&R First Lien Loan Agreement contains financial covenants requiring Eagle Shipping, among other things, to ensure that the aggregate market value of the vessels in Eagle Shipping’s fleet (plus the value of certain additional collateral) at all times on or after July 1, 2017 does not fall below 100% in the third and fourth quarters of 2017, 110% in 2018 and 120% in 2019 of the aggregate principal amount of debt outstanding (subject to certain adjustments) under the First Lien Facility and maintain minimum liquidity of not less than the greater of (i) $8,140,000 and (ii) $185,000 per vessel in Eagle Shipping’s fleet. In addition, the A&R First Lien Loan Agreement imposes operating restrictions on Eagle Shipping including limiting Eagle Shipping’s ability to, among other things: incur additional indebtedness; create liens on assets; acquire and sell capital assets (including vessels); and merge or consolidate with, or transfer all or substantially all of Eagle Shipping’s assets to, another person. The A&R First Lien Loan Agreement also includes customary events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation or warranty, a cross-default to other indebtedness and non-compliance with security documents. Further, there would be a default if any event occurs or circumstances arise in light of which, in the First Lien Lenders’ judgment, there is significant risk that Eagle Shipping is or would become insolvent. Eagle Shipping is not permitted to pay dividends. Indebtedness under the First Lien Facility may also be accelerated if Eagle Shipping experiences a change of control.
Upon entering into the A&R First Lien Loan Agreement on March 30, 2016
, Eagle Shipping paid three quarters of amortization payments with respect to the term loan under the First Lien Facility in the aggregate amount of $11,718,750, paid down $30,158,500, a portion of the amount outstanding in respect of the revolving credit facility under the First Lien Facility, maintained a minimum liquidity of $8,140,000 and added cash to the balance sheet. In addition, Eagle Shipping paid the first quarter amortization of $3,906,250 under the previously outstanding Exit Financing Facility. On June 30, 2017, December 31, 2017, June 30, 2018 and December 31, 2018 (each, a “Semi-Annual Determination Date”), Eagle Shipping is obligated to repay the term loan under the First Lien Facility in an amount equal to 75% of Eagle Shipping’s excess cash flow for the two fiscal quarters ended as of such Semi-Annual Determination Date, subject to a cap of such mandatory prepayments of $15,625,000 in any fiscal year. For the two fiscal quarters ended June 30, 2017, there was no excess cash flow and therefore no repayment of the term loan was made under the First Lien Facility. Thereafter, Eagle Shipping will make payments of $3,906,250 on January 15, 2019, April 15, 2019, and July 15, 2019, and a final balloon payment equal to the remaining amount outstanding under the term loan under the First Lien Facility on October 15, 2019.
Additionally, Eagle Shipping has prepaid $5,651,000 during the year ended December 31, 2016 and $5,293,250 for the six months ended June 30, 2017 pursuant to the terms of the A&R First Lien Loan Agreement relating to mandatory prepayments upon sales of vessels. The repayment schedule above has therefore been adjusted to account for such prepayments made through June 30, 2017, such that Eagle Shipping is required to make payments of $3,680,939 on January 15, 2019, April 15, 2019, and July 15, 2019, and a final balloon payment equal to the remaining amount outstanding under the First Lien Facility on October 15, 2019. As a result of the mandatory prepayments made through June 30, 2017, Eagle Shipping is not required to comply with the minimum security covenant until October 2017 pursuant to the terms of the A&R First Lien Loan Agreement.
Second Lien Facility
On March 30, 2016, Eagle Shipping, as borrower, and certain of its subsidiaries that were guarantors of the Company’s obligations under the Exit Financing Facility, as guarantors, entered into a Second Lien Loan Agreement (the “Second Lien Loan Agreement”) with certain lenders (the “Second Lien Lenders”) and Wilmington Savings Fund Society, FSB as agent for the Second Lien Lenders (the “Second Lien Agent”). The Second Lien Lenders include certain of the Company’s existing shareholders as well as other investors. The Second Lien Loan Agreement provides for a term loan in the amount of $60,000,000 (the “Second Lien Facility”), and matures on January 14, 2020 (91 days after the original stated maturity of the First Lien Facility). The term loan under the Second Lien Facility bears interest at a rate of LIBOR plus 14.00% per annum (with a 1.0% LIBOR floor) or the Base Rate (as defined in the Second Lien Loan Agreement) plus 13.00% per annum, paid in kind quarterly in arrears. The payment-in-kind interest represents a non-cash operating and financing activity on the condensed consolidated statement of cash flows for the six month periods ended June 30, 2017 and 2016. Eagle Shipping used the proceeds from the Second Lien Facility to pay down $30,158,500, a portion of the amount outstanding in respect of the revolving credit facility under the First Lien Facility, pay three quarters of amortization payments under the First Lien Facility, pay transaction fees in connection with the entry into the A&R First Lien Loan Agreement and the Second Lien Loan Agreement, maintain a minimum liquidity of $8,140,000 and add cash to its balance sheet.
The Second Lien Loan Agreement contains financial covenants substantially similar to those in the A&R First Lien Loan Agreement, subject to standard cushions, requiring Eagle Shipping, among other things, to ensure that the aggregate market value of the vessels in Eagle Shipping’s fleet (plus the value of certain additional collateral) at all times on or after July 1, 2017 does not fall below 100% in the third and fourth quarters of 2017, 110% in 2018 and 120% in 2019 of the aggregate principal amount of debt outstanding (subject to certain adjustments) under the Second Lien Facility (provided that Eagle Shipping will not be required to comply with such covenant until the discharge of its obligations under the A&R First Lien Loan Agreement) and to maintain a minimum liquidity of not less than the greater of (i) $6,512,000 and (ii) $148,000 per vessel in Eagle Shipping’s fleet. In addition, the Second Lien Loan Agreement also imposes operating restrictions on Eagle Shipping including limiting Eagle Shipping’s ability to, among other things: incur additional indebtedness; create liens on assets; acquire and sell capital assets (including vessels); and merge or consolidate with, or transfer all or substantially all of Eagle Shipping’s assets to, another person. Eagle Shipping may not prepay the Second Lien Facility while amounts or commitments under the First Lien Facility remain outstanding.
The Second Lien Loan Agreement also includes customary events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation or warranty, a cross-default to other indebtedness and non-compliance with security documents. Further, there would be a default if any event occurs or circumstances arise in light of which, in the Second Lien Lenders’ judgment, there is significant risk that Eagle Shipping is or would become insolvent. Eagle Shipping is not permitted to pay dividends. Indebtedness under the Second Lien Facility may also be accelerated if Eagle Shipping experiences a change of control.
Ultraco Debt Facility
On June 28, 2017, Eagle Bulk Ultraco LLC (“Ultraco”), a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Ultraco Debt Facility”), by and among Ultraco, as borrower, certain wholly-owned vessel-owning subsidiaries of Ultraco, as guarantors (the “Ultraco
Guarantors”), the lenders thereunder (the “Ultraco
Lenders”), the swap banks party thereto, ABN AMRO Capital USA LLC, as facility agent and security trustee for the Ultraco Lenders, ABN AMRO Capital USA LLC, DVB Bank SE and Skandinaviska Enskilda Banken AB (publ), as mandated lead arrangers, and ABN AMRO Capital USA LLC, as arranger and bookrunner. The Ultraco Debt Facility provides for a multi-draw senior secured term loan facility in an aggregate principal amount of up to the lesser of (i) $61,200,000 and (ii) 40% of the lesser of (1) the purchase price of nine vessels (the "Greenship Vessels") to be acquired by Ultraco and the Ultraco Guarantors pursuant to a previously disclosed framework agreement, dated as of February 28, 2017, with Greenship Bulk Manager Pte. Ltd., as Trustee-Manager of Greenship Bulk Trust, and (2) the fair market value of the Greenship Vessels. The proceeds of the Ultraco Debt Facility were used for the purpose of financing, refinancing or reimbursing a part of the acquisition cost of the Greenship Vessels. The outstanding borrowings under the Ultraco Debt Facility bear interest at LIBOR plus 2.95% per annum. The Ultraco Debt Facility also provides for the payment of certain other fees and expenses by Ultraco.
Mr. Bart Veldhuizen, a member of the Board of Directors of the Company, is on the board of managing directors of DVB Bank SE, where he is responsible for the bank’s shipping and offshore franchises. Mr. Veldhuizen did not participate in discussions of the Board of Directors of the Company concerning the Ultraco Debt Facility.
As of June 30, 2017, the Company has drawn $40,000,000 of the credit facility relating to acquisition of six of the nine Greenship Vessels.
The Ultraco Debt Facility matures on the earlier of (i) five years after the delivery of the last remaining Greenship Vessel to occur and (ii) October 31, 2022. There are no fixed repayments until January 2019 (the "First Repayment Date"). Ultraco is required to make quarterly repayments of principal in an amount of $1,075,601 beginning in the first quarter of 2019 based on the six Greenship Vessels delivered as of June 30, 2017, with a final balloon payment to be made at maturity. The quarterly principal repayment will increase to $1,602,270 after the delivery of the remaining three Greenship Vessels, which is expected to occur in the third quarter of 2017. The Ultraco Debt Facility allows for increased commitments, subject to the satisfaction of certain conditions and the obtaining of certain approvals, in an aggregate principal amount of up to the lesser of (i) $38,800,000 and (ii) 40% of the aggregate fair market value of any additional vessels to be financed with such incremental commitment.
Ultraco’s obligations under the Ultraco Debt Facility are secured by, among other items, a first priority mortgage on each of the Greenship Vessels and such other vessels that it may from time to time include with the approval of the Ultraco Lenders, an assignment of earnings of the Greenship Vessels, an assignment of all charters with terms that may exceed 12 months, an assignment of insurances, an assignment of certain master agreements, and a pledge of the membership interests of each of Ultraco’s vessel-owning subsidiaries. In the future, Ultraco may grant additional security to the Ultraco Lenders from time to time.
The Ultraco Debt Facility contains financial covenants requiring Ultraco, among other things: to ensure that the aggregate market value of the Greenship Vessels (plus the value of certain additional collateral) is at all times not less than 150% of the aggregate principal amount of debt outstanding (subject to certain adjustments); to maintain cash or cash equivalents not less than (a) a liquidity reserve of $600,000 in respect of each Greenship Vessel and (b) a debt service reserve of $600,000 in respect of each Greenship Vessel, a portion of which may be utilized to satisfy the obligations under the Ultraco Debt Facility upon satisfaction of certain conditions; however, the cash or cash equivalents cannot be less than the greater of (i) $7.5 million or (ii) 12% of the consolidated total debt of Ultraco and its subsidiaries;to maintain at all times a ratio of consolidated tangible net worth to consolidated total assets of not less than 0.35 to 1.00; to maintain a consolidated interest coverage ratio beginning after the second anniversary of June 28, 2017, of not less than a range varying from 2.00 to 1.00 to 2.50 to 1.00; and to maintain a ballast water treatment systems reserve of $4,550,000, which may be released upon the satisfaction of certain conditions. In addition, the Ultraco Debt Facility also imposes operating restrictions on Ultraco and the Ultraco Guarantors, including limiting Ultraco’s and the Ultraco Guarantors’ ability to, among other things: pay dividends; incur additional indebtedness; create liens on assets; sell assets; dissolve or liquidate; merge or consolidate with another person; make investments; engage in transactions with affiliates; and allow certain changes of control to occur.
As a result of the receipt of extensions from the United States Coast Guard (the "USCG") regarding compliance with a USCG approved ballast water treatment systems ("BWMS"), the funds held in the ballast water treatment system reserve account have been released for Ultraco's use subsequent to the quarter ended June 30, 2017. Please refer to "Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations - Vessel Expense."
The Ultraco Debt Facility also includes customary events of default, including those relating to: a failure to pay principal or interest; a breach of covenant, representation or warranty; a cross-default to other indebtedness; the occurrence of certain bankruptcy and insolvency events; the occurrence of certain ERISA events; a judgment default; the cessation of business; the impossibility or unlawfulness of performance of the loan documents; the ineffectiveness of any material provision of any loan document; the occurrence of a material adverse effect; and the occurrence of certain swap terminations.
Interest Rates
For the three-month period ended June 30, 2017, interest rates on the First Lien Facility ranged from 4.98% to 5.15% including a margin over LIBOR applicable under the terms of the First Lien Facility and commitment fees of 40% of the margin on the undrawn portion of the facility. The weighted average effective interest rate including the amortization of debt discount for this period was 5.58%.
For the three-month period ended June 30, 2016, interest rates on the First Lien Facility ranged from 3.94% to 4.53% including a margin over LIBOR applicable under the terms of the First Lien Facility and commitment fees of 40% of the margin on the undrawn portion of the facility. The weighted average effective interest rate including the amortization of debt discount for this period was 5.44%.
For the six-month period ended June 30, 2017, interest rates on our outstanding debt under First Lien Facility ranged from 4.77% to 5.15%, including a margin over LIBOR and commitment fees of 40% of the margin on the undrawn portion of the facility. The weighted average effective interest rate was 5.41%.
For the six-month period ended June 30, 2016, interest rates on the First Lien Facility ranged from 3.86% to 4.53% including a margin over LIBOR applicable under the terms of the First Lien facility and commitment fees of 40% of the margin on the undrawn portion of the facility. The weighted average effective interest rate including the amortization of debt discount for this period was 5.48%.
For the three and six-month period ended June 30, 2017, interest rate on the Ultraco Debt Facility was 4.08% including a margin over LIBOR applicable under the terms of the Ultraco Debt Facility which was entered into on June 28, 2017.
For the three and six-month periods ended June 30, 2017 and June 30, 2016, the payment-in-kind interest rate on our Second Lien Facility was 15% including a margin over LIBOR. The weighted average effective interest rate on our Second Lien Facility including the amortization of debt discount for this period was 17.05%. The payment-in-kind interest is due January 19, 2020.
Interest Expense consisted of:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
First Lien Facility/Exit Financing Facility
|
|
$
|
2,745,748
|
|
|
$
|
2,288,380
|
|
|
$
|
5,410,923
|
|
|
$
|
4,797,522
|
|
Amortization of Debt issuance costs
|
|
|
1,456,986
|
|
|
|
491,144
|
|
|
|
2,901,948
|
|
|
|
799,648
|
|
Payment in kind interest on Second Lien Facility
|
|
|
2,642,327
|
|
|
|
2,123,333
|
|
|
|
4,977,219
|
|
|
|
2,123,333
|
|
Ultraco Debt Facility
|
|
|
13,655
|
|
|
|
—
|
|
|
|
13,657
|
|
|
|
—
|
|
Total Interest Expense
|
|
$
|
6,858,716
|
|
|
$
|
4,902,857
|
|
|
$
|
13,303,747
|
|
|
$
|
7,720,503
|
|
Interest paid amounted to $5,338,742 and $4,999,476 for the six months ended June 30, 2017 and 2016, respectively.
Note 6. Derivative Instruments and Fair Value Measurements
Forward freight agreements and bunker swaps
The Company trades in forward freight agreements (“FFAs”) and bunker swaps, with the objective of utilizing this market as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market. The Company’s FFAs and bunker swaps have not qualified for hedge accounting treatment. As such, unrealized and realized losses are recognized as a component of other expense in the condensed consolidated statement of operations.
The effect of non-designated derivative instruments on the condensed consolidated statements of operations is as follows:
Derivatives not
designated as hedging
instruments
|
Location of
(gain)/loss recognized
|
|
Amount of (gain)/loss
|
|
|
|
|
For the
Three Months Ended
|
|
|
For the
Six Months Ended
|
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
FFAs
|
Other expense
|
|
$
|
(1,049,363
|
)
|
|
$
|
300,785
|
|
|
$
|
(788,715
|
)
|
|
$
|
300,785
|
|
Bunker Swaps
|
Other expense
|
|
|
(42,859
|
)
|
|
|
—
|
|
|
|
3,052
|
|
|
|
—
|
|
Total
|
|
$
|
(1,092,222
|
)
|
|
$
|
300,785
|
|
|
$
|
(785,663
|
)
|
|
$
|
300,785
|
|
Derivatives no
t
designated as hedging
instruments
|
Balance Sheet
location
|
|
Fair value of Derivatives
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
FFAs
|
Other current assets
|
|
$
|
725,850
|
|
|
|
—
|
|
Bunker Swaps
|
Other current assets
|
|
|
10,759
|
|
|
|
—
|
|
Total
|
|
$
|
736,609
|
|
|
|
—
|
|
Cash Collateral Disclosures
The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amount of collateral to be posted is defined in the terms of respective master agreement executed with counterparties or exchanges and is required when agreed upon threshold limits are exceeded. As of June 30, 2017 and December 31, 2016, the Company posted cash collateral related to derivative instruments under its collateral security arrangements of $994,204 and zero, respectively, which is recorded within other current assets in the condensed consolidated balance sheets.
Fair Value Measurements
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash, cash equivalents and restricted cash—
the carrying amounts reported in the consolidated balance sheets for interest-bearing deposits approximate their fair value due to their short-term nature thereof.
Debt
—the carrying amounts of borrowings under the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.
The Company defines fair value, establishes a framework for measuring fair value and provides disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 non-derivatives include cash, money-market accounts and restricted cash accounts.
Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Our Level 2 non-derivatives include our debt balances under the First Lien Facility and Ultraco Debt Facility.
Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Note 7. Commitments and Contingencies
Legal Proceedings
The Company is involved in legal proceedings and may become involved in other legal matters arising in the ordinary course of its business. The Company evaluates these legal matters on a case-by-case basis to make a determination as to the impact, if any, on its business, liquidity, results of operations, financial condition or cash flows.
In November 2015, the Company filed a voluntary self-disclosure report with OFAC regarding certain apparent violations of U.S. sanctions regulations in the provision of shipping services for third party charterers with respect to the transportation of cargo to or from Myanmar (formerly Burma) (the “OFAC Disclosure”). At the time of such apparent violations, the Company had a different senior operational management team. Notwithstanding the fact that the apparent violations took place under a different senior operational management team and although the Company’s new Board of Directors and management have implemented robust remedial measures and significantly enhanced its compliance safeguards, there can be no assurance that OFAC will not conclude that these past actions warrant the imposition of civil penalties and/or referral for further investigation by the U.S. Department of Justice. The report was provided to OFAC for the agency’s review, consideration and determination regarding what action, if any, may be taken in resolution of this matter. The Company will continue to cooperate with the agency regarding this matter and cannot estimate when such review will be concluded. While the ultimate impact of these matters cannot be determined, there can be no assurance that the impact will not be material to the Company’s financial condition or results of operations
Other Commitments
On July 28, 2011, the Company entered into an agreement to charter in a 37,000 dwt newbuilding Japanese vessel that was delivered in October 2014 for seven years with an option for an additional one year. The hire rate for the first to seventh year is $13,500 per day and $13,750 per day for the eighth year option. On May 10, 2017, the Company signed an agreement to cancel this existing time charter contract. The Company agreed to pay a lump sum termination fee of $1.5 million relating to the cancellation. At the same time, the Company entered into an agreement with the same lessor, effective April 28, 2017 to charter in a 61,400 dwt, 2013 built Japanese vessel for approximately four years (having the same redelivery dates as the aforementioned cancelled charter) with options for two additional years. The hire rate for the first four years is $12,800 per day and the hire rate for the first optional year is $13,800 per day and $14,300 per day for the second optional year.
On February 28, 2017, Ultraco, a wholly-owned subsidiary of the Company, entered into the Greenship Purchase Agreement with Greenship Sellers for the purchase of nine Greenship Vessels. The aggregate purchase price for the nine Greenship Vessels is $153.0 million. The allocated purchase price for each Greenship Vessel is $17.0 million.
The Company took delivery of six of the nine Greenship Vessels during the second quarter and is expected to take delivery of the remaining Greenship Vessels in the third quarter of 2017. As of June 30, 2017, the Company paid a deposit of $20.8 million towards the delivery of the remaining three Greenship Vessels. On July 3, 2017 and August 4, 2017, the Company took delivery of the seventh and eighth Greenship Vessels, respectively, and the remaining Greenship Vessel is expected to be delivered charter free in the third quarter of 2017.
Note 8. Loss Per Common Share
The computation of basic net loss per share is based on the weighted average number of common shares outstanding for the three and six-month periods ended June 30, 2017 and June 30, 2016. Diluted net loss per share gives effect to stock awards, stock options and restricted stock units using the treasury stock method, unless the impact is anti-dilutive. Diluted net loss per share as of June 30, 2017 does not include 1,843,211 unvested stock awards, 1,865,865 stock options and 152,266 warrants, as their effect was anti-dilutive. Diluted net loss per share as of June 30, 2016 does not include 30,385 stock awards, 68,640 stock options and 152,266 warrants, as their effect was anti-dilutive.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
|
June 30,
2017
|
|
|
June 30,
2016
|
|
Net loss
|
|
$
|
(5,888,466
|
)
|
|
$
|
(22,495,573
|
)
|
|
$
|
(16,956,914
|
)
|
|
$
|
(61,774,243
|
)
|
Weighted Average Shares - Basic
|
|
|
70,329,050
|
|
|
|
2,254,665
|
|
|
|
67,996,330
|
|
|
|
2,073,068
|
|
Dilutive effect of stock options and restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted Average Shares - Diluted
|
|
|
70,329,050
|
|
|
|
2,254,665
|
|
|
|
67,996,330
|
|
|
|
2,073,068
|
|
Basic loss per share *
|
|
$
|
(0.08
|
)
|
|
$
|
(9.98
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(29.80
|
)
|
Diluted loss per share *
|
|
$
|
(0.08
|
)
|
|
$
|
(9.98
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(29.80
|
)
|
*Adjusted to give effect for the 1 for 20 reverse stock split that became effective as of the opening of trading on August 5, 2016.
Note 9. Stock Incentive Plans
2016 Equity Compensation Plan
On December 15, 2016, the Company’s shareholders approved the 2016 Equity Compensation Plan (the “2016 Plan”) and the Company registered 5,348,613 shares of common stock, which may be issued under the 2016 Plan. The 2016 Plan replaced the post-emergence Management Incentive Program (the “2014 Plan”) and no other awards will be granted under the 2014 Plan. Outstanding awards under the 2014 Plan will continue to be governed by the terms of the 2014 Plan until exercised, expired, otherwise terminated, or canceled. As of December 31, 2016, 24,644 shares of common stock were subject to outstanding awards under the 2014 Plan. Under the terms of the 2016 Plan, awards for up to a maximum of 3,000,000 shares may be granted under the 2016 Plan to any one employee of the Company and its subsidiaries during any one calendar year, and awards in the form of options and stock appreciation rights for up to a maximum of 3,000,000 shares may be granted under the 2016 Plan. The total number of shares of common stock with respect to which awards may be granted under the 2016 Plan to any non-employee director during any one calendar year shall not exceed 500,000, subject to adjustment as provided in the 2016 Plan. Any director, officer, employee or consultant of the Company or any of its subsidiaries (including any prospective officer or employee) is eligible to be designated to participate in the 2016 Plan.
As of June 30, 2017 and 2016, stock awards covering a total of 1,843,211 and 30,385 of the Company’s common shares, respectively, are outstanding under the 2014 Plan and 2016 Plan. The vesting terms range between one to three years from the grant date. The Company is amortizing to non-cash compensation expense included in general and administrative expenses the fair value of non-vested stock awards at the grant date.
As of June 30, 2017 and 2016, options covering 1,865,865 and 68,640 of the Company’s common shares, respectively, are outstanding with exercise prices ranging from $4.28 to $505.00 per share. The options vest and become exercisable in four equal installments beginning on the grant date. All options expire within seven years from the effective date.
Non-cash compensation expense for all stock awards and options included in General and administrative expenses:
|
|
For the
Three Months
Ended
June 30, 2017
|
|
|
For the
Three Months
Ended
June 30, 2016
|
|
|
For the
Six Months
Ended
June 30, 2017
|
|
|
For the
Six Months
Ended
June 30, 2016
|
|
Stock awards /Stock Option Plans
|
|
$
|
2,478,051
|
|
|
$
|
841,933
|
|
|
$
|
4,648,751
|
|
|
$
|
1,668,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash compensation expense
|
|
$
|
2,478,051
|
|
|
$
|
841,933
|
|
|
$
|
4,648,751
|
|
|
$
|
1,668,546
|
|
The future compensation to be recognized for all the grants issued for the six-month period ending December 31, 2017, and the years ending December 31, 2018 and 2019 will be $4,276,686, $6,891,228 and $1,258,777, respectively.