PANL Pangaea Logistics Solutions Ltd

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		March 31, 2018				December 31, 2017
		(unaudited)
Advance hire		$	4,578,681			$	3,628,417
Prepaid expenses		304,402				460,445
Accrued receivables		4,397,325				6,153,212
Other current assets		517,376				1,790,198
		$	9,797,784			$	12,032,272

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		March 31, 2018				December 31, 2017
		(unaudited)
Accounts payable		$	14,776,185			$	15,686,235
Accrued voyage expenses		5,322,131				11,923,445
Accrued interest		571,549				611,406
Other accrued liabilities		1,123,488				960,190
		$	21,793,353			$	29,181,276

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Consolidated Balance Sheets		As Reported			Effect of ASC 606 Adoption			Under Prior Accounting
Advance hire, prepaid expenses and other current assets		9,797,784			1,359,317			8,438,467
Total current assets		73,979,506			1,359,317			72,620,189
Total assets		411,799,149			1,359,317			410,439,832
Deferred revenue		6,581,760			2,124,830			4,456,930
Total current liabilities		59,695,765			2,124,830			57,570,935
Accumulated deficit		(7,694,827	)		(765,513	)		(6,929,314	)
Total liabilities and stockholders' equity		411,799,149			1,359,317			410,439,832
Consolidated Statements of Operations		As Reported			Effect of ASC 606 Adoption			Under Prior Accounting
Voyage revenue		70,319,194			2,603,925			67,715,269
Total revenues		78,973,293			2,603,925			76,369,368
Voyage expense		30,168,028			256,325			29,911,703
Charter hire expense		22,695,935			690,078			22,005,857
Total Expenses		71,179,614			946,403			70,233,211
Income from Operations		7,793,679			1,657,522			6,136,157
Net Income		5,535,211			1,657,522			3,877,689
Net income attributable to Pangaea Logistics Solutions Ltd.		4,324,994			1,657,522			2,667,472
Earnings per common share, basic		0.10			0.04			0.06
Earnings per common share, diluted		0.10			0.04			0.06
Consolidated Statements of Cash Flows		As Reported			Effect of ASC 606 Adoption			Under Prior Accounting
Net Income		5,535,211			1,657,522			3,877,689
Change in operating assets and liabilities:
Advance hire, prepaid expenses and other current assets		4,026,194			946,403			3,079,791
Deferred Revenue		(3,962,909	)		(2,603,925	)		(1,358,984	)

Assets and liabilities related to our voyage contracts with customers are reported on a contract-by-contract basis at the end of each reporting period.  Accounts receivable represent amounts billed and currently due from customers which are reported at their net estimated realizable value. The Company maintains reserves against its accounts receivable for potential credit losses. Credit losses recognized on accounts receivable were immaterial for the three-month periods ended March 31, 2018 and 2017, respectively. Other contract assets include unbilled revenue which arises when revenue is recognized in advance of billing for certain voyage contracts. Contract liabilities consist of deferred revenue which arises when amounts are billed to or collected from customers in advance of revenue recognition.

At March 31, 2018, unbilled revenue and deferred revenue totaled $1.4 million and $2.1 million , respectively.  Upon adoption of ASC 606 on January 1, 2018, unbilled revenue and deferred revenue totaled $2.3 million and $4.7 million , respectively.  All voyages that were not substantially complete on January 1, 2018 were completed during the three months ended March 31, 2018 , therefore, all related voyage contract liabilities were recognized as revenue in the quarter.

On January 1, 2018, the Company adopted ASU No. 2016-18,  Statement of Cash Flows (ASC 230).  The amendments in this update provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in practice. Specifically, this update addresses how to classify and present changes in restricted cash or restricted cash equivalents that occur when there are transfers between cash, cash equivalents, and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments

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made from restricted cash or restricted cash equivalents. The new standard became effective for the Company on January 1, 2018. The amendments in this update were applied using a retrospective transition method to each period presented.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statement of cash flows:

	March 31, 2018				December 31, 2017
Cash and cash equivalents	$	28,205,463			$	34,531,812
Restricted cash	4,000,000				4,000,000
Total cash, cash equivalents and restricted cash	$	32,205,463			$	38,531,812

Cash and cash equivalents include short-term deposits with an original maturity of less than three months. Restricted cash at March 31, 2018 and December 31, 2017 consists of $1.5 million held by the facility agent as required by the The Senior Secured Post-Delivery Term Loan Facility and $2.5 million held by the facility agent as required by the Bulk Nordic Odin Ltd., Bulk Nordic Olympic Ltd. Bulk Nordic Odyssey Ltd., Bulk Nordic Orion Ltd. and Bulk Nordic Oshima Ltd. – Dated September 28, 2015 - Amended and Restated Loan Agreement.

Recently Issued Accounting Pronouncements

    

In February 2016, the FASB issued an ASU 2016-02, Accounting Standards Update for Leases. The update is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The Company does not typically enter into charters for terms exceeding six months. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company does not expect adoption of this guidance to have a material impact on its financial statements.

In August 2017, the FASB issued an ASU 2017-12 Accounting Standards Update for Derivatives and Hedging. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the update. All transition requirements and elections should be applied to hedging relationships existing on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this update. The amended presentation and disclosure guidance is required only prospectively. The Company does not expect adoption of this guidance to have a material impact on its financial statements.

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Note 3. Fixed Assets

At March 31, 2018 , the Company owned eighteen dry bulk vessels including two financed under capital leases and one barge. The carrying amounts of these vessels, including unamortized drydocking costs, are as follows: 

	March 31,				December 31,
	2018				2017
Owned vessels	(unaudited)
m/v BULK PANGAEA	$	16,034,826			$16,398,650
m/v BULK PATRIOT	10,790,200				11,111,437
m/v BULK JULIANA	11,205,266				11,411,052
m/v NORDIC ODYSSEY	25,296,932				25,634,743
m/v NORDIC ORION	26,124,812				26,467,928
m/v BULK TRIDENT	14,003,332				14,195,098
m/v BULK NEWPORT	14,720,293				13,139,242
m/v NORDIC BARENTS	4,731,668				4,846,522
m/v NORDIC BOTHNIA	4,678,480				4,787,388
m/v NORDIC OSHIMA	29,816,112				30,122,172
m/v NORDIC ODIN	30,241,726				30,548,435
m/v NORDIC OLYMPIC	30,066,346				30,371,285
m/v NORDIC OASIS	31,301,751				31,608,785
m/v BULK ENDURANCE	26,778,315				27,030,918
m/v BULK FREEDOM	8,742,824				8,834,746
m/v BULK PRIDE	13,871,047				14,007,731
MISS NORA G PEARL	2,639,360				2,695,145
	301,043,290				303,211,277
Other fixed assets, net	3,071,523				3,081,378
Total fixed assets, net	$	304,114,813			$	306,292,655
Vessels under capital lease
m/v BULK DESTINY	$	22,942,313			$	23,153,850
m/v BULK BEOTHUK	6,762,517				6,840,362
	$	29,704,830			$	29,994,212

The Company also operates two dry bulk vessels under bareboat charters accounted for as operating leases, as discussed in Note 7.

 

Long-lived Assets Impairment Considerations. The carrying values of the Company’s vessels may not represent their fair market value or the amount that could be obtained by selling the vessel at any point in time because the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the pricing of new vessels, which tend to be cyclical. The carrying value of each group of vessels classified as held and used are reviewed for potential impairment when events or changes in circumstances indicate that the carrying value of a particular group may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the group and its eventual disposition is less than its carrying value. This assessment is made at the group level, which represents the lowest level for which identifiable cash flows are largely independent of other groups of assets. The asset groups established by the Company are defined by vessel size and major characteristic or trade.

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The significant factors and assumptions used in the undiscounted projected net operating cash flow analysis include the Company’s estimate of future time charter equivalent "TCE" rates based on current rates under existing charters and contracts. When existing contracts expire, the Company uses an estimated TCE based on actual results and extends these rates out to the end of the vessel’s useful life. TCE rates can be highly volatile, may affect the fair value of the Company’s vessels and may have a significant impact on the Company’s ability to recover the carrying amount of its fleet. Accordingly, the volatility is contemplated in the undiscounted projected net operating cash flow by using a sensitivity analysis based on percent changes in the TCE rates. The Company prepares a series of scenarios in an attempt to capture the range of possible trends and outcomes. Projected net operating cash flows are net of brokerage and address commissions and assume no revenue on scheduled offhire days. The Company uses the current vessel operating expense budget, estimated costs of drydocking and historical general and administrative expenses as the basis for its expected outflows, and applies an inflation factor it considers appropriate. The net of these inflows and outflows, plus an estimated salvage value, constitutes the projected undiscounted future cash flows. If these projected cash flows do not exceed the carrying value of the asset group, an impairment charge would be recognized.

 

During the three months ended March 31, 2018 , the Company did not identify any potential triggering events and therefore, in accordance with authoritative guidance, did not perform tests of recoverability.

During the three months ended March 31, 2017 , the Company identified a potential impairment indicator based on the estimated market value of its vessels. As a result, the Company evaluated each asset group for impairment by estimating the total undiscounted cash flows expected to result from the use of the asset group and its eventual disposal. The estimated undiscounted future cash flows were higher than the carrying amount of the vessels in the Company's fleet and as such, no loss on impairment was recognized.

Note 4. Debt

Long-term debt consists of the following: 

		March 31, 2018				December 31, 2017
		(unaudited)
Bulk Trident Secured Note (1)		$	3,017,500			$	3,452,500
Bulk Juliana Secured Note (1)		1,014,064				1,521,095
Bulk Phoenix Secured Note (1)		4,030,947				4,473,805
Bulk Nordic Odin Ltd., Bulk Nordic Olympic Ltd. Bulk Nordic Odyssey Ltd., Bulk Nordic Orion Ltd. and Bulk Nordic Oshima Ltd. Amended and Restated Loan Agreement (2)		67,950,000				69,825,000
Term Loan Facility of USD 13,000,000 (Nordic Bulk Barents Ltd. and Nordic Bulk Bothnia Ltd.)		5,467,370				5,793,460
Bulk Nordic Oasis Ltd. Loan Agreement (2)		18,125,000				18,500,000
Bulk Nordic Six Ltd. Loan Agreement		28,196,666				28,803,333
Bulk Freedom Loan Agreement		4,975,000				5,150,000
109 Long Wharf Commercial Term Loan		895,067				922,466
Phoenix Bulk Carriers (US) LLC Automobile Loan		—				23,090
Total		133,671,614				138,464,749
Less: unamortized bank fees		(1,794,888		)		(1,869,780		)
		131,876,726				136,594,969
Less: current portion		(18,706,122		)		(18,979,335		)
Secured long-term debt, net		$	113,170,604			$	117,615,634

(1)	The Bulk Juliana Secured Note, the Bulk Trident Secured Note and the Bulk Phoenix Secured Note are cross-collateralized by the m/v Bulk Juliana, m/v Bulk Trident and m/v Bulk Newport and are guaranteed by the Company.

(2)

The borrower under this facility is NBHC, of which the Company and its joint venture partners, STST and ASO2020, each own one-third. NBHC is consolidated in accordance with Accounting Standards Codification ("ASC") 810, Consolidation , and as such, amounts pertaining to the non-controlling ownership held by these third parties in the financial position of NBHC are reported as non-controlling interest in the accompanying balance sheets.

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The Senior Secured Post-Delivery Term Loan Facility

 

On April 14, 2017, the Company, through its wholly owned subsidiaries, Bulk Pangaea, Bulk Patriot, Bulk Juliana, Bulk Trident and Bulk Phoenix, entered into the Fourth Amendatory Agreement, (the "Fourth Amendment"), amending and supplementing the Loan Agreement dated April 15, 2013, as amended by a First Amendatory Agreement dated May 16, 2013, the Second Amendatory Agreement dated August 28, 2013 and the Third Amendatory Agreement dated July 14, 2016. The Fourth Amendment advanced the final repayment dates for Bulk Pangaea and Bulk Patriot and extended the final maturity date and modified the repayment schedules, as follows: 

Bulk Trident Secured Note

Initial amount of $10,200,000 , entered into in April 2012, for the acquisition of the m/v Bulk Trident. The Fourth Amendment extends the final maturity date and modifies the repayment schedule. The first and second quarterly installments following the amendment were increased to $650,000 and the third and fourth installments were increased to $435,000 . These are followed by two installments of $327,500 and three of $300,000 . A balloon payment of $1,462,500 is payable on July 19, 2019. The interest rate was fixed at 4.29% through April 19, 2017 and is floating at LIBOR plus 3.50% ( 5.81% at March 31, 2018 ), since April 19, 2017.

On April 19, 2018, the Company entered into a sale-leaseback financing arrangement whereby the m/v Bulk Trident will be sold and simultaneously leased back under a bareboat charter for a period of eight years. Proceeds from the sale will be used to repay the Bulk Trident Secured Note (see Note 8. - Subsequent Events)

Bulk Juliana Secured Note

Initial amount of $8,112,500 , entered into in April 2012, for the acquisition of the m/v Bulk Juliana. The Fourth Amendment did not change this tranche, the balance of which is payable in six quarterly installments of $507,031 . The final payment is due on July 19, 2018. The interest rate is fixed at 4.38% .

 

Bulk Phoenix Secured Note

Initial amount of $10,000,000 , entered into in May 2013, for the acquisition of m/v Bulk Newport. The Fourth Amendment did not change this tranche, the balance of which is payable in two installments of $700,000 and seven installments of $442,858 . A balloon payment of $1,816,659 is payable on July 19, 2019. The interest rate is fixed at 5.09% .

The agreement contains financial covenants that require the Company to maintain a minimum net worth and minimum liquidity, on a consolidated basis. The facility also contains a consolidated leverage ratio and a consolidated debt service coverage ratio. In addition, the facility contains other Company and vessel related covenants that, among other things, restrict changes in management and ownership of the vessel, declaration of dividends, further indebtedness and mortgaging of a vessel without the bank’s prior consent. It also requires minimum collateral maintenance, which is tested at the discretion of the lender. As of March 31, 2018 and December 31, 2017 , the Company was in compliance with these covenants.

Bulk Nordic Odin Ltd., Bulk Nordic Olympic Ltd. Bulk Nordic Odyssey Ltd., Bulk Nordic Orion Ltd. And Bulk Nordic Oshima Ltd. – Dated September 28, 2015 - Amended and Restated Loan Agreement

 

The amended agreement advanced $21,750,000 in respect of each the m/v Nordic Odin and the m/v Nordic Olympic; $13,500,000 in respect of each the m/v Nordic Odyssey and the m/v Nordic Orion, and $21,000,000 in respect of the m/v Nordic Oshima.

The agreement requires repayment of the advances as follows:

In respect of the Odin and Olympic advances, repayment to be made in 28 equal quarterly installments of $375,000 per borrower (one of which was paid prior to the amendment by each borrower) and balloon payments of $11,233,150 due with each of the final installments in January 2022.

In respect of the Odyssey and Orion advances, repayment to be made in 20 quarterly installments of $375,000 per borrower and balloon payments of $5,677,203 due with each of the final installments in September 2020.

In respect of the Oshima advance, repayment to be made in 28 equal quarterly installments of $375,000 and a balloon payment of $11,254,295 due with the final installment in September 2021.

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Interest on 50% of the advances to Odyssey and Orion was fixed at 4.24% in March 2017. Interest on the remaining advances to Odyssey and Orion is floating at LIBOR plus 2.40% ( 4.71% at March 31, 2018 ). Interest on 50% of the advances to Odin and Olympic was fixed at 3.95% in January 2017. Interest on the remaining advances to Odin and Olympic was floating at LIBOR plus 2.0% and was fixed at 4.07% on April 27, 2017. Interest on 50% of the advance to Oshima was fixed at 4.16% in January 2017. Interest on the remaining advance to Oshima is floating at LIBOR plus 2.25% ( 4.56% at March 31, 2018 ).

The amended loan is secured by first preferred mortgages on the m/v Nordic Odin, m/v Nordic Olympic, m/v Nordic Odyssey, m/v Nordic Orion and m/v Nordic Oshima, the assignment of earnings, insurances and requisite compensation of the five entities, and by guarantees of their shareholders.

The amended agreement contains one financial covenant that requires the Company to maintain minimum liquidity and a collateral maintenance ratio clause, which requires the aggregate fair market value of the vessels plus the net realizable value of any additional collateral provided, to remain above defined ratios. At March 31, 2018 and December 31, 2017 , the Company was in compliance with this covenant.

The Bulk Nordic Oasis Ltd. - Loan Agreement - Dated December 11, 2015

The agreement advanced $21,500,000 in respect of the m/v Nordic Oasis. The agreement requires repayment of the advance in 24 equal quarterly installments of $375,000 beginning on March 28, 2016 and a balloon payment of $12,500,000 due with the final installment in March 2022. Interest on this advance is fixed at 4.30% .

The loan is secured by a first preferred mortgage on the m/v Nordic Oasis, the assignment of earnings, insurances and requisite compensation of the entity, and by guarantees of its shareholders. Additionally, the agreement contains a collateral maintenance ratio clause which requires the fair market value of the vessel plus the net realizable value of any additional collateral previously provided, to remain above defined ratios. As of March 31, 2018 and December 31, 2017 , the Company was in compliance with this covenant.

 

Term Loan Facility of USD 13,000,000 (Nordic Bulk Barents Ltd. and Nordic Bulk Bothnia Ltd.)

 

Barents and Bothnia entered into a secured Term Loan Facility of $13,000,000 in two tranches of $6,500,000 which were drawn in conjunction with the delivery of the m/v Bulk Bothnia on January 23, 2014 and the m/v Bulk Barents on March 7, 2014. The loan is secured by mortgages on the m/v Nordic Bulk Barents and m/v Nordic Bulk Bothnia and is guaranteed by the Company.

 

The facility bears interest at LIBOR plus 2.50% ( 4.81% at March 31, 2018 ). The loan requires repayment in 22 equal quarterly installments of $163,045 (per borrower) beginning in June 2014, one installment of $163,010 (per borrower) and a balloon payment of $1,755,415 (per borrower) due in December 2019. In addition, any cash in excess of $750,000 per borrower on any repayment date shall be applied toward prepayment of the relevant loan in inverse order, so the balloon payment is prepaid first. The agreement also contains a profit split in respect of the proceeds from the sale of either vessel and a minimum value clause ("MVC"). The Company was in compliance with this covenant at March 31, 2018 and December 31, 2017 .

The Amended Senior Facility - Dated December 21, 2017 (previously identified as Bulk Nordic Six Ltd. - Loan Agreement - Dated December 21, 2016)

The agreement advanced $19,500,000 in respect of the m/v Bulk Endurance on January 7, 2017, in two tranches. The agreement requires repayment of Tranche A, totaling $16,000,000 , in three equal quarterly installments of $100,000 beginning on April 7, 2017 and, thereafter, 17 equal quarterly installments of $266,667 and a balloon payment of $11,667,667 due with the final installment in March 2022. Interest on this advance was fixed at 4.74% on March 27, 2017. The agreement also advanced $3,500,000 under Tranche B, which is payable in 18 equal quarterly installments of $65,000 beginning on October 7, 2017, and a balloon payment of $2,330,000 due with the final installment in March 2022. Interest on this advance is floating at LIBOR plus 6.00% ( 8.31% at March 31, 2018 ).

The amended agreement advanced $10,000,000 in respect of the m/v Bulk Pride on December 21, 2017, in two tranches. The agreement requires repayment of Tranche C, totaling $8,500,000 , in 16 equal quarterly installments of $275,000 beginning in March 2018 and a balloon payment of $4,100,000 due with the final installment in December 2021. Interest on this advance is floating at LIBOR plus 2.75% ( 5.06% at March 31, 2018 ). The agreement also advanced $1,500,000 under Tranche D, which is payable in 4 equal quarterly installments of $375,000 beginning on August 21, 2018. Interest on this advance is floating at LIBOR plus 6.00% ( 8.31% at March 31, 2018 ).

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The loan is secured by a first preferred mortgage on the m/v Bulk Endurance, the assignment of earnings, insurances and requisite compensation of the entity, and by guarantees of its shareholders. Additionally, the agreement contains a minimum liquidity requirement, positive working capital of the borrower and a collateral maintenance ratio clause which requires the fair market value of the vessel plus the net realizable value of any additional collateral previously provided, to remain above defined ratios. At March 31, 2018 and December 31, 2017 , the Company was in compliance with these covenants.

The Bulk Freedom Corp. Loan Agreement -- Dated June 14, 2017

The agreement advanced $5,500,000 in respect of the m/v Bulk Freedom on June 14, 2017. The agreement requires repayment of the loan in 8 quarterly installments of $175,000 and 12 quarterly installments of $150,000 beginning on September 14, 2017. A balloon payment of $2,300,000 is due with the final installment. Interest is floating at LIBOR plus 3.75% ( 6.06% at March 31, 2018 ).

The loan is secured by a first preferred mortgage on the m/v Bulk Freedom, the assignment of earnings, insurances and requisite compensation of the entity, and by guarantees of its shareholders. Additionally, the agreement contains a collateral maintenance ratio clause which requires the fair market value of the vessel plus the net realizable value of any additional collateral previously provided, to remain above defined ratios. At March 31, 2018 and December 31, 2017 , the Company was in compliance with these covenants.

109 Long Wharf Commercial Term Loan

 

Initial amount of $1,096,000 entered into on May 27, 2016. The Long Wharf Construction to Term Loan was repaid from the proceeds of this new facility. The loan is payable in 120 equal monthly installments of $9,133 . Interest is floating at the 30 day LIBOR plus 2.0% ( 4.31% at March 31, 2018 ). The loan is collateralized by all real estate located at 109 Long Wharf, Newport, RI, and a corporate guarantee of the Company. The loan contains a maximum loan to value covenant and a debt service coverage ratio. At March 31, 2018 and December 31, 2017 , the Company was in compliance with these covenants.

Phoenix Bulk Carriers (US) LLC Automobile Loan

The Company purchased a commercial vehicle for use at the site of its port project on the United States' East Coast. The total loan amount of $29,435 is payable in 60 equal monthly installments of $539 . Interest is fixed at 3.74% . The vehicle was sold in January 2018 and the loan was repaid.

The future minimum annual payments (excluding unamortized bank fees) under the debt agreements are as follows:

 

	Years ending
	March 31,
	(unaudited)
2019	$	18,706,122
2020	20,721,295
2021	21,240,674
2022	70,096,857
2023	2,559,600
Thereafter	347,066
	$	133,671,614

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Note 5. Derivative Instruments and Fair Value Measurements

 

Forward freight agreements

 

The Company assesses risk associated with fluctuating future freight rates and, when appropriate, hedges identified economic risk with appropriate derivative instruments, specifically forward freight agreements (FFAs). Such economic hedges do not always qualify for hedge accounting under ASC 815 and as such, the usage of such derivatives can lead to fluctuations in the Company’s reported results from operations on a period-to-period basis. Between November 2016 and March 31, 2018 , the Company entered into FFAs that were not designated for hedge accounting. The aggregate fair value of these FFAs at March 31, 2018 were liabilities of approximately $49,000 , which are included in other current liabilities on the consolidated balance sheets. The aggregate fair value of FFAs at December 31, 2017 were assets of approximately $266,000 , which are included in other current assets on the consolidated balance sheets. The change in the aggregate fair value of the FFAs during the three months ended March 31, 2018 and 2017 are a loss of approximately $314,000 and a gain of approximately $2,728,000 , respectively, which are included in unrealized (loss) gain on derivative instruments in the accompanying consolidated statements of operations.

Fuel Swap Contracts

The Company continuously monitors the market volatility associated with bunker prices and seeks to reduce the risk of such volatility through a bunker hedging program. During 2017 and 2016, the Company entered into various fuel swap contracts that were not designated for hedge accounting. The aggregate fair value of these fuel swaps at March 31, 2018 and December 31, 2017 are assets of approximately $129,000 and $377,000 , respectively, which are included in other current assets on the consolidated balance sheets. The change in the aggregate fair value of the fuel swaps during the three months ended March 31, 2018 and 2017 are losses of approximately $248,000 and $758,000 , respectively, which are included in unrealized (loss) gain on derivative instruments in the accompanying consolidated statements of operations.

The three levels of the fair value hierarchy established by ASC 820, Fair Value Measurements and Disclosures , in order of priority are as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 fair value measurements 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.

 

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions). 

The following table summarizes assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 :

	Balance at
	March 31, 2018				Level 1				Level 2				Level 3
	(unaudited)
Margin accounts	$	579,299			$	579,299			$	—			$	—
Fuel swaps	$	129,037			$	—			$	129,037			$	—
Freight forward agreements	$	(48,600	)		$	—			$	(48,600	)		$	—

 

	Balance at December 31, 2017				Level 1				Level 2				Level 3
Margin accounts	$	912,981			$	912,981			$	—			$	—
Fuel swaps	$	377,273			$	—			$	377,273			$	—
Freight forward agreements	$	265,768			$	—			$	265,768			$	—

 

The estimated fair values of the Company’s forward freight agreements and fuel swap contracts are based on market prices obtained from an independent third-party valuation specialist based on published indexes. Such quotes represent the estimated amounts the Company would receive or pay to terminate the contracts.

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Note 6. Related Party Transactions

	December 31, 2017				Activity				March 31, 2018
									(unaudited)
Included in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets:
Affiliated companies (trade payables)	$	1,421,920			(203,479		)		$	1,218,441
Included in current related party debt on the consolidated balance sheets:
Loan payable – 2011 Founders Note	$	4,325,000			—				$	4,325,000
Interest payable in-kind - 2011 Founders Note (i)	684,597				(541,140		)		143,457
Promissory Note to Bulk Invest, Ltd.	2,000,000				(2,000,000		)		—
Total current related party debt	$	7,009,597			$	(2,541,140	)		$	4,468,457

  ⁽ⁱ⁾      Paid in cash

            

 In November 2014, the Company entered into a $5,000,000 Promissory Note (the “Note”) with Bulk Invest, Ltd., a company controlled by the Founders. The outstanding balance on the Note was repaid on February 6, 2018.

 

On October 1, 2011, the Company entered into a $10,000,000 loan agreement with the Founders, which was payable on demand at the request of the lenders (the 2011 Founders Note). The note bears interest at a rate of 5% . The balance of the 2011 Founders Note was $4,325,000 at March 31, 2018 and December 31, 2017 .

Under the terms of a technical management agreement between the Company and Seamar Management S.A. (“Seamar”), an equity method investee, Seamar is responsible for the day-to-day operations for certain of the Company’s owned vessels and the two vessels operating under bareboat charters. During the three -month periods ended March 31, 2018 and 2017 , the Company incurred technical management fees of approximately $756,000 and $642,000 , respectively, under this arrangement. These fees are included in vessel operating expenses in the consolidated statements of income. The total amounts payable to Seamar at March 31, 2018 and December 31, 2017 were approximately $1,218,000 and $1,422,000 , respectively.

    

Dividends payable consist of the following, all of which are payable to related parties:

		2013 common stock dividend				2013 Odyssey and Orion dividend (1)				Total
Balance at December 31, 2017		6,333,598				904,803				7,238,401
Payments		—				(904,803		)		(904,803		)
Balance at March 31, 2018		$	6,333,598			$	—			$	6,333,598

⁽¹⁾ Paid on February 13, 2018

Note 7. Commitments and Contingencies

Vessel Sales and Leasebacks Accounted for as Capital Leases

The Company's fleet includes two vessels financed under sale and leaseback financing arrangements accounted for as capital leases. The selling price of the m/v Bulk Destiny to the new owner (lessor) was $21.0 million and the fair value of the vessel at the inception of the lease was $24.0 million . The difference between the selling price and the fair value of the vessel was recorded as prepaid rent and is being amortized over the 25 year estimated useful life of the vessel. Prepaid rent is included in vessel under capital lease on the consolidated balance sheet at March 31, 2018 . Minimum lease payments fluctuate based on three-month LIBOR and are payable quarterly over the seven year lease term , with a purchase obligation of $11,200,000 due with the final lease payment in January 2024. Interest is floating at LIBOR plus 2.75% ( 5.06% including the margin, at inception of the lease). The Company will own this vessel at the end of the lease term.

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The selling price of the m/v Bulk Beothuk was $7,000,000 and the fair value was estimated to be the same. The lease is payable at $3,500 per day every fifteen days over the five year lease term , and a balloon payment of $4,000,000 is due with the final lease payment in June 2022. Interest is fixed at 11.83% . The Company will own this vessel at the end of the lease term.

Long-term Contracts Accounted for as Operating Leases

On July 5, 2016, the Company entered into five-year bareboat charter agreements with the owner of two vessels (which were then renamed the m/v Bulk Power and the m/v Bulk Progress). Under a bareboat charter, the charterer is responsible for all of the vessel operating expenses in addition to the charter hire. The agreement also contains a profit sharing arrangement. Scheduled increases in charter hire are included in minimum rental payments and recognized on a straight-line basis over the lease term. Profit sharing is excluded from minimum lease payments and recognized as incurred. The rent expense under these bareboat charters (which are classified as operating leases) totals approximately $365,000 per annum.

The Company leases office space for its Copenhagen operations. The lease can be terminated with six months prior notice after June 30, 2018.

Future minimum lease payments under capital leases and operating leases with initial or remaining terms in excess of one year at March 31, 2018 were:

	Capital Lease				Operating Leases
2019	$	3,278,295			$	530,649
2020	3,278,295				365,446
2021	3,278,295				365,446
2022	3,330,795				103,126
2023	6,175,795				—
Thereafter	13,218,293				—
Total minimum lease payments	$	32,559,768			$	1,364,667
Less amount representing interest	6,194,995
Present value of minimum lease payments	26,364,773
Less current portion	1,812,475
Long-term portion	$	24,552,298

            

The Company is subject to certain asserted claims arising in the ordinary course of business. The Company intends to vigorously assert its rights and defend itself in any litigation that may arise from such claims. While the ultimate outcome of these matters could affect the results of operations of any one year, and while there can be no assurance with respect thereto, management believes that after final disposition, any financial impact to the Company would not be material to its consolidated financial position, results of operations, or cash flows.    

Note 8. Subsequent Events

On April 12, 2018, the Company, through a wholly-owned subsidiary, signed a Memorandum of Agreement to purchase a Panamax bulk carrier built in 2006 for approximately $14.3 million . The vessel is expected to be delivered in the second quarter of 2018.

On April 19, 2018, the Company entered into a sale-leaseback financing arrangement whereby the m/v Bulk Trident will be sold for $15.0 million and simultaneously leased back under a bareboat charter for a period of eight years. The agreement requires a $2.0 million bareboat charter hire down payment to be deducted from the selling price at the time of delivery to the buyer. The lease is payable monthly at a rate of $4,845 per day over the eight year lease term . Interest is floating at LIBOR plus 1.7% (approximately 4.8% including the margin, at inception of the lease).

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our consolidated financial statements and footnotes thereto contained in this report.

 

Forward Looking Statements

 

All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward looking statements. When used in this Form 10-Q, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify forward looking statements. Such forward looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward looking statements as a result of the risk factors and other factors detailed in our filings with the Securities and Exchange Commission. All subsequent written or oral forward looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.

 

Important Financial and Operational Terms and Concepts

 

The Company uses a variety of financial and operational terms and concepts when analyzing its performance.

These include revenue recognition, deferred revenue, allowance for doubtful accounts, vessels and depreciation and long-lived assets impairment considerations, as defined above as well as the following:

Voyage Revenue. Voyage revenue is derived from voyage charters which involve the carriage of cargo from a load port to a discharge port. Gross revenue is calculated by multiplying the agreed rate per ton of cargo by the number of tons loaded.

Charter Revenue. Charter revenue is earned when the Company lets a vessel it owns or operates to a charterer for a specified period of time. Charter revenue is based on the agree rate per day.

 

Voyage Expenses. The Company incurs expenses for voyage charters, including bunkers (fuel), port charges, canal tolls, brokerage commissions and cargo handling operations, which are expensed as incurred.

Charter Expenses. The Company charters in vessels to supplement its owned fleet to support its voyage charter operations. The Company hires vessels under time charters with third party vessel owners, and recognizes the charter hire payments as an expense on a straight-line basis over the term of the charter. Charter hire payments are typically made in advance, and the unrecognized portion is reflected as advance hire in the accompanying consolidated balance sheets. Under the time charters, the vessel owner is responsible for the vessel operating costs such as crews, maintenance and repairs, insurance, and stores.

Vessel Operating Expenses. Vessel operating expenses represent the cost to operate the Company’s owned vessels. Vessel operating expenses include crew hire and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes, other miscellaneous expenses, and technical management fees. These expenses are recognized as incurred. Technical management services include day-to-day vessel operations, performing general vessel maintenance, ensuring regulatory and classification society compliance, arranging the hire of crew, and purchasing stores, supplies, and spare parts.

Net Revenue. Net revenue represents total revenue less the total direct costs of transportation and services, which includes charter hire, voyage and vessel operating expenses.

Fleet Data. The Company believes that the measures for analyzing future trends in its results of operations consist of the following:

Shipping days. The Company defines shipping days as the aggregate number of days in a period during which its owned or chartered-in vessels are performing either a voyage charter (voyage days) or a time charter (time charter days).

Daily vessel operating expenses. The Company defines daily vessel operating expenses as vessel operating expenses divided by ownership days for the period. Vessel operating expenses include crew hire and related costs, the cost of insurance, expenses relating to repairs and maintenance, the costs of spares and consumable stores, tonnage taxes, other miscellaneous expenses, and technical management fees.

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Chartered in days. The Company defines chartered in days as the aggregate number of days in a period during which it chartered in vessels from third party vessel owners.

Time Charter Equivalent ‘‘TCE’’ rates . The Company defines TCE rates as total revenues less voyage expenses divided by the length of the voyage, which is consistent with industry standards. TCE rate is a common shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with daily earnings generated by vessels on voyage charters, because rates for vessels on voyage charters are generally not expressed in per-day amounts while rates for vessels on time charters generally are expressed in per-day amounts.

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Selected Financial Information

(in thousands, except shipping days data) (figures may not foot due to rounding)	For the three months ended March 31,
	2018				2017
Selected Data from the Consolidated Statements of Operations
Voyage revenue	$	70,319			$	77,688
Charter revenue	$	8,654			$	6,767
Total revenue	78,973				84,455
Voyage expense	30,168				41,272
Charter expense	22,696				23,201
Vessel operating expenses	9,849				8,591
Total cost of transportation and service revenue	62,713				73,064
Net revenue (1)	16,260				11,391
Other operating expenses	8,466				7,457
Loss on sale and leaseback of vessels	—				4,290
Income from operations	7,794				(356		)
Total other expense, net	(2,258		)		352
Net income	5,536				(4		)
Income attributable to noncontrolling interests	(1,210		)		1,351
Net income attributable to Pangaea Logistics Solutions Ltd.	$	4,326			$	1,347
	March 31, 2018				December 31, 2017
Selected Data from the Consolidated Balance Sheets
Cash	$	28,205			$	34,532
Total assets	$	411,799			$	423,297
Total secured debt, including obligations under capital leases	$	158,241			$	163,396
Total liabilities and stockholders' equity	$	411,799			$	423,297
	For the three months ended March 31,
	2018				2017
Selected Data from the Consolidated Statements of Cash Flows
Net cash provided by operating activities	$	2,790			$	2,431
Net cash used in investing activities	$	(377	)		$	(38,709	)
Net cash (used in) provided by financing activities	$	(8,740	)		$	35,677
Adjusted EBITDA (2)	$	12,132			$	7,876
Shipping Days (3)
Voyage days	2,945				3,668
Time charter days	579				674
Total shipping days	3,524				4,342
TCE Rates ($/day) (4)	$	13,849			$	9,945

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(1)

Net revenue represents total revenue less the total direct costs of transportation and services, which includes charter hire, voyage and vessel operating expenses. Net revenue is included because it is used by management and certain investors to measure performance by comparison to other logistic service providers. Net revenue is not an item recognized by the generally accepted accounting principles in the United States of America, or U.S. GAAP, and should not be considered as an alternative to net income, operating income, or any other indicator of a company's operating performance required by U.S. GAAP. Pangaea’s definition of net revenue used here may not be comparable to an operating measure used by other companies.

(2)

Adjusted EBITDA represents operating earnings before interest expense, income taxes, depreciation and amortization, loss on sale and leaseback of vessels and other non-operating income and/or expense, if any. Adjusted EBITDA is included because it is used by management and certain investors to measure operating performance and is also reviewed periodically as a measure of financial performance by Pangaea's Board of Directors. Adjusted EBITDA is not an item recognized by the generally accepted accounting principles in the United States of America, or U.S. GAAP, and should not be considered as an alternative to net income, operating income, or any other indicator of a company's operating performance required by U.S. GAAP. Pangaea’s definition of Adjusted EBITDA used here may not be comparable to the definition of EBITDA used by other companies.

The reconciliation of income from operations to net revenue and adjusted EBITDA is as follows:

		Three Months Ended March 31,
		2018				2017
Net Revenue
Income from operations		$	7,794			$	(356	)
General and administrative		$	4,128			$	3,515
Depreciation and amortization		4,338				3,942
Loss on sale and leaseback of vessels		—				4,290
Net Revenue		$	16,260			$	11,391
Adjusted EBITDA (in millions)
Income from operations		$	7,794			$	(356	)
Depreciation and amortization		$	4,338			$	3,942
Loss on sale and leaseback of vessel		$	—			$	4,290
Adjusted EBITDA		$	12,132			$	7,876

 

(3) Shipping days are defined as the aggregate number of days in a period during which its owned or chartered-in vessels are performing either a voyage charter (voyage days) or time charter (time charter days).

(4) Pangaea defines time charter equivalent, or “TCE,” rates as total revenues less voyage expenses divided by the length of the voyage, which is consistent with industry standards. TCE rate is a common shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with daily earnings generated by vessels on voyage charters, because rates for vessels on voyage charters are generally not expressed in per-day amounts while rates for vessels on time charters generally are expressed in such amounts.

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Industry Overview

The seaborne drybulk transportation industry is cyclical and can be volatile. The industry has seen steady improvement over the last year, with rates and demand for dry bulk tonnage up significantly since the historic low in February of 2016 and average published market rates have improved more than 86% since that time. The Baltic Dry Index (“BDI”), a measure of dry bulk market performance, averaged 1,146 for the first quarter of 2018, up from an average of 996 for the comparable quarter of 2017. The Company's TCE rates have climbed consistently since the first quarter of 2017 and have exceeded average published market rates by 10% to 25% over this period.

1st Quarter 2018 Highlights     

•	Income from operations of $7.8 million for the three months ended March 31, 2018 , as opposed to a loss from operations of $0.4 million for the same period of 2017 .

•	Net income attributable to Pangaea Logistics Solutions Ltd. of $4.3 million as compared to $1.3 million for the three months ended March 31, 2017 .

•	Pangaea's TCE rates increased 39% to $13,849 from $9,945 in the first quarter of 2017 while the market average for the first quarter was approximately $11,100, giving the Company an overall average premium over market rates of approximately $2,800 or 25%. The market rate increase is due to the consistent improvement in the drybulk market over the last year.

•

The Company completed two long-term COAs during 2017 and as a result, total shipping days decreased in the first quarter as compared to the first quarter of 2017. This decrease was matched with a corresponding decrease in voyage revenue, however, net revenue increased to $16.3 million for the three months ended March 31, 2018 , due to the relative strength of the market as reflected in higher freight rates. Net revenue was $11.4 million for the three months ended March 31, 2017 .

•	At the end of the quarter, Pangaea had $28.2 million in unrestricted cash and cash equivalents.

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

 

Revenues

 

Pangaea’s revenues are derived predominately from voyage and time charters, which are discussed below. Total revenue for the three months ended March 31, 2018 was $79.0 million , compared to $84.5 million for the same period in 2017 , a 6% decrease. The total number of shipping days decreased 19% to 3,524 in the three months ended March 31, 2018 , compared to 4,342 for the same period in 2017 . The average TCE rate was $13,849 per day for the three months ended March 31, 2018 , compared to $9,945 per day for same period in 2017 . The revenue decrease is predominantly due to the decrease in total shipping days, even as rates improved dramatically.

 

Components of revenue are as follows:

 

Voyage revenues decreased by 9% for the three months ended March 31, 2018 to $70.3 million compared to $77.7 million for the same period in 2017 . The decrease in voyage revenues was predominantly driven by the 20% decrease in the number of voyage days, which were 2,945 in the first quarter of 2018 as compared to 3,668 in the first quarter of 2017 . The decrease in voyage days was due in large part to COAs that began in the three months ended March 31, 2017 and were completed prior to the first quarter of 2018 . However, market improvement from the three months ended March 31, 2017 to the three months ended March 31, 2018 translated into better net results for the current period, as highlighted above. Voyage revenues were also impacted by the adoption of ASC 606 which resulted in a net increase of approximately $2.6 million or $739 per day of TCE revenue for the three months ended March 31, 2018 .

Charter revenues increased to $8.7 million from $6.8 million , or 28% , for the three months ended March 31, 2018 compared to the same period in 2017 . The increase in charter revenues was due to improvement in drybulk market rates. Time charter days were down 14% to 579 in the first quarter of 2018 from 674 in the first quarter of 2017 .

 

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Voyage Expenses

 

Voyage expenses for the three months ended March 31, 2018 were $30.2 million , compared to $41.3 million for the same period in 2017 , a decrease of approximately 27% . The decrease in voyage expense was due to the 20% decrease in voyage days, as discussed above. In addition, the Company incurred relet expenses of $3.4 million in the first quarter of 2017, but incurred only minimal relet expense in the same period of 2018 . The Company will opportunistically relet a cargo depending on market conditions and as a risk management tool. Voyage expenses were also impacted by the adoption of ASC 606 which resulted in a net increase in voyage expenses of approximately $0.9 million .

 

Charter Hire Expenses

 

Charter hire expenses for the three months ended March 31, 2018 were $22.7 million , compared to $23.2 million for the same period in 2017 . The number of chartered-in days decreased 33% from 2,916 days in the three months ended March 31, 2017 to 1,959 days for the three months ended March 31, 2018 . However, the improving dry bulk market pushed average charter-hire rates paid by the Company up 46% for the three months ended March 31, 2018 as compared to the same period of 2017 . Charter hire expense as a percentage of total revenue remained fairly consistent at 27% in the three months ended March 31, 2017 compared to 29% in the three months ended March 31, 2018 . The Company continues to operate under its successful strategy of chartering-in primarily for committed contracts. Increasing charter hire rates in the first quarter kept the Company from taking longer positions, thereby avoiding potential losses as these increases in hire rates outpaced improvements in freight rates.

 

Vessel Operating Expenses

 

Vessel operating expenses for the three months ended March 31, 2018 were $9.8 million , compared to $8.6 million in the comparable period in 2017 , an increase of approximately 15% . The increase in vessel operating expenses is due to the 12% increase in owned and bareboat charter days, which were 1,800 in the three months ended March 31, 2018 as compared to 1,608 in the three months ended March 31, 2017 . This increase is due to the addition of two vessels acquired on June 14, 2017 and December 21, 2017. Vessel operating expenses per day were $5,472 for the three months ended March 31, 2018 and $5,343 for the three months ended March 31, 2017 .

General and Administrative Expenses

General and administrative expenses increased from $3.5 million in the three months ended March 31, 2017 to $4.1 million in the three months ended March 31, 2018 . This is due to an increase in accrued bonus compensation and director fees.

Depreciation and amortization

The increase in depreciation and amortization is due to the increase in the number of vessels owned and operated under bareboat charters. Ownership days increased 12% due to acquisitions in June and December of 2017, as noted above.

Loss on sale and leaseback of vessels

The Company incurred a $4.3 million loss on the sale and subsequent leaseback of the m/v Bulk Destiny in three months ended March 31, 2017  but did not incur any such losses for the corresponding period of 2018 .

Income from Operations

The Company had income from operations of $7.8 million for the three months ended March 31, 2018 as compared to $0.4 million for the three months ended March 31, 2017 . This is primarily due to the loss on sale and leaseback in January 2017, discussed above, and to improvement in the dry bulk market rates over the same period of 2017 .

Interest Expense

The increase in interest expense is predominantly due to financing of the m/v Bulk Freedom in June 2017 and the m/v Bulk Pride in December 2017.

Unrealized (loss) gain on derivative instruments

The Company incurred losses on FFAs of approximately $314,000 and losses on bunker swaps of approximately $248,000 in the three months ended March 31, 2018 as compared to gains on FFAs of approximately $2,728,000 and losses on bunker swaps of

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approximately $758,000 in the three months ended March 31, 2017 . These result from changes in the fair value of the derivatives at the respective balance sheet dates.

Significant accounting estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“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 the estimated fair value used in determining loss on sale and leaseback of vessel, the estimated future cash flows used in its impairment analysis, the estimated salvage value used in determining depreciation expense and the allowances for doubtful accounts.

Long-lived Assets Impairment Considerations

Long-lived Assets Impairment Considerations. The carrying values of the Company’s vessels may not represent their fair market value or the amount that could be obtained by selling the vessel at any point in time because the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the pricing of new vessels. Historically, both charter rates and vessel values tend to be cyclical. The carrying value of each group of vessels (allocated by size, age and major characteristic or trade), which are classified as held and used by the Company, are reviewed for potential impairment when events or changes in circumstances indicate that the carrying value of a particular group may not be fully recoverable. In such instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the group and its eventual disposition is less than its carrying value. This assessment is made at the group level, which represents the lowest level for which identifiable cash flows are largely independent of other groups of assets. The asset groups established by the Company are defined by vessel size and major characteristic or trade.

The significant factors and assumptions used in the undiscounted projected net operating cash flow analysis include the Company’s estimate of future TCE rates based on current rates under existing charters and contracts. When existing contracts expire, the Company uses an estimated TCE based on actual results and extends these rates out to the end of the vessel’s useful life. TCE rates can be highly volatile, may affect the fair value of the Company’s vessels and may have a significant impact on the Company’s ability to recover the carrying amount of its fleet. Accordingly, the volatility is contemplated in the undiscounted projected net operating cash flow by using a sensitivity analysis based on percent changes in the TCE rates. The Company prepares a series of scenarios in an attempt to capture the range of possible trends and outcomes. Projected net operating cash flows are net of brokerage and address commissions and assume no revenue on scheduled offhire days. The Company uses the current vessel operating expense budget, estimated costs of drydocking and historical general and administrative expenses as the basis for its expected outflows, and applies an inflation factor it considers appropriate. The net of these inflows and outflows, plus an estimated salvage value, constitutes the projected undiscounted future cash flows. If these projected cash flows do not exceed the carrying value of the asset group, an impairment charge would be recognized.

During the three months ended March 31, 2018 , the Company did not identify any potential triggering events and therefore, in accordance with authoritative guidance, did not perform tests of recoverability.

During the three months ended March 31, 2017 , the Company identified a potential impairment indicator based on the estimated market value of its vessels. As a result, the Company evaluated each asset group for impairment by estimating the total undiscounted cash flows expected to result from the use of the asset group and its eventual disposal. The estimated undiscounted future cash flows were higher than the carrying amount of the vessels in the Company's fleet and as such, no loss on impairment was recognized.

Liquidity and Capital Resources

Liquidity and Cash Needs

The Company has historically financed its capital requirements with cash flow from operations, proceeds from related party debt, proceeds from long-term debt and capital leases, and, in June 2017, through a private placement of common stock. The Company may consider additional debt and equity financing alternatives in the future. However, if market conditions are negative, the Company may be unable to raise additional debt or equity financing on acceptable terms or at all. As a result, the Company may be unable to pursue opportunities to expand its business.

 

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At March 31, 2018 and December 31, 2017 , the Company had working capital of $14.3 million and $13.0 million , respectively.

 

Considerations made by management in assessing the Company’s ability to continue as a going concern are its ability to consistently generate positive cash flows from operations, which were approximately $2.8 million and $2.4 million in the three months ended March 31, 2018 and 2017, respectively; $29.2 million in 2017 and $19.2 million in 2016; and its ability to procure long-term fixed contract employment (COAs) with new and longstanding customers. In addition, the Company has demonstrated its unique ability to adapt to changing market conditions by changing the chartered-in profile to meet its cargo commitments. For more information on the results of operations, see ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Results of Operations.

Capital Expenditures

 

The Company’s capital expenditures relate to the purchase and lease of interests in vessels, and capital improvements to its vessels which are expected to enhance the revenue earning capabilities and safety of these vessels. The Company’s owned and leased fleet includes two Panamax drybulk carriers, six Supramax drybulk carriers, two Ultramax Ice-Class 1C, two Handymax drybulk carriers (both of which are Ice-Class 1A) and one barge. The Company also has a one-third interest in a consolidated joint venture which owns six Panamax Ice-Class 1A drybulk carriers.

 

In addition to vessel acquisitions that the Company may undertake in future periods, its other major capital expenditures include funding its program of regularly scheduled drydockings necessary to make improvements to its vessels, as well as to comply with international shipping standards and environmental laws and regulations. Funding expenses associated with these requirements will be met with cash from operations. The Company anticipates that this process of recertification will require it to reposition these vessels from a discharge port to shipyard facilities, which will reduce the Company’s available days and operating days during that period. The Company capitalized drydocking costs totaling approximately $1.5 million and $64,000 and expensed drydocking costs of approximately $34,000 and $58,000 in the three months ended March 31, 2018 and 2017 , respectively.

 

Off-Balance Sheet Arrangements

 

The Company does not have off-balance sheet arrangements at March 31, 2018 or December 31, 2017 .  

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risks

 

Interest Rate Risk    

 

The international shipping industry is capital intensive, requiring significant amounts of investment provided in the form of long-term debt. Certain of the Company’s outstanding debt contain floating interest rates that fluctuate with changes in the financial markets and in particular changes in LIBOR. Increasing interest rates could increase the Company’s interest expense and adversely impact its future earnings. The Company’s net effective exposure to floating interest rate fluctuations on its outstanding debt was $64.3 million and $66.5 million, respectively, at March 31, 2018 and December 31, 2017 .

 

The Company’s interest expense is affected by changes in the general level of interest rates, particularly LIBOR. As an indication of the extent of the Company’s sensitivity to interest rate changes, an increase in LIBOR of 1% would have decreased the Company’s net income and cash flows during each of the three month periods ended March 31, 2018 and 2017 by approximately $0.1 million, based on the debt levels at the beginning of each period. The Company expects its sensitivity to interest rate changes to increase in the future if the Company enters into additional floating rate debt agreements in connection with its acquisition of additional vessels.

 

Forward Freight Agreements

 

The Company assesses risk associated with fluctuating future freight rates and, when appropriate, hedges identified economic risk with appropriate derivative instruments, specifically forward freight agreements (FFAs). Such economic hedges do not always qualify for hedge accounting under ASC 815 and as such, the usage of such derivatives can lead to fluctuations in the Company’s reported results from operations on a period-to-period basis. The aggregate fair value of FFAs at March 31, 2018 was a liability of $49,000 . The aggregate fair value of FFAs at December 31, 2017 was an asset of $266,000 .

 

Fuel Swap Contracts  

The Company continuously monitors the market volatility associated with bunker prices and seeks to reduce the risk of such volatility through a bunker hedging program. During the three months ended March 31, 2018 and the year ended December 31, 2017 , the Company entered into various fuel swap contracts that were not designated for hedge accounting. The aggregate fair value of these fuel swaps at March 31, 2018 and December 31, 2017 were assets of $129,000 and $377,000 , respectively.

 

ITEM 4. Controls and Procedures

 

Management’s Evaluation of Disclosure Controls and Procedures.

 

As of the end of the period covered by this report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective for the three months ended March 31, 2018 .

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

Item 1 - Legal Proceedings

 

From time to time, we are involved in various other disputes and litigation matters that arise in the ordinary course of our business, principally cargo claims. Those claims, even if lacking merit, could result in the expenditure by us of significant financial and managerial resources.

 

Item 1A – Risk Factors

 

There have been no material changes from the “Risk Factors” previously disclosed in our Annual Report on Form 10-K, filed with the SEC on March 21, 2018.

 

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

 

None.

Item 3 - Defaults Upon Senior Securities

 

None.

 

Item 4 – Mine Safety Disclosures

 

None.

 

Item 5 - Other Information  

 

None.

 

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Item 6 – Exhibits 

Exhibit no.	Description	Incorporated By Reference			Filed herewith
		Form	Date	Exhibit
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
31.2	Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				X
32.2	Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				X
EX-101.INS	XBRL Instance Document				X
EX-101.SCH	XBRL Taxonomy Extension Schema				X
EX-101.CAL	XBRL Taxonomy Extension Calculation Linkbase				X
EX-101.DEF	XBRL Taxonomy Extension Definition Linkbase				X
EX-101.LAB	XBRL Taxonomy Extension Label Linkbase				X
EX-101.PRE	XBRL Taxonomy Extension Presentation Linkbase				X

 

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SIGNATURES

 

Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 10, 2018 .

 

	PANGAEA LOGISTICS SOLUTIONS LTD.
	By:	/s/ Edward Coll
	Edward Coll
	Chief Executive Officer
	(Principal Executive Officer)
	By:	/s/ Gianni DelSignore
	Gianni DelSignore
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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