Item 1. Financial
Statements
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements (Unaudited)
DIAMOND
S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
as of June 30, 2020 and December 31, 2019
(In Thousands, except for share and
per share data)
(Unaudited)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
118,392
|
|
|
$
|
83,609
|
|
Due from charterers – Net of provision for doubtful accounts of $1,717 and $1,415, respectively
|
|
|
80,663
|
|
|
|
80,691
|
|
Inventories
|
|
|
21,730
|
|
|
|
32,071
|
|
Prepaid expenses and other current assets
|
|
|
13,815
|
|
|
|
13,179
|
|
Total current assets
|
|
|
234,600
|
|
|
|
209,550
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
Vessels – Net of accumulated depreciation of $605,350 and $553,483, respectively
|
|
|
1,821,428
|
|
|
|
1,865,738
|
|
Other property – Net of accumulated depreciation of $737 and $584, respectively
|
|
|
508
|
|
|
|
642
|
|
Deferred drydocking costs – Net of accumulated amortization of $21,505 and $17,975, respectively
|
|
|
35,720
|
|
|
|
37,256
|
|
Restricted cash
|
|
|
5,679
|
|
|
|
5,610
|
|
Advances to Norient pool
|
|
|
1,390
|
|
|
|
—
|
|
Time charter contracts acquired – Net of accumulated amortization of $3,914 and $2,296, respectively
|
|
|
3,486
|
|
|
|
5,004
|
|
Other noncurrent assets
|
|
|
3,543
|
|
|
|
4,582
|
|
Total noncurrent assets
|
|
|
1,871,754
|
|
|
|
1,918,832
|
|
Total
|
|
$
|
2,106,354
|
|
|
$
|
2,128,382
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
134,389
|
|
|
$
|
134,389
|
|
Accounts payable and accrued expenses
|
|
|
37,569
|
|
|
|
44,062
|
|
Deferred charter hire revenue
|
|
|
6,482
|
|
|
|
1,934
|
|
Derivative liability
|
|
|
456
|
|
|
|
—
|
|
Total current liabilities
|
|
|
178,896
|
|
|
|
180,385
|
|
|
|
|
|
|
|
|
|
|
Long-term debt – Net of deferred financing costs of $14,258 and $15,866, respectively
|
|
|
633,468
|
|
|
|
744,055
|
|
Derivative liability
|
|
|
440
|
|
|
|
—
|
|
Total liabilities
|
|
|
812,804
|
|
|
|
924,440
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001; 100,000,000 shares authorized; issued and outstanding 39,912,877 and 39,890,699 shares at June 30, 2020 and December 31, 2019, respectively
|
|
|
40
|
|
|
|
40
|
|
Treasury stock – at cost; 137,289 shares at June 30, 2020
|
|
|
(1,418
|
)
|
|
|
—
|
|
Additional paid-in capital
|
|
|
1,239,408
|
|
|
|
1,237,658
|
|
Accumulated other comprehensive loss
|
|
|
(896
|
)
|
|
|
—
|
|
Retained earnings (accumulated deficit)
|
|
|
22,189
|
|
|
|
(68,567
|
)
|
Total Diamond S Shipping Inc. equity
|
|
|
1,259,323
|
|
|
|
1,169,131
|
|
Noncontrolling interests
|
|
|
34,227
|
|
|
|
34,811
|
|
Total equity
|
|
|
1,293,550
|
|
|
|
1,203,942
|
|
Total
|
|
$
|
2,106,354
|
|
|
$
|
2,128,382
|
|
See notes to condensed consolidated financial statements.
DIAMOND
S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Operations
for the Three and Six Months Ended June 30, 2020 and 2019
(In Thousands, except for share and per
share data)
(Unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spot revenue
|
|
$
|
162,419
|
|
|
$
|
129,344
|
|
|
$
|
350,071
|
|
|
$
|
227,793
|
|
Time charter revenue
|
|
|
20,815
|
|
|
|
19,951
|
|
|
|
42,888
|
|
|
|
24,158
|
|
Pool revenue
|
|
|
319
|
|
|
|
—
|
|
|
|
319
|
|
|
|
—
|
|
Voyage revenue
|
|
|
183,553
|
|
|
|
149,295
|
|
|
|
393,278
|
|
|
|
251,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expenses
|
|
|
49,349
|
|
|
|
65,895
|
|
|
|
124,030
|
|
|
|
107,473
|
|
Vessel expenses
|
|
|
41,738
|
|
|
|
42,376
|
|
|
|
83,274
|
|
|
|
67,177
|
|
Depreciation and amortization expense
|
|
|
28,771
|
|
|
|
29,243
|
|
|
|
57,531
|
|
|
|
51,199
|
|
General and administrative expenses
|
|
|
7,485
|
|
|
|
7,320
|
|
|
|
15,609
|
|
|
|
13,608
|
|
Total operating expenses
|
|
|
127,343
|
|
|
|
144,834
|
|
|
|
280,444
|
|
|
|
239,457
|
|
Operating income
|
|
|
56,210
|
|
|
|
4,461
|
|
|
|
112,834
|
|
|
|
12,494
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(9,711
|
)
|
|
|
(13,422
|
)
|
|
|
(21,087
|
)
|
|
|
(22,792
|
)
|
Other income
|
|
|
3
|
|
|
|
384
|
|
|
|
336
|
|
|
|
901
|
|
Total other expense – Net
|
|
|
(9,708
|
)
|
|
|
(13,038
|
)
|
|
|
(20,751
|
)
|
|
|
(21,891
|
)
|
Net income (loss)
|
|
|
46,502
|
|
|
|
(8,577
|
)
|
|
|
92,083
|
|
|
|
(9,397
|
)
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
790
|
|
|
|
(74
|
)
|
|
|
1,327
|
|
|
|
132
|
|
Net income (loss) attributable to Diamond S Shipping Inc.
|
|
$
|
45,712
|
|
|
$
|
(8,503
|
)
|
|
$
|
90,756
|
|
|
$
|
(9,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share – basic
|
|
$
|
1.15
|
|
|
$
|
(0.21
|
)
|
|
$
|
2.28
|
|
|
$
|
(0.28
|
)
|
Net earnings (loss) per share – diluted
|
|
$
|
1.14
|
|
|
$
|
(0.21
|
)
|
|
$
|
2.26
|
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
39,920,559
|
|
|
|
39,890,698
|
|
|
|
39,861,943
|
|
|
|
33,774,260
|
|
Weighted average common shares outstanding – diluted
|
|
|
40,111,348
|
|
|
|
39,890,698
|
|
|
|
40,091,647
|
|
|
|
33,774,260
|
|
See notes to condensed consolidated financial statements.
DIAMOND
S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Comprehensive Income (Loss)
for the Three and Six Months Ended June 30, 2020 and 2019
(In Thousands)
(Unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
46,502
|
|
|
$
|
(8,577
|
)
|
|
$
|
92,083
|
|
|
$
|
(9,397
|
)
|
Unrealized loss on cash flow hedges
|
|
|
(896
|
)
|
|
|
(1,882
|
)
|
|
|
(896
|
)
|
|
|
(2,978
|
)
|
Other comprehensive loss
|
|
|
(896
|
)
|
|
|
(1,882
|
)
|
|
|
(896
|
)
|
|
|
(2,978
|
)
|
Comprehensive income (loss)
|
|
|
45,606
|
|
|
|
(10,459
|
)
|
|
|
91,187
|
|
|
|
(12,375
|
)
|
Less: comprehensive income (loss) attributable to noncontrolling interest
|
|
|
790
|
|
|
|
(74
|
)
|
|
|
1,327
|
|
|
|
132
|
|
Comprehensive income (loss) attributable to Diamond S Shipping Inc.
|
|
$
|
44,816
|
|
|
$
|
(10,385
|
)
|
|
$
|
89,860
|
|
|
$
|
(12,507
|
)
|
See notes to condensed consolidated financial statements.
DIAMOND
S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Changes in Equity
for the Six Months Ended June 30, 2020 and 2019
(In Thousands)
(Unaudited)
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Additional
Paid-
in Capital
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
(Accumulated
Deficit)
Retained
Earnings
|
|
|
Noncontrolling
Interests
|
|
|
Total
|
|
Balance
– January 1, 2020
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
1,237,658
|
|
|
$
|
—
|
|
|
$
|
(68,567
|
)
|
|
$
|
34,811
|
|
|
$
|
1,203,942
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,334
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,334
|
|
NT
Suez Holdco LLC distribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,568
|
)
|
|
|
(1,568
|
)
|
Shares
repurchased
|
|
|
—
|
|
|
|
(1,418
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,418
|
)
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,044
|
|
|
|
537
|
|
|
|
45,581
|
|
Balance
– March 31, 2020
|
|
|
40
|
|
|
|
(1,418
|
)
|
|
|
1,238,992
|
|
|
|
—
|
|
|
|
(23,523
|
)
|
|
|
33,780
|
|
|
|
1,247,871
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,109
|
|
NT
Suez Holdco LLC distribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(343
|
)
|
|
|
(343
|
)
|
Unrealized
loss on cash flow hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(896
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(896
|
)
|
Equity
awards net settled to cover employee withholding taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
(693
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(693
|
)
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,712
|
|
|
|
790
|
|
|
|
46,502
|
|
Balance
– June 30, 2020
|
|
$
|
40
|
|
|
$
|
(1,418
|
)
|
|
$
|
1,239,408
|
|
|
$
|
(896
|
)
|
|
$
|
22,189
|
|
|
$
|
34,227
|
|
|
$
|
1,293,550
|
|
|
|
Partners’
Contributions
|
|
|
Common
Stock
|
|
|
Additional
Paid-
in Capital
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Accumulated
Deficit
|
|
|
Noncontrolling
Interests
|
|
|
Total
|
|
Balance
– January 1, 2019
|
|
$
|
994,771
|
|
|
$
|
—
|
|
|
$
|
2,558
|
|
|
$
|
4,387
|
|
|
$
|
(56,477
|
)
|
|
$
|
34,607
|
|
|
$
|
979,846
|
|
Cumulative
effect of accounting change
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,784
|
)
|
|
|
—
|
|
|
|
(2,784
|
)
|
Merger
transaction (Note 3)
|
|
|
(994,771
|
)
|
|
|
40
|
|
|
|
1,231,579
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
236,848
|
|
Unrealized
loss on cash flow hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,096
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,096
|
)
|
Net
loss (income)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,026
|
)
|
|
|
206
|
|
|
|
(820
|
)
|
Balance
– March 31, 2019
|
|
|
—
|
|
|
|
40
|
|
|
|
1,234,137
|
|
|
|
3,291
|
|
|
|
(60,287
|
)
|
|
|
34,813
|
|
|
|
1,211,994
|
|
Unrealized
loss on cash flow hedges
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,882
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,882
|
)
|
Capital
contributions for NT Suez Holdco LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
980
|
|
|
|
980
|
|
Stock-based
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
861
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
861
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,503
|
)
|
|
|
(74
|
)
|
|
|
(8,577
|
)
|
Balance
– June 30, 2019
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
1,234,998
|
|
|
$
|
1,409
|
|
|
$
|
(68,790
|
)
|
|
$
|
35,719
|
|
|
$
|
1,203,376
|
|
See notes to condensed consolidated financial statements.
DIAMOND
S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
for the Six Months Ended June 30, 2020 and 2019
(In Thousands)
(Unaudited)
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
92,083
|
|
|
$
|
(9,397
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
57,531
|
|
|
|
51,199
|
|
Amortization of deferred financing costs
|
|
|
1,771
|
|
|
|
1,892
|
|
Amortization of time charter hire contracts acquired
|
|
|
1,518
|
|
|
|
872
|
|
Amortization of the realized gain from recouponing swaps
|
|
|
—
|
|
|
|
(1,377
|
)
|
Stock-based compensation expense
|
|
|
2,443
|
|
|
|
861
|
|
Changes in assets and liabilities
|
|
|
6,802
|
|
|
|
(24,313
|
)
|
Cash paid for drydocking
|
|
|
(3,014
|
)
|
|
|
(7,691
|
)
|
Net cash provided by operating activities
|
|
|
159,134
|
|
|
|
12,046
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition costs, net of cash acquired of $16,568
|
|
|
—
|
|
|
|
(292,683
|
)
|
Transaction costs
|
|
|
—
|
|
|
|
(18,804
|
)
|
Payments for vessel additions and other property
|
|
|
(7,481
|
)
|
|
|
(7,388
|
)
|
Net cash used in investing activities
|
|
|
(7,481
|
)
|
|
|
(318,875
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Borrowings on long-term debt
|
|
|
—
|
|
|
|
300,000
|
|
Principal payments on long-term debt
|
|
|
(67,195
|
)
|
|
|
(35,496
|
)
|
Borrowings on revolving credit facilities
|
|
|
—
|
|
|
|
56,000
|
|
Repayments on revolving credit facilities
|
|
|
(45,000
|
)
|
|
|
(26,323
|
)
|
NT Suez Holdco LLC distribution
|
|
|
(1,911
|
)
|
|
|
—
|
|
Shares repurchased
|
|
|
(1,418
|
)
|
|
|
—
|
|
Cash paid to net settle employee withholding taxes on equity
awards
|
|
|
(693
|
)
|
|
|
—
|
|
Proceeds from partners’ contributions in subsidiaries
|
|
|
—
|
|
|
|
980
|
|
Payments for deferred financing costs
|
|
|
(584
|
)
|
|
|
(6,959
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(116,801
|
)
|
|
|
288,202
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
34,852
|
|
|
|
(18,627
|
)
|
Cash, cash equivalents and restricted cash – Beginning of period
|
|
|
89,219
|
|
|
|
88,158
|
|
Cash, cash equivalents and restricted cash – End of period
|
|
$
|
124,071
|
|
|
$
|
69,531
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
20,538
|
|
|
$
|
22,075
|
|
Unpaid transaction
costs in Accounts payable and accrued expenses at the end of the period
|
|
$
|
—
|
|
|
$
|
280
|
|
Unpaid vessel additions in Accounts payable and accrued expenses at the end of the period
|
|
$
|
—
|
|
|
$
|
2,485
|
|
See notes to condensed consolidated financial statements.
DIAMOND
S SHIPPING INC. AND SUBSIDIARIES
(In Thousands, except for share and
per share data)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
|
1.
|
BUSINESS AND BASIS OF PRESENTATION
|
Business — Diamond
S Shipping Inc. (“DSSI”) was formed on November 14, 2018 under the laws of the Republic of the Marshall Islands
for the purpose of receiving, via contribution from Capital Product Partners L.P. (“CPLP”), CPLP’s crude and
product tanker business and combining that business with the business and operations of DSS Holdings L.P. (“DSS LP”)
pursuant to the Transaction Agreement, dated as of November 27, 2018 (as amended, the “Transaction Agreement”),
by and among CPLP, DSS LP, DSSI and the other parties named therein. DSS LP was a Cayman Islands limited partnership formed on
October 1, 2007.
On March 27, 2019, DSSI and DSS LP
and all of its directly-owned subsidiaries (the “DSS LP Subsidiaries”) completed a merger pursuant to the Transaction
Agreement. Pursuant to the terms of the Transaction Agreement, on March 27, 2019, the DSS LP Subsidiaries merged with and
into DSSI, with DSSI being the surviving corporation in the merger (the “Merger”). DSSI and the DSS LP Subsidiaries
are hereinafter referred to collectively as the “Company.”
The Merger was accounted for as a reverse
acquisition in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 805, “Business Combinations” as the DSS LP Subsidiaries are the accounting acquirer for financial
reporting purposes. Accordingly, the historical consolidated financial statements of the DSS LP Subsidiaries for periods prior
to the Merger are considered to be the predecessor financial statements of the Company. Refer to Note 3 — Merger Transaction
for further information.
The Company is a seaborne transporter of
crude oil and refined petroleum products, operating in the international shipping industry. As of June 30, 2020, through its
wholly-owned subsidiaries, the Company owns and operates 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier
and 50 medium range (“MR”) product carriers. The Company also controls and operates two Suezmax vessels through a joint
venture (Refer to Note 5 — Joint Venture Investments).
|
2.
|
Summary of SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation —
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) which includes the accounts of the Company and its direct and
indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation —
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial
information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion
of management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and operating results have been included in the statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31,
2019 and notes thereto included in the Company’s annual report on Form 10-K (the “2019 Financial Statements”). The
results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the operating results
to be expected for the year ending December 31, 2020.
The Company is an “emerging growth
company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”). As such, the Company is eligible to take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of
the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of
the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay
the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends
to take advantage of the benefits of this extended transition period for as long as it is available. The Company’s condensed
consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting
standards. Section 107 of the JOBS Act provides that the decision not to opt out of the extended transition period for complying
with new or revised accounting standards is irrevocable.
Cash and Cash Equivalents, and Restricted
Cash — The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported within
the consolidated balance sheets that sum to the total of the amounts shown in the condensed consolidated statements of cash flows:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Cash and cash equivalents
|
|
$
|
118,392
|
|
|
$
|
83,609
|
|
|
$
|
64,144
|
|
|
$
|
83,054
|
|
Restricted cash
|
|
|
5,679
|
|
|
|
5,610
|
|
|
|
5,387
|
|
|
|
5,104
|
|
Total Cash and cash equivalents, and Restricted cash shown in the condensed consolidated statements of cash flows
|
|
$
|
124,071
|
|
|
$
|
89,219
|
|
|
$
|
69,531
|
|
|
$
|
88,158
|
|
Amounts included in restricted cash represent
those required to be set aside by the $66 Million Facility, as defined in Note 8 below. The restriction will lapse when the related
long-term debt is retired.
Revenue and Voyage Expense Recognition
— Total voyage revenue includes revenue earned on fixed rate time charters, spot market voyage charters, spot market-related
time charters and pools. Pursuant to the new revenue recognition guidance, which was adopted as of January 1, 2019, revenue
for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the
vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port.
As a result of the adoption of the new
revenue recognition guidance on January 1, 2019, the Company recorded a net increase to the opening accumulated deficit of
$2,784 for the cumulative impact of adopting the new guidance. The impact related primarily to the change in accounting for
spot market voyage charters. Prior to the adoption of the new guidance, revenue for spot market voyage charters was recognized
ratably over the total transit time of the voyage, which previously commenced the later of when the vessel departed from its last
discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed
at the discharge port. As a result of the adoption of the new guidance, revenue for spot market voyage charters is now being
recognized ratably over the total transit time of the voyage which now begins when the vessel arrives at the loading port and ends
at the time the discharge of cargo is completed at the discharge port. Additionally, the Company has identified that the contract
fulfillment costs of spot market voyage charters consist primarily of the fuel consumption that is incurred by the Company from
the end of the previous vessel employment until the arrival at the loading port. The fuel consumption during this period is
deferred and recorded as deferred voyage costs included in Prepaid expenses and other current assets in the condensed consolidated
balance sheet and is amortized ratably over the total transit time of the voyage from arrival at the loading port until the vessel
departs from the discharge port and recognized as part of Voyage expenses. Refer also to Note 6 — Prepaid
expenses and other current assets.
In time charters, operating costs including
crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port
charges are paid by the charterer. These voyage expenses are borne by the Company when engaged in spot market voyage charters. As
such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters. There
are certain other non-specified voyage expenses, such as commissions, which are typically borne by the Company.
Recent Accounting Pronouncements
New accounting
standards to be implemented — In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies
the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes
lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a
lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning after December 15,
2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption
permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the
balance sheet for operating leases and providing new disclosures about the Company’s leasing activities. The Company is currently
analyzing its contracts and will then calculate the right-of-use assets and lease liabilities as of January 1, 2021 based
on the present value of the Company’s remaining minimum lease payments, primarily due to the recognition of right-of-use
assets and lease liabilities with respect to operating leases.
In June 2016,
the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”),
which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected
credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized
cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial
assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods
beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15,
2021, with early adoption permitted. The Company is currently evaluating the potential impact of this pronouncement on the condensed
consolidated financial statements.
As discussed in Note
1, the Company completed a Merger on March 27, 2019. Directly prior to the Merger, the following took place:
|
·
|
DSSI formed four wholly-owned subsidiaries organized under the laws of the Republic of the Marshall
Islands, referred to as “Products Merger Entity,” “Crude Merger Entity,” “Management Merger Entity”
and “Surviving Merger Entity.”
|
|
·
|
CPLP separated its product and crude tanker businesses into separate lines of subsidiaries and
contributed them to DSSI (the “Separation”).
|
|
·
|
DSSI issued 12,724,500 additional common shares in connection with the contribution by CPLP.
|
|
·
|
In the Separation, CPLP contributed to DSSI (1) CPLP’s crude and product tanker vessels,
(2) an amount in cash equal to $10 million and (3) associated inventories.
|
|
·
|
On March 27, 2019, CPLP distributed on a pro rata basis all 12,725,000 then-outstanding
common shares of DSSI to its unitholders of record as of March 19, 2019 (the “Distribution”).
|
Immediately following the Distribution,
the Merger took place, which is detailed as follows:
|
·
|
The Pre-Mergers took place:
|
|
o
|
DSS Crude Transport Inc., a wholly-owned subsidiary of DSS LP, merged with Crude Merger Entity,
with DSS Crude Transport Inc. surviving the merger,
|
|
o
|
DSS Products Transport Inc., a wholly-owned subsidiary of DSS LP, merged with Products Merger Entity,
with DSS Products Transport Inc. surviving the merger, and
|
|
o
|
Diamond S Technical Management LLC, a wholly-owned subsidiary of DSS LP, merged with Management
Merger Entity, with Diamond S Technical Management LLC surviving the merger.
|
|
·
|
Following
the Pre-Mergers and pursuant to the same plan, each of DSS Crude Transport Inc., DSS
Products Transport Inc. and Diamond S Technical Management LLC merged with the Surviving
Merger Entity, with the Surviving Merger Entity surviving. The Surviving Merger Entity
subsequently merged with DSSI, with DSSI surviving.
|
Pursuant to the Transaction agreement,
the CPLP unitholders received 12,725,000 common shares in DSSI, and the DSS LP limited partners received common shares of DSSI
that were determined by the factor to which DSS LP’s net asset value is to the net asset value of DSSI immediately after
the Distribution, multiplied by the number of shares distributed to CPLP unitholders after the March 27, 2019 effective date.
This equated to the DSS LP limited partners receiving 27,165,696 common shares.
The Merger completed
on March 27, 2019, and the Company’s common shares commenced trading on the New York Stock Exchange on March 28,
2019.
The Merger was accounted
for as a reverse acquisition in accordance with ASC 805, “Business Combinations.” Based on the structure of the Merger
and other activities contemplated by the Transaction Agreement, relative outstanding share ownership, the composition of the Company's
board of directors and the designation of certain senior management positions of the Company, the DSS LP Subsidiaries are the accounting
acquirer for financial reporting purposes.
Further, in accordance
with ASU 2017-01, the Merger was determined to be an asset acquisition as substantially all of the fair value of the gross assets
acquired is concentrated in a group of similar identifiable assets.
The consideration transferred, assets acquired,
and liabilities assumed are recognized as follows:
Consideration paid and transferred
|
|
|
|
Cash paid — net of cash received of $16,568
|
|
$
|
292,683
|
|
Common stock issued to CPLP
|
|
|
236,848
|
|
Transaction costs
|
|
|
20,738
|
|
Total consideration paid and transferred
|
|
$
|
550,269
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
|
Due from charterers
|
|
$
|
4,514
|
|
Inventories
|
|
|
6,969
|
|
Prepaid expenses and other current assets
|
|
|
1,152
|
|
Vessels
|
|
|
537,988
|
|
Time charter contracts acquired — assets
|
|
|
7,300
|
|
Other noncurrent assets
|
|
|
2,191
|
|
Accounts payable and accrued expenses
|
|
|
(7,478
|
)
|
Deferred charter hire revenue
|
|
|
(2,367
|
)
|
Net assets acquired
|
|
$
|
550,269
|
|
Further, as the Merger was determined to
be an asset acquisition, the Company recorded the acquired assets and liabilities at the cost of the acquisition, including transaction
costs, on the basis of relative fair value. The carrying value of the vessels were recorded in accordance with the principles set
forth under ASC Topic 820, “Fair Value Measurement” based upon current market values obtained from at least two independent
ship brokers. The time charter contract assets acquired represent an estimate of the fair value of the time charters acquired as
of the date of the Merger, and considers the differential between the stated time charter rate and the contracts’ fair value
at the time of the Merger.
In connection with the Merger, the incentive
units granted under the DSS LP unit incentive plan expired with no value. Further, while the Company is now a public company, management
believe that, pursuant to Section 883 of the U.S. Internal Revenue Code of 1986, the income related to vessel operations will
continue to be exempt from U.S. federal income tax, although no assurance can be given that the Company will continue to satisfy
this statutory exemption from U.S. federal income taxation.
|
4.
|
Net earnings (Loss) Per Share
|
The computation of basic net earnings
(loss) per share is based on the weighted-average number of common shares outstanding during the reporting period. The
computation of diluted net earnings (loss) per share assumes the vesting of nonvested stock awards (refer to Note 14 —
Stock-Based Compensation), for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost
attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. Of the
616,157 and 566,660 nonvested shares and RSUs outstanding as of June 30, 2020 and 2019, 218,248 and 566,660,
respectively, were excluded from the computation of diluted net earnings per share because these were anti-dilutive (refer to
Note 14 — Stock-Based Compensation).
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Common shares outstanding, basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
|
|
39,920,559
|
|
|
|
39,890,698
|
|
|
|
39,861,943
|
|
|
|
33,774,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding, diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
|
|
39,920,559
|
|
|
|
39,890,698
|
|
|
|
39,861,943
|
|
|
|
33,774,260
|
|
Dilutive effect of restricted stock awards
|
|
|
190,789
|
|
|
|
—
|
|
|
|
229,704
|
|
|
|
—
|
|
Weighted-average common shares outstanding, diluted
|
|
|
40,111,348
|
|
|
|
39,890,698
|
|
|
|
40,091,647
|
|
|
|
33,774,260
|
|
|
5.
|
JOINT VENTURE INVESTMENTS
|
NT Suez Holdco LLC —
In September 2014, the Company formed a joint venture, NT Suez Holdco LLC (“NT Suez”), to purchase two Suezmax
newbuildings. The two vessels were delivered in October and November 2016.
NT Suez is owned 51% by the Company and
49% by WLR/TRF Shipping S.a.r.l (“WLR/TRF”). WLR/TRF is indirectly owned by funds managed or jointly managed by WL
Ross & Co, LLC (“WLR”), including WLR Recovery Fund V DSS AIV, L.P. and WLR V Parallel ESC, L.P., which
are also shareholders of the Company. WLR is a fund manager that manages the Company’s largest shareholders.
As of June 30, 2020 and December 31,
2019, the investments NT Suez received from the Company and WLR/TRF aggregated $74,104, which was used for shipyard installment
payments and working capital. In February 2020, NT Suez distributed $1,632 and $1,568 to the Company and WLR/TRF, respectively.
In June 2020, NT Suez distributed $357 and $343 to the Company and WLR/TRF, respectively.
Management has determined that NT Suez
qualifies as a variable interest entity, and, when aggregating the variable interests held by the related parties (i.e. the Company
and WLR/TRF), the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly
impact NT Suez’s economic performance. Accordingly, the Company consolidates NT Suez.
Diamond Anglo Ship Management Pte.
Ltd. — In January 2018, the Company and Anglo Eastern Investment Holdings Ltd. (“AE Holdings”),
a third party, formed a joint venture, Diamond Anglo Ship Management Pte. Ltd. (“DASM”). DASM is owned 51% by the Company
and 49% by AE Holdings as of June 30, 2020 and December 31, 2019, and was formed to provide ship management services
to the Company’s vessels.
As of June 30, 2020 and December 31,
2019, the investments DASM received from the Company and AE Holdings totaled $51 and $49, respectively, which were used for general
and administrative expenses.
Management has determined that DASM qualifies
as a variable interest entity, and, when aggregating the variable interests held by the Company and AE Holdings, the Company is
the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts DASM’s economic
performance. Accordingly, the Company consolidates DASM.
|
6.
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets
consist of the following as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Advances to Capital Ship Management Corp. (“CSM”) (Refer to Note 13 — Related Party Transactions)
|
|
$
|
6,427
|
|
|
$
|
5,757
|
|
Advances to technical managers
|
|
|
121
|
|
|
|
26
|
|
Insurance claims receivable
|
|
|
733
|
|
|
|
511
|
|
Prepaid insurance
|
|
|
1,605
|
|
|
|
1,093
|
|
Advances to agents
|
|
|
1,388
|
|
|
|
1,421
|
|
Deferred voyage costs
|
|
|
2,074
|
|
|
|
3,132
|
|
Other
|
|
|
1,467
|
|
|
|
1,239
|
|
Total prepaid expenses and other current assets
|
|
$
|
13,815
|
|
|
$
|
13,179
|
|
|
7.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consist
of the following as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Trade accounts payable and accrued expenses
|
|
$
|
10,922
|
|
|
$
|
9,716
|
|
Accrued vessel and voyage expenses
|
|
|
24,094
|
|
|
|
32,201
|
|
Accrued interest
|
|
|
47
|
|
|
|
1,090
|
|
Accrued vessel and voyage expenses and Other current liabilities (Refer to Note 13 — Related Party Transactions)
|
|
|
2,506
|
|
|
|
1,055
|
|
Total accounts payable and accrued expenses
|
|
$
|
37,569
|
|
|
$
|
44,062
|
|
Long-term debt at June 30, 2020 and
December 31, 2019 was comprised of the following:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
$360 Million Facility
|
|
$
|
255,000
|
|
|
$
|
327,500
|
|
$525 Million Facility
|
|
|
477,500
|
|
|
|
515,000
|
|
$66 Million Facility
|
|
|
49,615
|
|
|
|
51,810
|
|
Total
|
|
|
782,115
|
|
|
|
894,310
|
|
Less: Unamortized deferred financing costs
|
|
|
(14,258
|
)
|
|
|
(15,866
|
)
|
Less: Current portion
|
|
|
(134,389
|
)
|
|
|
(134,389
|
)
|
Long-term debt, net of deferred financing costs
|
|
$
|
633,468
|
|
|
$
|
744,055
|
|
$360 Million Facility —
On March 27, 2019, in connection with the Merger, the Company entered into a $360,000 five-year Credit Agreement, as amended
(the “$360 Million Facility”), for the purposes of financing the Merger and refinancing the $30 Million Line of Credit
(defined below). The $360 Million Facility consists of a term loan of $300,000 and a revolving loan of $60,000, and is collateralized
by the 25 vessels acquired in the Merger and the three vessels that collateralized the $30 Million Line of Credit, with reductions
based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Million
Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin, and the interest
is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $360 Million Facility are
1.06%. As of June 30, 2020, $10,000 of the revolving loan was drawn, while $50,000 was available and undrawn.
The $360 Million Facility
contains certain restrictions on the payments of dividends. The $360 Million Facility permits the Company to pay dividends so long
as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any
fiscal quarter an amount that is equal to 50% of the adjusted consolidated net income of the Company in such fiscal quarter.
$525 Million Facility —
On December 23, 2019, the Company entered into a $525,000 five-year Credit Agreement (the “$525 Million
Facility”), for the purposes of refinancing the $460 Million Facility, the $235 Million Facility and the $75 Million
Facility (defined below). The $525 Million Facility consists of a term loan of $375,000 and a revolving loan of $150,000, and
is collateralized by the 36 vessels that collateralized the $460 Million Facility, the $235 Million Facility and the $75
Million Facility, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The
term loan component of the $525 Million Facility bears interest at the Eurodollar Rate for a three-month interest period,
plus a 2.50% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the
revolving loan component of the $525 Million Facility are 0.875%. As of June 30, 2020, $140,000 of the revolving loan
was drawn, while $10,000 was available and undrawn.
The $525 Million Facility contains certain
restrictions on the payments of dividends. The $525 Million Facility permits the Company to pay dividends so long as the payment
of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal quarter
an amount that is equal to 50% of the adjusted consolidated net income of the Company in the preceding fiscal quarter.
Prior to the December 2019 refinancing,
the Company financed 26 MR vessels, which were acquired in September 2011, with a $460,000 five-year senior secured term loan
facility, as amended (the “$460 Million Facility”). Interest was paid monthly, and the $460 Million Facility bore interest
at the Eurodollar Rate for a one-month interest period, plus a 2.80% interest rate margin.
Also, prior to the December 2019 refinancing,
the Company financed eight 2012-built Suezmaxes with a $235,000 five-year senior secured financing facility, as amended (the “$235
Million Facility”), which consisted of a term loan of $220 million and a revolving loan of $15,000. Interest on the term
loan component was paid quarterly and the $235 Million Facility bore interest at the Eurodollar Rate for a three-month interest
period, plus a 2.75% interest rate margin. Commitment fees on undrawn amounts related to the revolving loan component of the $235
Million Facility were 1.10%.
Lastly, prior to the December 2019
refinancing, the Company financed two 2016-built Suezmaxes vessels with a $75,000 seven-year senior secured term loan facility,
as amended (the “$75 Million Facility”). Interest was paid quarterly, and the $75 Million Facility bore interest at
the Eurodollar Rate for a three-month interest period, plus a 2.20% interest rate margin.
$66 Million Facility —
On August 9, 2016, the Company entered into a $66,000 five-year senior secured term loan facility (the “$66 Million
Facility”) for the purpose of financing two vessels controlled through the joint venture NT Suez (refer to Note 5 — Joint
Venture Investments). The $66 Million Facility, which is collateralized by the two vessels controlled through NT Suez, is a nonrecourse
term loan with reductions that are based on a 15-year amortization schedule, and are payable on a quarterly basis. Interest is
paid quarterly, and the $66 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 3.25%
interest rate margin.
The $66 Million Facility contains certain
restrictions on the payments of dividends by the NT Suez joint venture. The $66 Million Facility permits the NT Suez joint venture
to pay dividends so long as the payment of dividends does not cause an event of default, and does not exceed an amount equal to
75% of the consolidated net income, as determined in accordance with GAAP, of the borrower, which is the consolidated accounts
of NT Suez.
Interest Rates – The
following table sets forth the effective interest rate associated with the interest costs for the Company’s debt facilities,
including the rate differential between the fixed pay rate and the variable receive rate on the interest rate swap agreements that
were in effect (refer to Note 9 — Interest Rate Swaps), combined, as well as the cost associated with the commitment
fees. Additionally, the table includes the range of interest rates on the debt, excluding the impact of swaps and commitment fees:
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended
June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Effective interest rate
|
|
4.09%
|
|
4.98%
|
|
4.36%
|
|
4.98%
|
Range of interest rates (excluding impact of swaps and unused commitment fees)
|
|
3.95% to 4.71%
|
|
4.53% to 5.86%
|
|
3.95% to 5.32%
|
|
4.53% to 6.06%
|
Restrictive Covenants —
The Company’s credit facilities credit contain restrictive covenants and other non-financial restrictions. The $360
Million Facility and $525 Million Facility include, among other things, restrictions on the Company’s ability to incur
indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, leverage ratio requirements, minimum
working capital requirements, and other customary restrictions. The $66 Million Facility includes restrictions and financial
covenants including, among other things, the Company’s ability to incur indebtedness, limitations on dividends, minimum
cash balance, collateral maintenance, and other customary restrictions. The Company was in compliance with its financial
covenants as of June 30, 2020.
Maturities – The aggregate
maturities of debt during the remaining six months of the year ending December 31, 2020, and annually for the years ending
December 31 are as follows:
2020 (for the remaining six months of the year)
|
|
$
|
67,194
|
|
2021
|
|
|
177,421
|
|
2022
|
|
|
130,000
|
|
2023
|
|
|
130,000
|
|
2024
|
|
|
277,500
|
|
Total
|
|
$
|
782,115
|
|
The Company uses interest rate swaps for
the management of interest rate risk exposure, as the interest rate swaps effectively convert a portion of the Company’s
debt from a floating to a fixed rate. The interest rate swaps are agreements between the Company and counterparties to pay, in
the future, a fixed-rate payment in exchange for the counterparties paying the Company a variable payment. The amount of the net
payment obligation is based on the notional amount of the swap contract and the prevailing market interest rates. The Company may
terminate the swap contracts prior to their expiration dates, at which point a realized gain or loss would be recognized. The value
of the Company’s commitment would increase or decrease based primarily on the extent to which interest rates move against
the rate fixed for each swap. All derivatives are recognized on the Company’s Consolidated Balance Sheets at their fair values.
For accounting hedges, on the date the derivative contract is entered into, the Company designates the derivative as (1) a
hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge)
or (2) a hedge of a forecasted transaction (“cash flow” hedge).
The Company previously entered into interest
rate swap transactions, with multiple counterparties, which were designated as cash flow hedges. In September 2018, the Company
re-couponed its swaps, receiving cash of $6,813, with the corresponding gain recognized ratably over the original term of the hedged
instruments. The re-couponed swaps were terminated in December 2019 when the related $460 Million Facility was extinguished.
Upon the swaps’ termination, the Company made a payment of $2,486 and recognized the remaining gain that resulted from the
re-couponing in September 2018, which are recognized in Interest expense in the condensed consolidated statements of operations.
On April 29, 2020, the Company entered
into interest rate swap transactions, with multiple counterparties, which were designated as cash flow hedges. In accordance with
these transactions, the Company will pay an average fixed-rate interest amount of 0.54% and will receive floating rate interest
amounts based on three-month LIBOR settings. These interest rate swaps are designated as cash flow hedges with a start date of
June 30, 2020 and end date of December 23, 2024, with an aggregate notional amount outstanding of $205,529 at June 30,
2020.
The derivative asset and liability balances
at June 30, 2020 and December 31, 2019 are as follows:
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
|
|
Fair
Value
|
|
|
|
|
Fair
Value
|
|
|
|
Balance
Sheet
Location
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
Balance
Sheet
Location
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Derivatives designated
as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts
|
|
Derivative
asset
(Current assets)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivative
liability
(Current liabilities)
|
|
$
|
456
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Derivative
asset
(Noncurrent assets)
|
|
|
—
|
|
|
|
—
|
|
|
Derivative
liability
(Noncurrent
liabilities)
|
|
|
440
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives designated as hedging instruments
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
896
|
|
|
|
—
|
|
Total
Derivatives
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
896
|
|
|
$
|
—
|
|
The components of Accumulated other comprehensive
loss included in the Condensed Consolidated Balance Sheets consist of net unrealized loss on cash flow hedges as of June 30,
2020 and December 31, 2019.
The following table presents the gross
amounts of these liabilities with any offsets to arrive at the net amounts recognized in the Condensed Consolidated Balance Sheets
at June 30, 2020 and December 31, 2019:
|
|
|
|
|
Gross
Amounts
Offset in the
|
|
|
Net
Amounts
of Liabilities
Presented in
the
|
|
|
Gross
Amounts not Offset in the Condensed
Consolidated
Balance Sheets
|
|
|
|
|
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
|
Condensed
Consolidated
Balance
Sheets
|
|
|
Condensed
Consolidated
Balance
Sheets
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Received
|
|
|
Net
Amount
|
|
June 30, 2020 Derivatives
|
|
$
|
896
|
|
|
$
|
—
|
|
|
$
|
896
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
896
|
|
December 31, 2019 Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
10.
|
ACCUMULATED OTHER COMPREHENSIVE Loss
|
The components of Accumulated other comprehensive
income included in the Condensed Consolidated Balance Sheets consist of net unrealized loss on cash flow hedges as of June 30,
2020 and December 31, 2019.
The changes in Accumulated other comprehensive
income by component are as follows:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Accumulated other comprehensive income – January 1,
|
|
$
|
—
|
|
|
$
|
4,387
|
|
Other comprehensive loss before reclassifications
|
|
|
(896
|
)
|
|
|
(4,007
|
)
|
Amounts reclassified from Accumulated other comprehensive (loss) income
|
|
|
—
|
|
|
|
1,029
|
|
Other comprehensive loss for the period
|
|
|
(896
|
)
|
|
|
(2,978
|
)
|
Accumulated other comprehensive (loss) income – June 30,
|
|
$
|
(896
|
)
|
|
$
|
1,409
|
|
The realized gain for the six months
ended June 30, 2019 reclassified from Accumulated other comprehensive income consists of a realized loss of ($348) related
to interest rate swap contracts and $1,377 related to the amortization of the gain on re-couponed swaps, as discussed in Note 9.
The realized gain reclassified from Accumulated other comprehensive loss are presented in Interest expense in the Condensed Consolidated
Statements of Operations.
|
11.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The fair values and carrying amounts of
the Company’s financial instruments at June 30, 2020 and December 31, 2019 that are required to be disclosed at
fair value, but not recorded at fair value, are as follows:
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
118,392
|
|
|
$
|
118,392
|
|
|
$
|
83,609
|
|
|
$
|
83,609
|
|
Restricted cash
|
|
|
5,679
|
|
|
|
5,679
|
|
|
|
5,610
|
|
|
|
5,610
|
|
Variable rate debt
|
|
|
782,115
|
|
|
|
782,115
|
|
|
|
894,310
|
|
|
|
894,310
|
|
The following methods and assumptions are
used in estimating the fair value of disclosures for financial instruments:
Cash and cash equivalents, and Restricted
cash: The carrying amounts reported in the condensed consolidated balance sheets for Cash and cash equivalents, and Restricted
cash approximate fair value. Cash and cash equivalents, and Restricted cash are considered Level 1 items as they represent liquid
assets with short-term maturities.
Variable Rate Debt: The fair value
of variable rate debt is based on management’s estimate of rates the Company could obtain for similar debt of the same remaining
maturities. Additionally, the Company considers its creditworthiness in determining the fair value of variable rate debt under
the credit facilities. The carrying amounts in the above table, which exclude the impact of deferred financing costs, approximate
the fair market value for the variable rate debt. Variable rate debt is considered to be a Level 2 item as the Company considers
the estimate of rates it could obtain for similar debt.
The fair value of an asset or liability
is based on assumptions that market participants would use in pricing the asset or liability. The hierarchies of inputs used when
determining fair value are described below:
Level 1: Valuations based on
quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted
prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant
degree of judgment.
Level 2: Valuations based on
quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical
or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets.
Level 3: Valuations based on inputs
that are unobservable and significant to the overall fair value measurement.
The assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and the
placement of financial instruments within the fair value hierarchy.
The table below provides the financial
instruments carried at fair value based on the levels of hierarchy as of the valuation date listed:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
896
|
|
|
$
|
—
|
|
|
$
|
896
|
|
Derivative Liabilities: The fair
value of the derivative liabilities, which relate to the interest rate swaps used for hedging purposes, is the estimated amount
the Company would pay for the liability to terminate the swap agreements at the reporting date, taking into account current interest
rates and the current creditworthiness of the swap counterparties. Interest rate swaps are considered to be a Level 2 item
as the Company, using the income approach to value the derivatives, uses observable Level 2 market inputs at measurement date
and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated,
but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets in active
markets (specifically, futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable
for the asset (specifically, LIBOR, cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used
as a practical expedient for fair value measurements. Refer to Note 9 — Interest Rate Swaps for further information regarding
the Company’s interest rate swap agreements.
The Company does not currently have any
Level 3 financial assets or liabilities and there have been no transfers in and/or out of Level 3 during the six months ended June 30,
2020 and 2019.
|
12.
|
REVENUE FROM TIME CHARTERS
|
The future minimum revenues, before
inclusion of profit-sharing revenue, if any, expected to be received on irrevocable time charters for which revenues can be
reasonably estimated and the related revenue days that the vessels are available for employment, and not including
charterers’ renewal options for the remaining six months of the year ending December 31, 2020, and annually for
the years ending December 31 are as follows:
2020 (for the remaining six months of the year)
|
|
$
|
32,988
|
|
2021
|
|
|
37,818
|
|
2022
|
|
|
13,511
|
|
Total future committed revenue
|
|
$
|
84,317
|
|
|
13.
|
Related Party Transactions
|
During the three and six months ended June 30,
2020 and 2019, the Company had the following related party transactions.
Capital Ship Management Corp. (“CSM”)
— Pursuant to the Transaction Agreement, for a period of five years, CSM will provide commercial and technical management
services for the 25 vessels acquired in the Merger. For the three and six months ended June 30, 2020 and 2019, the following
transactions were recorded for these services:
|
·
|
For the three and six months ended June 30, 2020, $1,934 and $3,867, respectively, and for the three and six months ended
June 30, 2019, $1,934 and $2,019, respectively, was incurred for technical management services, which is included in Vessel
expenses in the condensed consolidated statements of operations and have been paid as of June 30, 2020.
|
|
·
|
For the three and six months ended June 30, 2020, $622 and $1,367, respectively, and for the three and six months ended
June 30, 2019, $582 and $582, respectively, was incurred for commercial management services, which is included in Voyage expenses
in the condensed consolidated statements of operations. As of June 30, 2020, $749 remains unpaid, and is included in Accounts
payable and accrued expenses in the condensed consolidated balance sheet.
|
|
·
|
For the three and six months ended June 30, 2020, $499 and $996, respectively, and for the three and six months ended
June 30, 2019, $519 and $519, respectively, was incurred for general management services, which is included in General and
administrative expenses in the condensed consolidated statements of operations. As of June 30, 2020, $165 remains unpaid,
and is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet.
|
Working capital is advanced to CSM to procure
both voyage and vessel costs. At June 30, 2020, the net funds advanced totaled $3,921, of which $6,427 is included in Prepaid
Expense and Other Current Assets in the condensed consolidated balance sheet (refer to Note 6 — Prepaid Expenses and Other
Current Assets), and the $2,506 liability is included in Accounts payable and accrued expenses in the condensed consolidated balance
sheet (refer to Note 7 — Accounts Payable and Accrued Expenses). At December 31, 2019, the net funds advanced totaled
$4,748, of which $5,757 is included in Prepaid Expense and Other Current Assets in the condensed consolidated balance sheet and
the $1,009 liability is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet.
At December 31, 2019, amounts received
for activity that occurred prior to the Merger that are due to CSM total $46 and are included in Accounts payable and accrued expenses
in the condensed consolidated balance sheet. These amounts were settled during the six months ended June 30, 2020.
|
14.
|
Stock-Based Compensation
|
2019 Equity Incentive Plan —
Under the 2019 Equity Incentive Plan (“2019 Plan”), the Company’s Board of Directors, the Compensation Committee,
or their designees may grant a variety of stock-based incentive awards representing an aggregate of 3,989,000 shares of common
stock to the Company’s officers, directors, employees, and consultants. Such awards include stock options, stock appreciation
rights, restricted (nonvested) stock, restricted stock units, and unrestricted stock.
Restricted
Stock Units — The Company has issued restricted stock units (“RSUs”) under the 2019 Plan to certain
members of the Board of Directors, an executive and certain employees of the Company, which represent the right to receive a
share of common stock, or in the sole discretion of the Company’s Compensation Committee, the value of a share of
common stock on the date that the RSU vests. Such shares of common stock will only be issued to certain directors, an
executive and employees when their RSUs vest under the terms of their grant agreements and 2019 Plan described above.
The RSUs that have
been issued to certain members of the Board of Directors vest one year from the date of grant. The RSUs that have been issued
to other individuals vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes
the Company’s unvested RSUs for the six months ended June 30, 2020:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
RSUs
|
|
|
Date Price
|
|
Outstanding at January 1, 2020
|
|
|
74,716
|
|
|
$
|
14.03
|
|
Granted
|
|
|
47,156
|
|
|
|
12.08
|
|
Vested
|
|
|
(37,639
|
)
|
|
|
13.24
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
84,233
|
|
|
$
|
13.29
|
|
The following table summarizes certain
information of the RSUs unvested and vested as of June 30, 2020:
Unvested RSUs
|
|
Vested RSUs
|
|
June 30, 2020
|
|
June 30, 2020
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
Weighted
|
|
|
|
Average
|
|
Remaining
|
|
|
|
Average
|
|
Number of
|
|
Grant Date
|
|
Contractual
|
|
Number of
|
|
Grant Date
|
|
RSUs
|
|
Price
|
|
Life
|
|
RSUs
|
|
Price
|
|
84,233
|
|
$
|
13.29
|
|
1.8
|
|
37,639
|
|
$
|
13.24
|
|
The Company is amortizing these grants
over the applicable graded vesting periods. Forfeitures are taken into account when they occur. As of June 30, 2020, unrecognized
compensation cost of $803 related to RSUs will be recognized over a weighted-average period of 1.8 years. For the three and six
months ended June 30, 2020, the Company recognized $160 and $370, respectively, of nonvested stock amortization expense for
the RSUs, which is included in General and administrative expenses.
Restricted Stock
— Under the 2019 Plan, grants of restricted common stock were issued to certain members of the Board of Directors, executives
and employees. The restricted common stock issued to certain members of the Board of Directors vest one year from the date of grant. The
restricted common stock issued to certain executives and employees ordinarily vest ratably on each of the three anniversaries of
the determined vesting date. The table below summarizes the Company’s nonvested stock awards for the six months ended
June 30, 2020 which were issued under the 2019 Plan:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Price
|
|
Outstanding at January 1, 2020
|
|
|
562,790
|
|
|
$
|
13.44
|
|
Granted
|
|
|
175,151
|
|
|
|
12.41
|
|
Vested
|
|
|
(161,831
|
)
|
|
|
13.64
|
|
Forfeited
|
|
|
(20,127
|
)
|
|
|
13.70
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
555,983
|
|
|
$
|
13.04
|
|
For the six months ended June 30,
2020, 161,831 shares vested under the 2019 Plan. There were no shares that vested under the 2019 Plan during the year ended December 31,
2019. For the three and six months ended June 30, 2020, the Company recognized $856 and $1,980, respectively, in nonvested
stock amortization expense for the 2019 Plan restricted stock, which is included in General and administrative expenses.
The Company is amortizing these grants
over the applicable graded vesting periods. Forfeitures are taken into account when they occur. As of June 30, 2020, unrecognized
compensation cost of $4,769 related to nonvested stock will be recognized over a weighted-average period of 2.2 years.
Performance Awards — The Company
granted performance awards that contain service, performance-based and/or market-based vesting criteria. Vesting occurs if the
recipient remains employed and depends on the degree to which performance goals are achieved during the three-year performance
period (as defined in the award agreements). The table below summarizes the Company’s nonvested performance awards for the
six months ended June 30, 2020 which were issued under the 2019 Plan:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Price
|
|
Outstanding at January 1, 2020
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
133,305
|
|
|
|
12.60
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2020
|
|
|
133,305
|
|
|
$
|
12.60
|
|
For the three and six months ended June 30,
2020, the Company recognized $93 in nonvested stock amortization expense for the 2019 Plan performance awards, which is included
in General and administrative expenses. As of June 30, 2020, unrecognized compensation cost of $1,586 related to nonvested
stock will be recognized over a weighted-average period of 2.8 years.
The future compensation to be recognized
for the aforementioned RSUs, restricted stock and performance awards as of June 30, 2020 is as follows:
2020 (for the remaining six months of the year)
|
|
$
|
2,697
|
|
2021
|
|
|
2,962
|
|
2022
|
|
|
1,245
|
|
2023
|
|
|
254
|
|
Total
|
|
$
|
7,158
|
|
|
15.
|
COMMITMENTS AND CONTINGENCIES
|
From time to time, the Company may be subject
to legal proceedings and claims in the ordinary course of its business. Such claims, even if lacking merit, could result in the
expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that
it believes will have, individually or in the aggregate, a material effect on the Company, its financial condition, results of
operations or cash flows.
The Company is engaged primarily in the
ocean transportation of crude oil and petroleum products in the international market through the ownership and operation of a diversified
fleet of vessels. The international shipping industry has many distinct market segments based, in large part, on the size and design
configuration of vessels required. Rates in each market segment are determined by a variety of factors affecting the supply and
demand for vessels to move cargoes in the trades for which they are suited. Tankers are not bound to specific ports or schedules
and therefore can respond to market opportunities by moving between trades and geographical areas. The Company’s vessels
regularly navigate in international waters, over hundreds of trade routes, to hundreds of ports and, as a result, the disclosure
of geographic information is impracticable. The Company charters its vessels primarily on voyage charters and on time charters.
The Company has two reportable segments,
Crude Tankers and Product Carriers. Segment results are evaluated based on income from operations. The accounting policies applied
to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements.
Results for the Company’s revenue
and loss from operations by segment for the three and six months ended June 30, 2020 and 2019 are as follows:
|
|
Crude Tankers
|
|
|
Product Carriers
|
|
|
Total
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenue
|
|
$
|
69,873
|
|
|
$
|
113,680
|
|
|
$
|
183,553
|
|
Voyage expenses
|
|
|
(14,660
|
)
|
|
|
(34,689
|
)
|
|
|
(49,349
|
)
|
Vessel expenses
|
|
|
(12,662
|
)
|
|
|
(29,076
|
)
|
|
|
(41,738
|
)
|
Depreciation and amortization
|
|
|
(9,974
|
)
|
|
|
(18,797
|
)
|
|
|
(28,771
|
)
|
General, administrative and management fees(1)
|
|
|
(1,829
|
)
|
|
|
(5,656
|
)
|
|
|
(7,485
|
)
|
Income from operations
|
|
$
|
30,748
|
|
|
$
|
25,462
|
|
|
$
|
56,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenue
|
|
$
|
51,474
|
|
|
$
|
97,821
|
|
|
$
|
149,295
|
|
Voyage expenses
|
|
|
(27,094
|
)
|
|
|
(38,801
|
)
|
|
|
(65,895
|
)
|
Vessel expenses
|
|
|
(10,509
|
)
|
|
|
(31,867
|
)
|
|
|
(42,376
|
)
|
Depreciation and amortization
|
|
|
(9,872
|
)
|
|
|
(19,371
|
)
|
|
|
(29,243
|
)
|
General, administrative and management fees(1)
|
|
|
(1,722
|
)
|
|
|
(5,598
|
)
|
|
|
(7,320
|
)
|
Income from operations
|
|
$
|
2,277
|
|
|
$
|
2,184
|
|
|
$
|
4,461
|
|
|
|
Crude Tankers
|
|
|
Product Carriers
|
|
|
Total
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenue
|
|
$
|
160,502
|
|
|
$
|
232,776
|
|
|
$
|
393,278
|
|
Voyage expenses
|
|
|
(43,009
|
)
|
|
|
(81,021
|
)
|
|
|
(124,030
|
)
|
Vessel expenses
|
|
|
(23,884
|
)
|
|
|
(59,390
|
)
|
|
|
(83,274
|
)
|
Depreciation and amortization
|
|
|
(19,921
|
)
|
|
|
(37,610
|
)
|
|
|
(57,531
|
)
|
General, administrative and management fees(1)
|
|
|
(3,806
|
)
|
|
|
(11,803
|
)
|
|
|
(15,609
|
)
|
Income from operations
|
|
$
|
69,882
|
|
|
$
|
42,952
|
|
|
$
|
112,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenue
|
|
$
|
86,883
|
|
|
$
|
165,068
|
|
|
$
|
251,951
|
|
Voyage expenses
|
|
|
(41,464
|
)
|
|
|
(66,009
|
)
|
|
|
(107,473
|
)
|
Vessel expenses
|
|
|
(17,269
|
)
|
|
|
(49,908
|
)
|
|
|
(67,177
|
)
|
Depreciation and amortization
|
|
|
(17,911
|
)
|
|
|
(33,288
|
)
|
|
|
(51,199
|
)
|
General, administrative and management fees(1)
|
|
|
(3,408
|
)
|
|
|
(10,200
|
)
|
|
|
(13,608
|
)
|
Income from operations
|
|
$
|
6,831
|
|
|
$
|
5,663
|
|
|
$
|
12,494
|
|
|
(1)
|
Includes direct general and administrative expenses and indirect general and administrative expenses
(allocated to each segment based on a formula).
|
The reconciliations of total assets of
the segments to amounts included in the condensed consolidated balance sheets are as follows:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Crude Tankers
|
|
$
|
883,230
|
|
|
$
|
896,897
|
|
Product Carriers
|
|
|
1,215,852
|
|
|
|
1,225,235
|
|
Corporate unrestricted cash and cash equivalents
|
|
|
5,774
|
|
|
|
2,609
|
|
Other unallocated amounts
|
|
|
1,498
|
|
|
|
3,641
|
|
Consolidated total assets
|
|
$
|
2,106,354
|
|
|
$
|
2,128,382
|
|
The Company has evaluated all subsequent
events to ensure that these condensed consolidated financial statements include appropriate recognition and disclosure of recognized
events as of June 30, 2020. There were no subsequent events that the Company believes require recognition or disclosure.
ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is
designed to provide a better understanding of various factors related to the results of operations and financial condition of Diamond
S Shipping Inc. (“we,” “us,” “our” or the “Company”). This discussion should be
read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K
(the “2019 Annual Report”) for the year ended December 31, 2019, filed with the SEC on March 27, 2020, and
our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains
a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by
uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements
as a result of many factors including, but not limited to, those described under “Cautionary Note on Forward-Looking Statements”.
Business Overview
Diamond S Shipping Inc. (“DSSI”)
was formed on November 14, 2018 under the laws of the Republic of the Marshall Islands for the purpose of receiving, via contribution
from CPLP, CPLP’s crude and product tanker business and combining that business with the business and operations of DSS LP
pursuant to the Transaction Agreement. For a description of the Transaction Agreement and related Merger, please see Note 1 —
Business and Basis of Presentation and Note 3 — Merger Transaction in the unaudited condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.
We provide seaborne transportation of crude
oil, refined petroleum, and other products in the international shipping industry. As of June 30, 2020, through our wholly
owned subsidiaries, we owned and operated 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 50 MR product
carriers. As of the same date, we also controlled and operated two Suezmax vessels through a joint venture.
Factors to Consider When Evaluating the Company’s Results
The COVID-19 Pandemic
On March 11, 2020, the World Health
Organization declared the novel coronavirus (“COVID-19”) outbreak a pandemic. In response to the ongoing outbreak,
many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented
measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have, and will likely continue to,
negatively affect the global economy. The extent to which COVID-19 will impact the Company’s results of operations and
financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot
be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat
its impact, among others. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at
this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer
period of time in response to the outbreak, it may have a material adverse effect on the Company’s future results of operation
and financial condition.
Strategic Product Tanker Partnership
On June 15, 2020, the Company entered
into an agreement with Dampskibsselskabet Norden A/S (“Norden”). During the term of this agreement, the Company and
Norden have agreed to use commercially reasonable efforts to identify new projects in the product tanker industry that they may
jointly pursue and develop. Pursuant to this agreement, Company has agreed to initially contribute 28 of its MR vessels to the
Norient Product Pool (the “Pool”). This agreement will terminate upon the occurrence of certain events, including when
the Company no longer has vessels operating in the Pool. As of June 30, 2020, five of the Company’s vessels are operating
in the Pool.
The Merger
The Merger, as described in Note 3
— Merger Transaction in the unaudited condensed consolidated financial statements included herein, closed on
March 27, 2019. Our condensed consolidated financial statements include operating results for the 25 vessels acquired
for 95 days and 182 days during the six months ended June 30, 2019 and 2020, respectively, in addition to the 41 vessels
historically owned by us for the full period and the two vessels sold in September 2019.
New Credit Facilities and Refinancings
For a description
of the Company’s credit agreements and refinancings, please see Note 8 — Long-Term Debt in the unaudited condensed
consolidated financial statements included herein.
Vessel Dispositions
In August 2019, our Board of Directors
approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. We reached an agreement to sell the Atlantic
Aquarius and Atlantic Leo, each for $16.0 million less a 1% broker commission payable to a third party. In September 2019,
we completed the sale of the Atlantic Aquarius and Atlantic Leo.
Share Repurchase Program
On March 4, 2020, our Board of Directors
approved a share repurchase program, providing authorization to repurchase up to $50 million of our common shares, effective for
a period of one year. We may repurchase these shares in the open market or in privately negotiated transactions, at times and prices
that we consider to be appropriate. As of June 30, 2020, we repurchased 137,289 shares for a total of $1.4 million under the
share repurchase program, with all repurchases having been effected in the three months ended March 31, 2020.
Other Trends and Factors Affecting the Company’s Future
Results of Operations
The principal factors that have affected
our results of operations, and may in the future affect results of operations, are the economic, regulatory, financial, credit,
political and governmental conditions prevailing in the tanker market and shipping industry generally and in the countries and
markets in which our vessels are chartered.
The world economy has experienced significant
economic and political upheavals in recent history. In addition, credit supply has been constrained and financial markets have
been particularly turbulent. Protectionist trends, global growth and demand for the seaborne transportation of goods, including
oil and oil products and overcapacity and deliveries of newly-built vessels have affected, and may further affect, the tanker market
and shipping industry in general and the business, financial condition, results of operations and cash flows of the Company.
Some of the key factors that have affected
our business, financial condition, results of operations and cash flows, and may in the future affect our business, financial condition,
results of operations and cash flows, include the following:
|
·
|
levels of oil product demand and inventories;
|
|
·
|
supply and demand for crude oil and oil products;
|
|
·
|
charter hire levels (under time and bareboat charters) and the ability to re-charter
vessels at competitive rates as their current charters expire;
|
|
·
|
developments in vessel values, which may affect compliance with covenants under credit facilities and/or debt refinancing;
|
|
·
|
compliance with covenants in credit facilities, including covenants relating to
the maintenance of vessel value ratios;
|
|
·
|
the level of debt and the related interest expense and amortization of principal;
|
|
·
|
access to debt and equity and the cost of capital required to acquire additional
vessels;
|
|
·
|
supply and order-book of tanker vessels;
|
|
·
|
the ability to increase the size of the fleet and make additional acquisitions that are accretive to earnings;
|
|
·
|
the ability of the commercial and chartering operations to successfully employ
vessels at economically attractive rates, particularly as charters expire and the fleet expands;
|
|
·
|
the continuing demand for crude oil and oil products from China, India, Brazil
and Russia and other emerging markets;
|
|
·
|
the ability to comply with new maritime regulations, the more restrictive regulations
for the transport of certain products and cargoes and the increased costs associated therewith;
|
|
·
|
changes in fuel prices, including as a result of the imposition of sulfur oxide
emissions limits in 2020 under new regulations adopted by the IMO (for those vessels that are not retrofitted with scrubbers);
|
|
·
|
the effective and efficient technical management of the vessels;
|
|
·
|
the costs associated with upcoming drydocking of vessels;
|
|
·
|
the ability to obtain and maintain major international oil company approvals and
to satisfy technical, health, safety and compliance standards;
|
|
·
|
the strength of and growth in the number of the customer relationships, especially
with major international oil companies and major commodity traders;
|
|
·
|
the prevailing spot market rates and the number of vessels operating in the spot
market; and
|
|
·
|
the ability to acquire and sell vessels at satisfactory prices.
|
Operating Data
The following tables represent the operating
data for the three and six months ended June 30, 2020 and 2019 on a consolidated basis.
|
|
For the Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In Thousands, Except Per Share and Share Data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenue
|
|
$
|
162,419
|
|
|
$
|
129,344
|
|
|
$
|
33,075
|
|
|
|
25.6
|
%
|
Time charter revenue
|
|
|
20,815
|
|
|
|
19,951
|
|
|
|
864
|
|
|
|
4.3
|
%
|
Pool revenue
|
|
|
319
|
|
|
|
—
|
|
|
|
319
|
|
|
|
—
|
|
Total revenue
|
|
|
183,553
|
|
|
|
149,295
|
|
|
|
34,258
|
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expenses
|
|
|
49,349
|
|
|
|
65,895
|
|
|
|
(16,546
|
)
|
|
|
(25.1
|
)%
|
Vessel expenses
|
|
|
41,738
|
|
|
|
42,376
|
|
|
|
(638
|
)
|
|
|
(1.5
|
)%
|
Depreciation and amortization expense
|
|
|
28,771
|
|
|
|
29,243
|
|
|
|
(472
|
)
|
|
|
(1.6
|
)%
|
General and administrative expenses
|
|
|
7,485
|
|
|
|
7,320
|
|
|
|
165
|
|
|
|
2.3
|
%
|
Total operating expenses
|
|
|
127,343
|
|
|
|
144,834
|
|
|
|
(17,491
|
)
|
|
|
(12.1
|
)%
|
Operating income
|
|
|
56,210
|
|
|
|
4,461
|
|
|
|
51,749
|
|
|
|
1160.0
|
%
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense — Net
|
|
|
(9,708
|
)
|
|
|
(13,038
|
)
|
|
|
3,330
|
|
|
|
(25.5
|
)%
|
Net income (loss)
|
|
|
46,502
|
|
|
|
(8,577
|
)
|
|
|
55,079
|
|
|
|
642.2
|
%
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
790
|
|
|
|
(74
|
)
|
|
|
864
|
|
|
|
1167.6
|
%
|
Net income (loss) attributable to Diamond S Shipping Inc.
|
|
$
|
45,712
|
|
|
$
|
(8,503
|
)
|
|
$
|
54,215
|
|
|
|
637.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share – basic
|
|
$
|
1.15
|
|
|
$
|
(0.21
|
)
|
|
$
|
1.36
|
|
|
|
647.6
|
%
|
Net earnings (loss) per share – diluted
|
|
$
|
1.14
|
|
|
$
|
(0.21
|
)
|
|
$
|
1.35
|
|
|
|
642.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
39,920,559
|
|
|
|
39,890,696
|
|
|
|
29,863
|
|
|
|
0.1
|
%
|
Weighted average common shares outstanding – diluted
|
|
|
40,111,348
|
|
|
|
39,890,696
|
|
|
|
220,652
|
|
|
|
0.6
|
%
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
% Change
|
|
|
|
(In Thousands, Except Per Share and Share Data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage revenue
|
|
$
|
350,071
|
|
|
$
|
227,793
|
|
|
$
|
122,278
|
|
|
|
53.7
|
%
|
Time charter revenue
|
|
|
42,888
|
|
|
|
24,158
|
|
|
|
18,730
|
|
|
|
77.5
|
%
|
Pool revenue
|
|
|
319
|
|
|
|
—
|
|
|
|
319
|
|
|
|
—
|
|
Total revenue
|
|
|
393,278
|
|
|
|
251,951
|
|
|
|
141,327
|
|
|
|
56.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage expenses
|
|
|
124,030
|
|
|
|
107,473
|
|
|
|
16,557
|
|
|
|
15.4
|
%
|
Vessel expenses
|
|
|
83,274
|
|
|
|
67,177
|
|
|
|
16,097
|
|
|
|
24.0
|
%
|
Depreciation and amortization expense
|
|
|
57,531
|
|
|
|
51,199
|
|
|
|
6,332
|
|
|
|
12.4
|
%
|
General and administrative expenses
|
|
|
15,609
|
|
|
|
13,608
|
|
|
|
2,001
|
|
|
|
14.7
|
%
|
Total operating expenses
|
|
|
280,444
|
|
|
|
239,457
|
|
|
|
40,987
|
|
|
|
17.1
|
%
|
Operating income
|
|
|
112,834
|
|
|
|
12,494
|
|
|
|
100,340
|
|
|
|
803.1
|
%
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense — Net
|
|
|
(20,751
|
)
|
|
|
(21,891
|
)
|
|
|
1,140
|
|
|
|
(5.2
|
)%
|
Net income (loss)
|
|
|
92,083
|
|
|
|
(9,397
|
)
|
|
|
101,480
|
|
|
|
1,079.9
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
1,327
|
|
|
|
132
|
|
|
|
1,195
|
|
|
|
905.3
|
%
|
Net income (loss) attributable to Diamond S Shipping Inc.
|
|
$
|
90,756
|
|
|
$
|
(9,529
|
)
|
|
$
|
100,285
|
|
|
|
1,052.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share – basic
|
|
$
|
2.28
|
|
|
$
|
(0.28
|
)
|
|
$
|
2.56
|
|
|
|
914.3
|
%
|
Net earnings (loss) per share – diluted
|
|
$
|
2.26
|
|
|
$
|
(0.28
|
)
|
|
$
|
2.54
|
|
|
|
907.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
39,861,943
|
|
|
|
33,774,260
|
|
|
|
6,087,683
|
|
|
|
18.0
|
%
|
Weighted average common shares outstanding – diluted
|
|
|
40,091,647
|
|
|
|
33,774,260
|
|
|
|
6,317,387
|
|
|
|
18.7
|
%
|
Results of Operations
Three months ended June 30, 2020 compared to the
three months ended June 30, 2019
Voyage revenue
Voyage revenue increased by $34.3
million to $183.6 million during the three months ended June 30, 2020 as compared to $149.3 million for the three months
ended June 30, 2019. The $34.3 million increase was principally driven by strong market conditions in both the crude
tanker and product carrier segments. Despite the demand destruction caused by the global COVID-19 pandemic, tanker markets
were firm because of the sharp contango structure of the crude oil price curve, where the future price of oil was expected to
be substantially greater than the current. This led to a strong demand for the floating storage of oil and petroleum products
on tankers, which led to a reduction in ships available to transport cargoes. As the effective supply of ships decreased,
freight rates increased.
Voyage Expenses
Voyage expenses primarily consist of bunkers,
port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements
on the Company’s behalf. Voyage expenses incurred during time charters and while vessels are operating in pools are paid
for by the charterer and pool, respectively, except for commissions, which were paid for by the Company. Voyage expenses incurred
during voyage charters were paid for by the Company.
Voyage expenses decreased by $16.6 million
to $49.3 million during the three months ended June 30, 2020 as compared to $65.9 million for the three months ended June 30,
2019. The $16.6 million decrease in voyage expenses was driven by a reduction in bunker prices coupled with a 2.3% reduction in
revenue days.
Vessel Expenses
Vessel expenses include crew wages and
associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical
management fees and other miscellaneous expenses.
Vessel expenses decreased by $0.7 million
to $41.7 million during the three months ended June 30, 2020 as compared to $42.4 million for the three months ended June 30,
2020. The $0.7 million decrease in vessel expenses is commensurate with the 2.9% decrease in vessel operating days due to the sale
of the Atlantic Aquarius and Atlantic Leo, which occurred in September 2019.
Vessel Depreciation and Amortization Expense
We depreciate the cost of our vessels on
a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated
residual value. We estimate the useful life of our vessels to be 25 years, and we estimate the residual value by taking the estimated
scrap value of $300 per lightweight ton times the weight of the ship in lightweight tons. We continue to monitor changes in the
oil and petroleum product supply chain that might have an impact on the useful operating life of our assets.
Depreciation and amortization expense decreased
by $0.4 million to $28.8 million during the three months ended June 30, 2020 as compared to $29.2 million during the three
months ended June 30, 2019. This decrease is due to the sale of the Atlantic Aquarius and Atlantic Leo in September 2019,
offset by vessel additions primarily related the scrubber and ballast water treatment projects.
General and Administrative Expenses
For the three months ended June 30,
2020 and 2019, general and administrative expenses were $7.5 million and $7.3 million, respectively. The general and administrative
expenses remained relatively flat as the Company has had similar onshore infrastructure in place during both quarters.
Total Other Expense, net
Total other expense, net, which includes
term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $9.7 million
for the three months ended June 30, 2020 compared to $13.0 million for the three months ended June 30, 2019. The
decrease of $3.3 million was primarily driven by a $112 million decrease in the average debt balance in the two comparative
periods, coupled with a decrease in the effective interest rate.
Net Income (Loss) Attributable to Noncontrolling Interest
The net income (loss) attributable to noncontrolling
interest was net income of $0.8 million for the three months ended June 30, 2020 compared to net loss of $0.1 million
for the three months ended June 30, 2019. The net income attributable to noncontrolling interest primarily represents a 49%
interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the
net income of 0.9 million was mainly attributable fixing these two Suezmax vessels on three-year time charter contracts,
which began in the latter half of 2019.
Six months ended June 30, 2020 compared to the six
months ended June 30, 2019
Voyage revenue
Voyage revenue increased by $141.3 million
to $393.3 million during the six months ended June 30, 2020 as compared to $252.0 million for the six months ended June 30,
2019. The $141.3 million increase was principally driven by a 16.9% increase in total revenue days due to an additional 1,696 revenue
days during the six months ended June 30, 2020, primarily due to the Merger coupled with stronger prevailing market conditions
in both the crude tanker and product carrier segments.
Voyage Expenses
Voyage expenses increased by $16.5 million
to $124.0 million during the six months ended June 30, 2020 as compared to $107.5 million for the six months ended June 30,
2019. The $16.5 million increase in voyage expenses was predominantly driven by an 11.7% increase in spot revenue days due to an
additional 981 spot revenue days as a result of the Merger, offset by a decrease in bunker prices.
Vessel Expenses
Vessel expenses increased by $16.1 million
to $83.3 million during the six months ended June 30, 2020 as compared to $67.2 million for the six months ended June 30,
2019. The $16.1 million increase in vessel expenses was driven by a 18.3% increase in vessel operating days, which consists of
an increase in 2,175 vessel operating days due to the Merger and a decrease in 362 days as a result of the sale of the Atlantic
Aquarius and Atlantic Leo.
Vessel Depreciation and Amortization Expense
Depreciation and amortization expense increased
by $6.3 million to $57.5 million during the six months ended June 30, 2020 as compared to $51.2 million during the six months
ended June 30, 2019. The increase in depreciation and amortization expense is due to the added depreciation expense for the
25 vessels acquired in the Merger for 2,175 vessel operating days in the six months ended June 30, 2020 coupled with vessel
additions primarily related to the scrubber and ballast water treatment projects, and offset by the decrease in the depreciation
and amortization expense related to the sale of the Atlantic Aquarius and Atlantic Leo in September 2019.
General and Administrative Expenses
For the six months ended June 30,
2020 and 2019, general and administrative expenses were $15.6 million and $13.6 million, respectively. The $2.0 million increase
was primarily due to costs incurred in the first quarter of 2020 when compared to the first quarter of 2019 that were attributable
to stock-based compensation costs, legal fees in connection with the annual filings and an increase in headcount to maintain the
infrastructure of a public company and to manage a larger fleet employed in the spot market.
Total Other Expense, net
Total other expense, net, which includes
term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $20.8 million
for the six months ended June 30, 2020 compared to $21.9 million for the six months ended June 30, 2019. The decrease
of $1.1 million was primarily driven by a decrease in the effective interest rate in the two comparative periods.
Net Income Attributable to Noncontrolling Interest
The net income attributable to noncontrolling
interest was net income of $1.3 million for the six months ended June 30, 2020 compared to net income of $0.1 million
for the six months ended June 30, 2019. The net income attributable to noncontrolling interest primarily represents a 49%
interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the
net income of $1.2 million was mainly attributable to fixing these two Suezmax vessels on three-year time charter contracts,
which began in the latter half of 2019.
Liquidity and Capital Resources
As of June 30, 2020 and December 31,
2019, total cash, cash equivalents and restricted cash were $124.0 million and $89.2 million, including restricted cash
of $5.7 million and $5.6 million, respectively. As of June 30, 2020 and December 31, 2019, the Company
had $60.0 million and $15.0 million available and undrawn under its credit facilities, respectively.
Generally, the primary sources of funds
have been cash from operations and undrawn amounts under credit facilities.
Effective upon completion of the Merger,
the Company has indebtedness outstanding under a new term loan and revolving credit facility, arranged in connection with the Merger,
and indebtedness under previously existing credit facilities of the Company. Refer to Note 8 — Long-Term Debt in our unaudited
condensed consolidated financial statements included herein.
On December 27,
2019, we refinanced (i) the $460 Million Facility, (ii) the $235 Million Facility, and (iii) the $75 Million Facility
with the proceeds of the $525 Million Facility.
At June 30, 2020, the Company was
in compliance with all financial covenants under each of its credit facilities.
Passage of environmental legislation or
other regulatory initiatives have in the past had, and may in the future may have, a significant impact on our operations. Regulatory
measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels
with new equipment to comply with new or existing regulations.
Among other capital expenditures, in connection with the International
Maritime Organization’s new limits for sulfur oxide emissions effective January 1, 2020, we contracted for the purchase and
installation of scrubbers on five of our Suezmax vessels. As of June 30, 2020, three of these scrubbers have been installed and
the remaining two installations are scheduled to be completed by the third quarter of 2020 and first quarter of 2021. The total
aggregate capital expenditures for these five scrubbers is approximately $16.8 million, of which $11.3 million has been paid as
of June 30, 2020. We may, in the future, determine to purchase additional scrubbers for installation on other vessels that we own
or operate. In addition, with respect to vessels that are not retrofitted with scrubbers, we expect to incur expenditures to ensure
those vessels are capable of efficiently using low-sulfur fuel, which expenditures are not expected to be significant or which
have not yet been determined.
We entered into contracts to install
ballast water treatment systems on 15 of our vessels for a total estimated cost of $17.0 million, of which 12 systems have
been installed and $13.6 million has been paid as of June 30, 2020. The remaining three vessels are employed on time charter
contracts as of June 30, 2020, and we expect to install the ballast water treatment systems after redelivery from the
charterers and before expiry of regulatory exemptions in 2021.
We believe that we
have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months. However,
should market conditions deteriorate beyond third-party forecasts, we would consider a number of liquidity enhancing measures,
which could include refinancing a portion of our senior debt, exploring unsecured debt instruments, asset sales and sale-leaseback
transactions on certain of our assets.
Cash Flows
The following table summarizes the Company’s
cash and cash equivalents provided by or used in operating, financing and investing activities for the periods presented below
(presented in millions):
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net Cash Provided by Operating Activities
|
|
$
|
159.1
|
|
|
$
|
12.0
|
|
Net Cash Used in Investing Activities
|
|
|
(7.5
|
)
|
|
|
(318.9
|
)
|
Net Cash (Used in) Provided by Financing Activities
|
|
|
(116.8
|
)
|
|
|
288.2
|
|
Net Cash Provided by Operating Activities
Net cash provided by operating activities
during the six months ended June 30, 2020 and 2019 was $159.1 million and $12.0 million, respectively. The increase of $147.1
million was mainly attributable to more revenue days and higher charter rates that increased our revenues and overall net income
by $101.5 million for the six months ended June 30, 2020, when compared to the six months ended June 30, 2019, coupled
with an increase of $35.8 million in cash provided by the changes in assets and liabilities for the comparative periods.
Net Cash Used in Investing Activities
Net cash used in investing activities refers
primarily to cash used for vessel acquisitions and improvements, and the Merger. Net cash used by investing activities during the
six months ended June 30, 2020 and 2019 was $7.5 million and $318.9 million, respectively. The $7.5 million net cash
used by investing activities during the six months ended June 30, 2020 was for additions to vessels and other property, while
the $318.9 million net cash used by investing activities during the six months ended June 30, 2019 included the consideration
paid in connection with the Merger, with $292.7 million paid to CPLP to acquire the vessels, $18.8 million paid in transaction
costs, and $7.4 million paid for additions to vessels and other property.
Net Cash (Used in) Provided by Financing Activities
Net cash (used in) provided by financing
activities during the six months ended June 30, 2020 and 2019 was ($116.8) million and $288.2 million, respectively.
The change in cash (used in) provided by financing activities was due to the financing activities that we engaged in during the
two comparable periods. During the six months ended June 30, 2020, the main outflows of cash for financing activities consisted
of debt payments of $112.2 million, a $1.9 million distribution to the noncontrolling interest in the NT Suez Holdco LLC entity,
and paying $1.4 million to repurchase shares under the share repurchase program. During the six months ended June 30, 2019
we had borrowings under the $360 Million Facility, consisting of $300 million in the term loan drawn and $50 million, which were
offset by $26.4 million repaid on lines of credit that were cancelled in connection with the Merger, $35.5 million in term loan
repayments and $6.9 million in deferred financing costs paid in connection with the $360 Million Facility.
Off-Balance Sheet Arrangements
The Company does not have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to investors.
Contractual Obligations and Contingencies
The following table summarizes the Company’s
long-term contractual obligations as of June 30, 2020 (in thousands of U.S. dollars).
|
|
Payment due by period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1 – 3 years
|
|
|
3 – 5 years
|
|
|
More than 5 years
|
|
Long-term Debt Obligations
|
|
$
|
782,115
|
|
|
$
|
67,194
|
|
|
$
|
307,421
|
|
|
$
|
407,500
|
|
|
$
|
—
|
|
Interest Obligations(1)
|
|
|
59,069
|
|
|
|
11,078
|
|
|
|
32,411
|
|
|
|
15,580
|
|
|
|
—
|
|
Capital Obligations (scrubbers and ballast water treatment systems)
|
|
|
8,475
|
|
|
|
8,475
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Lease Obligations
|
|
|
6,658
|
|
|
|
408
|
|
|
|
1,909
|
|
|
|
2,401
|
|
|
|
1,940
|
|
Total:
|
|
$
|
856,317
|
|
|
$
|
87,155
|
|
|
$
|
341,741
|
|
|
$
|
425,481
|
|
|
$
|
1,940
|
|
|
(1)
|
Interest has been estimated based on the LIBOR forward
rates and the prescribed margin for each of our facilities. Refer to Note 8 — Long-Term Debt of our unaudited condensed
consolidated financial statements contained herein.
|
Critical Accounting Policies
The Company’s condensed consolidated
financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are those
that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different
assumptions and conditions. The Company has described below what its management believes are its most critical accounting policies.
For a description of all of the Company’s significant accounting policies, see Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — B. Liquidity and Capital Resources — Critical Accounting
Policies and Note 2 — Summary of Significant Accounting Policies, each contained in our 2019 Annual Report, and in Note 2
— Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements included herein,
for further information.
Revenue Recognition
During the three and six months ended June 30,
2020 and 2019, revenues were generated from time charters and voyage charters.
We recognize revenues over the term of
the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection
of the related revenue is reasonably assured. We do not recognize revenue during days the vessel is off-hire. Where the time charter
contains a profit or loss sharing arrangement, the profit or loss is recognized based on amounts earned or incurred as of the reporting
date.
For the three and six months ended June 30,
2020 and 2019, pursuant to the new revenue recognition guidance, which was adopted as of January 1, 2019, revenue for spot
market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel
arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Previously, revenue
was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with
the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs
including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel
and port charges are paid by the charterer. These voyage expenses are borne by us when the vessels are engaged in spot market voyage
charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters.
Vessel Lives and Impairment
The carrying value of each of the Company’s
vessels represents its original cost (contract price plus initial expenditures) at the time of delivery or purchase less accumulated
depreciation or impairment charges. The carrying values of vessels may not represent their fair market value at any point in time
since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. In
recent years changing market conditions resulted in a decrease in charter rates and values of assets. We consider these market
developments as indicators of potential impairment of the carrying amount of its assets.
In developing estimates of future undiscounted
cash flows, we make assumptions and estimates about the vessels’ future performance, with the significant assumptions being
related to charter rates, fleet utilization, vessels’ operating expenses, vessels’ capital expenditures and drydocking
requirements, vessels’ residual value and the estimated remaining useful life of each vessel. The assumptions used to develop
estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect
for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where the vessels
are not fixed on time charters, we utilize an estimated daily time charter equivalent for its vessels’ unfixed days based
on the most recent ten year historical one-year time charter average.
Although we believe that the assumptions
used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions are highly subjective
and likely to change, possibly materially, in the future. In recent years, the market values of vessels have experienced particular
volatility, with substantial declines in many of the charter-free market value, or basic market value, of various vessel classes.
As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their
carrying values under our impairment accounting policy. This is due to management’s projection that future undiscounted cash
flows expected to be earned by such vessels over their operating lives will exceed such vessels’ carrying amounts.
Deferred Drydocking Costs and Amortization
We use the deferral
method of accounting for drydocking costs. Under the deferral method, drydocking costs are deferred and amortized on a straight-line
basis over the useful life of the drydock, which is estimated to be approximately 30 to 60 months. Management uses judgment when
estimating the period between drydocks performed, which can result in adjustments to the estimated amortization of drydock expense
if drydocks occur earlier or later than originally estimated. We update our estimate of a vessel’s next scheduled drydock
as necessary. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off as
a component of the gain or loss upon disposal of vessels. We defer the costs associated with drydocking as they occur and amortize
these costs on a straight-line basis over the period between drydocking. Deferred drydocking costs include actual costs incurred
at the drydock yard, cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise, and the
cost of hiring a third party to oversee the drydocking. Expenditures for normal maintenance and repairs, whether incurred as part
of the drydock or not, are expensed as incurred. If the vessel is drydocked earlier than originally anticipated, any remaining
deferred drydock costs that have not been amortized are expensed at the beginning of the next drydock.
Recent Accounting Pronouncements
New Accounting Standards to be Implemented
In February 2016, the FASB issued
ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease
accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to
current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding
right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual
periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15,
2021, with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets
and lease liabilities on the balance sheet for operating leases and providing new disclosures about our leasing activities. We
are currently analyzing our contracts and will then calculate the right-of-use assets and lease liabilities as of January 1,
2021 based on the present value of our remaining minimum lease payments, primarily due to the recognition of right-of-use assets
and lease liabilities with respect to operating leases.
In June 2016, the FASB issued
ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326)” (“ASU 2016-13”),
which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current
expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets
measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to
debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU
2016-13 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual
reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the
potential impact of this pronouncement on the condensed consolidated financial statements.