(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant
to Section 12(g) of the Act: None
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As
of December 31, 2015, there were 664,458 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Note-Checking the box above will not relieve
any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations
under those Sections.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Paragon Shipping Inc., or the Company,
desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including
this cautionary statement in connection with this safe harbor legislation. This document and any other written or oral statements
made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events
and financial performance. The words “believe,” “except,” “anticipate,” “intends,”
“estimate,” “forecast,” “project,” “plan,” “potential,” “will,”
“may,” “should,” “expect” and similar expressions identify forward-looking statements. The
Company assumes no obligation to update or revise any forward-looking statements. Forward-looking statements in this annual report
on Form 20-F and written or oral forward-looking statements attributable to the Company or its representatives after the date of
this Form 20-F are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter
filed by the Company with the Securities and Exchange Commission, or the SEC.
The forward-looking statements in this
document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation,
management’s examination of historical operating trends, data contained in our records and other data available from third
parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject
to significant uncertainties and contingencies, which are difficult or impossible to predict and are beyond our control, we cannot
assure you that we will achieve or accomplish these expectations, beliefs or projections.
In addition to these important factors
and matters discussed elsewhere herein, important factors that, in our view, could cause actual results to differ materially from
those discussed in the forward-looking statements include: the strength of world economies, fluctuations in currencies and interest
rates, general market conditions, including fluctuations in charter hire rates and vessel values, changes in demand in the drybulk
shipping industry, changes in the Company’s operating expenses, including bunker prices, dry-docking and insurance costs,
changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future
litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or
political events, and other important factors described from time to time in the reports filed by the Company with the SEC.
Please note in this annual report, references
to “we,” “us,” “our,” and “the Company,” all refer to Paragon Shipping Inc. and
its subsidiaries, unless otherwise stated or the context otherwise requires.
Unless otherwise noted, all the per share
prices of our common stock in this annual report are presented taking into effect the 1-for -38 reverse split effective on March
1, 2016.
PART I
|
Item 1.
|
Identity of Directors, Senior Management and Advisers
|
Not applicable.
|
Item 2.
|
Offer Statistics and Expected Timetable
|
Not applicable.
|
A.
|
Selected Consolidated Financial Data
|
The following table
sets forth our selected consolidated financial data and other operating data, which are stated in U.S. dollars, other than share
data, as of and for the years ended December 31, 2011, 2012, 2013, 2014 and 2015. The selected data is derived from our audited
consolidated financial statements and notes thereto, which have been prepared in accordance with U.S. generally accepted accounting
principles, or U.S. GAAP.
Our audited consolidated
statements of operations, shareholders’ equity / (deficit) and cash flows for the years ended December 31, 2013, 2014 and
2015, and the consolidated balance sheets at December 31, 2014 and 2015, together with the notes thereto, are included elsewhere
in this annual report. The following data should be read in conjunction with “Item 5. Operating and Financial Review and
Prospects,” the consolidated financial statements, related notes and other financial information included elsewhere in this
annual report.
Following the (i) one
share for ten (10) share reverse stock split that was effective on November 5, 2012, and (ii) the one share for thirty-eight (38)
share reverse stock split that was effective on March 1, 2016, all share and per share amounts disclosed in this annual report,
including the table below and in our consolidated financial statements included at the end of this annual report, have been retroactively
restated to reflect this change in capital structure. Please refer to “Item 4. Information on the Company – A. History
and development of the Company.”
STATEMENT OF COMPREHENSIVE LOSS DATA
|
|
|
|
|
|
|
|
|
|
(Expressed in United States Dollars,
except for share data)
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Net revenue
|
|
$
|
86,907,967
|
|
|
$
|
50,300,679
|
|
|
$
|
56,256,756
|
|
|
$
|
54,763,678
|
|
|
$
|
33,715,955
|
|
Operating income / (loss)
|
|
|
(275,225,740
|
)
|
|
|
2,293,932
|
|
|
|
(2,954,345
|
)
|
|
|
(33,831,017
|
)
|
|
|
(264,662,870
|
)
|
Net loss
|
|
|
(283,498,759
|
)
|
|
|
(17,557,125
|
)
|
|
|
(16,953,032
|
)
|
|
|
(51,796,181
|
)
|
|
|
(268,707,322
|
)
|
Comprehensive loss
|
|
|
(283,498,759
|
)
|
|
|
(18,184,229
|
)
|
|
|
(16,585,739
|
)
|
|
|
(51,687,356
|
)
|
|
|
(268,556,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Class A common share, basic and diluted
|
|
$
|
(1,809.18
|
)
|
|
$
|
(107.92
|
)
|
|
$
|
(49.78
|
)
|
|
$
|
(82.84
|
)
|
|
$
|
(409.93
|
)
|
Weighted average number of Class A common shares, basic and diluted
|
|
|
152,469
|
|
|
|
158,840
|
|
|
|
332,609
|
|
|
|
613,844
|
|
|
|
644,260
|
|
Dividends declared per Class A common share
|
|
$
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
OTHER FINANCIAL DATA
|
|
Year ended December 31,
|
|
(Expressed in United States Dollars)
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Net cash from / (used in) operating activities
|
|
$
|
45,467,429
|
|
|
$
|
13,376,809
|
|
|
$
|
4,563,696
|
|
|
$
|
(6,181,843
|
)
|
|
$
|
(7,262,133
|
)
|
Net cash from / (used in) investing activities
|
|
|
43,673,793
|
|
|
|
(15,702,244
|
)
|
|
|
(6,441,495
|
)
|
|
|
(104,546,565
|
)
|
|
|
23,087,022
|
|
Net cash (used in) / from financing activities
|
|
|
(109,365,640
|
)
|
|
|
5,438,803
|
|
|
|
15,502,871
|
|
|
|
86,456,958
|
|
|
|
(22,855,396
|
)
|
BALANCE SHEET DATA
|
|
As of December 31,
|
|
(Expressed in United States Dollars)
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Total current assets
|
|
$
|
37,457,564
|
|
|
$
|
31,333,204
|
|
|
$
|
44,220,084
|
|
|
$
|
26,688,017
|
|
|
$
|
22,203,738
|
|
Total assets
(1)
|
|
|
429,973,660
|
|
|
|
417,378,873
|
|
|
|
417,248,859
|
|
|
|
456,604,166
|
|
|
|
107,240,711
|
|
Total current liabilities
(1)
|
|
|
40,346,943
|
|
|
|
21,857,537
|
|
|
|
23,215,019
|
|
|
|
27,760,258
|
|
|
|
152,428,834
|
|
Long-term debt
(1)
|
|
|
167,135,626
|
|
|
|
178,633,246
|
|
|
|
161,000,947
|
|
|
|
206,425,996
|
|
|
|
-
|
|
Total liabilities
(1)
|
|
|
208,749,513
|
|
|
|
201,858,360
|
|
|
|
184,598,082
|
|
|
|
234,203,623
|
|
|
|
152,428,834
|
|
Capital stock
|
|
|
160
|
|
|
|
289
|
|
|
|
465
|
|
|
|
653
|
|
|
|
665
|
|
Total shareholders’ equity / (deficit) / net assets
|
|
|
221,224,147
|
|
|
|
215,520,513
|
|
|
|
232,650,777
|
|
|
|
222,400,543
|
|
|
|
(45,188,123
|
)
|
(1)
In order to conform
with the current year presentation, the Company has eliminated deferred finance costs, net, previously included in Other Assets,
and has decreased the amount of current and long-term portion of debt
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
Some of the following
risks relate principally to us, the industry in which we operate and our business in general. Other risks relate principally to
the securities market and ownership of our common shares. The occurrence of any of the events described in this section could significantly
and negatively affect our business, financial condition, operating results or cash available for dividends, if any, or the trading
price of our common shares.
Industry Specific Risk Factors
The drybulk shipping industry is
cyclical and volatile, with charter hire rates and profitability currently at depressed levels, and the recent global economic
recession has resulted in decreased demand for drybulk shipping, which has and may continue to negatively impact our operations.
The drybulk shipping
industry is cyclical with attendant volatility in charter hire rates and profitability. The degree of charter hire rate volatility
among different types of drybulk carriers varies widely; however, the continued downturn in the drybulk charter market has severely
affected the entire drybulk shipping industry and charter hire rates for drybulk vessels have declined significantly from historically
high levels in 2008. Fluctuations in charter rates result from changes in the supply of and demand for vessel capacity and changes
in the supply of and demand for drybulk cargoes carried internationally at sea, including coal, iron ore, grain and minerals. Because
the factors affecting the supply of and demand for vessels are outside of our control and are unpredictable, the nature, timing,
direction and degree of changes in industry conditions are also unpredictable. We cannot assure you that we will be able to successfully
charter our newbuilding vessels, which are scheduled to be delivered in the third and fourth quarters of 2016 by Jiangsu Yangzijiang
Shipbuilding Co., or Yangzijiang, at rates sufficient to allow us to meet our obligations, or at all. If the current low hire rates
continue, management may have to decide to refuse to take the scheduled delivery of the newbuildings from Yangzijiang, which may
required us to forego deposits on construction, which amounted to an aggregate of $27.5 million as of the date of this annual report,
and we may result in default damages and other incidental costs and expenses.
Factors that influence demand for vessel
capacity include:
|
·
|
supply of and demand for energy resources, commodities and drybulk cargoes;
|
|
·
|
changes in the exploration or production of energy resources commodities, and drybulk cargoes;
|
|
·
|
the location of regional and global exploration, production and manufacturing facilities;
|
|
·
|
the location of consuming regions for energy resources, commodities and drybulk cargoes;
|
|
·
|
the globalization of production and manufacturing;
|
|
·
|
global and regional economic and political conditions, including armed conflicts and terrorist
activities, embargoes and strikes;
|
|
·
|
developments in international trade;
|
|
·
|
changes in seaborne and other transportation patterns, including the distance cargo is transported
by sea;
|
|
·
|
environmental and other regulatory developments;
|
|
·
|
currency exchange rates; and
|
The factors that could influence the supply
of vessel capacity include:
|
·
|
the number of newbuilding deliveries;
|
|
·
|
port and canal congestion;
|
|
·
|
the scrapping rate of older vessels;
|
|
·
|
the number of vessels that are out of service, namely those that are laid-up, dry-docked, awaiting
repairs or otherwise not available for hire.
|
In addition to the
prevailing and anticipated freight rates, factors that affect the rate of newbuilding, scrapping and laying-up include newbuilding
prices, secondhand vessel values in relation to scrap prices, costs of bunkers and other operating costs, costs associated with
classification society surveys, normal maintenance and insurance coverage, the efficiency and age profile of the existing drybulk
fleet in the market and government and industry regulation of maritime transportation practices, particularly environmental protection
laws and regulations. These factors influencing the supply of and demand for shipping capacity are outside of our control, and
we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.
We anticipate that
the future demand for our drybulk carriers will be dependent upon economic growth in the world's economies, including China and
India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier fleet and the sources and
supply of drybulk cargoes to be transported by sea. Given the large number of new drybulk carriers currently on order with the
shipyards, the capacity of the global drybulk carrier fleet seems likely to increase and there can be no assurance that economic
growth will resume or continue. Adverse economic, political, social or other developments could have a material adverse effect
on our business and operating results.
The downturn
in the drybulk carrier charter market has had and may continue to have an adverse effect on our revenues, earnings and profitability,
and may adversely affect our ability to comply with debt covenants.
The downturn in the
drybulk charter market, from which we derive our revenues, has severely affected the entire drybulk shipping industry and our business.
The Baltic Dry Index, or the BDI, an index published by the Baltic Exchange Limited of shipping rates for key drybulk routes, which
has long been viewed as the main benchmark to monitor the movements of the drybulk vessel charter market and the performance of
the entire drybulk shipping market, declined 94% from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and has remained
volatile since that time. During 2014, the BDI remained volatile, ranging from a high of 2,113 to a low of 723. In 2015, the BDI
fluctuated in a range between 471 and 1,222. During the first four months of 2016, the BDI has remained volatile, ranging from
a low of 290 (which is the lowest point ever recorded on February 10, 2016) and has since increased to 616 as of May 9, 2016.
The downturn and volatility
in drybulk charter rates has had a number of adverse consequences for drybulk shipping, including, among other things:
|
·
|
an absence of financing for vessels;
|
|
·
|
no active second-hand market for the sale of vessels;
|
|
·
|
extremely low charter rates, particularly for vessels employed in the spot market;
|
|
·
|
widespread loan covenant defaults in the drybulk shipping industry; and
|
|
·
|
declaration of bankruptcy by some operators, shipowners, as well as charterers.
|
The occurrence of one
or more of these events could adversely affect our business, results of operations, cash flows and financial condition.
The decline and volatility
in charter rates in the drybulk market also affects the value of our drybulk vessels, which follows the trends of drybulk charter
rates, and earnings on our charters, and similarly, affects our cash flows, liquidity and ability to comply with the financial
and security coverage ratio covenants that we expect will be contained in our debt agreements. There can be no assurance as to
how long charter rates and vessel values will remain at their current levels and the market could decline. If charter rates and
vessel values in the drybulk market decline further or remain at low levels for any significant period in 2016, this will have
an adverse effect on our revenues, profitability, cash flows and our ability to maintain compliance with the financial and security
coverage ratio covenants that we expect will be contained in our debt agreements.
If economic conditions throughout
the world do not improve, it will impede our results of operations, financial condition and cash flows, and could cause the market
price of our common shares to further decline.
Negative trends in
the global economy that emerged in 2008 continue to adversely affect global economic conditions. The world economy continues to
face a number of challenges, including uncertainty related to the continuing discussions in the United States regarding the federal
debt ceiling and turmoil and hostilities in the Middle East, North Africa and other geographic areas and countries and continuing
economic weakness in the European Union. The downturn in the global economy has caused, and may continue to cause, a decrease in
worldwide demand for certain goods and, thus, shipping. While market conditions have improved since 2008, continuing economic and
governmental factors, together with the concurrent decline in charter rates and vessel values, have had a material adverse effect
on our results of operations, financial condition and cash flows, have caused the price of our common shares to decline and could
cause the price of our common shares to decline further.
The economies of the
United States, the European Union and other parts of the world continue to experience relatively slow growth or remain in recession
and exhibit weak economic trends. Over the past five years, credit markets in the United States and Europe have experienced significant
contraction, deleveraging and reduced liquidity. While credit conditions are improving, global financial markets and economic conditions
have been, and continue to be, disrupted and volatile. Since 2008, lending by financial institutions worldwide remains at lower
levels compared to the period preceding 2008. As of December 31, 2015, we had total outstanding indebtedness of $144.7 million
under our debt agreements, which include our credit and loan facilities and the indenture governing our 8.375% Senior Notes due
2021, or our Notes.
Continued economic
slowdown in the Asia Pacific region, especially in Japan and China, may exacerbate the effect on us of the recent slowdown in the
rest of the world. Before the global economic financial crisis that began in 2008, China had one of the world’s fastest growing
economies in terms of gross domestic product, or GDP, which had a significant impact on shipping demand. The growth rate of China's
GDP for the year ended December 31, 2014 was 7.4%, down from a growth rate of 7.7% in 2013, and remained below pre-2008 levels.
In 2015, China’s economy grew by 6.9%, a growth which is forecasted to continue to slow during 2016. China and other countries
in the Asia Pacific region may continue to experience slowed or even negative economic growth in the future. Our results of operations
and ability to grow our fleet would be impeded by a continuing or worsening economic downturn in any of these countries.
The inability of countries to refinance
their debts could have a material adverse effect on our revenue, profitability and financial position.
As a result of the
credit crisis in Europe, the European Commission created the European Financial Stability Facility, or the EFSF, and the European
Financial Stability Mechanism, or the EFSM, to provide funding to Eurozone countries in financial difficulties that seek such support.
In September 2012, the European Council established a permanent stability mechanism, the European Stability Mechanism, or the ESM,
to assume the role of the EFSF and the EFSM in providing external financial assistance to Eurozone countries. Despite these measures,
concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations
and the overall stability of the Euro. Potential adverse developments in the outlook for European countries could reduce the overall
demand for drybulk cargoes and for our services. Market perceptions concerning these and related issues could affect our financial
position, results of operations and cash flow.
The current state of global financial
markets and current economic conditions may adversely impact our ability to obtain additional financing or refinance our existing
debt agreements on acceptable terms which may hinder or prevent us from expanding our business.
Global
financial markets and economic conditions continue to be volatile. This volatility has negatively affected the general willingness
of banks and other financial institutions to extend credit, particularly in the shipping industry, due to the historically volatile
asset values of vessels.
The current state of global financial markets might adversely impact
our ability to issue additional equity at prices which will not be dilutive to our existing shareholders or preclude us from issuing
equity at all.
Also, as a result of
concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining
money from the credit markets has increased as many lenders have increased interest rates, enacted tighter lending standards, refused
to refinance existing debt at all or on terms similar to current debt and reduced, and in some cases ceased, to provide funding
to borrowers. Due to these factors, we cannot be certain that additional financing will be available if needed and to the extent
required, or that we will be able to refinance our existing debt agreements, on acceptable terms or at all. If additional financing
or refinancing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations
as they come due or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take
advantage of business opportunities as they arise.
A decrease in the level of China’s
export of goods or an increase in trade protectionism could have a material adverse impact on our charterers’ business and,
in turn, could cause a material adverse impact on our results of operations, financial condition and cash flows.
China exports considerably
more goods than it imports. Our vessels may be deployed on routes involving trade in and out of emerging markets, and our charterers’
shipping and business revenue may be derived from the shipment of goods from the Asia Pacific region to various overseas export
markets including the United States and Europe. Any reduction in or hindrance to the output of China-based exporters could have
a material adverse effect on the growth rate of China’s exports and on our charterers’ business. For instance, the
government of China has recently implemented economic policies aimed at increasing domestic consumption of Chinese-made goods.
This may have the effect of reducing the supply of goods available for export and may, in turn, result in a decrease of demand
for drybulk shipping. Additionally, though in China there is an increasing level of autonomy and a gradual shift in emphasis to
a “market economy” and enterprise reform, many of the reforms, particularly some limited price reforms that result
in the prices for certain commodities being principally determined by market forces, are unprecedented or experimental and may
be subject to revision, change or abolition. The level of imports to and exports from China could be adversely affected by changes
to these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other
relevant policies of the Chinese government.
Our operations expose
us to the risk that increased trade protectionism will adversely affect our business. If the global economic recovery is undermined
by downside risks and the recent economic downturn is prolonged, governments may turn to trade barriers to protect their domestic
industries against foreign imports, thereby depressing the demand for shipping. Specifically, increasing trade protectionism in
the markets that our charterers serve has caused and may continue to cause an increase in: (i) the cost of goods exported from
China, (ii) the length of time required to deliver goods from China and (iii) the risks associated with exporting goods from China,
as well as a decrease in the quantity of goods to be shipped.
Any increased trade
barriers or restrictions on trade, especially trade with China, would have an adverse impact on our charterers’ business,
operating results and financial condition and could thereby affect their ability to make timely charter hire payments to us and
to renew and increase the number of their time charters with us. This could have a material adverse effect on our business, results
of operations and financial condition.
World events could adversely affect
our results of operations and financial condition.
Terrorist
attacks and the threat of future terrorist attacks around the world may cause uncertainty in the world’s financial markets
and may affect our business, operating results and financial condition.
Continuing conflicts
and recent developments in the Middle East, including Egypt, and North Africa, and the presence of U.S. or other armed forces in
the Middle East, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further
economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional
financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, such
as the attack on the MT Limburg, a vessel unaffiliated with us, in October 2002, mining of waterways and other efforts to disrupt
international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading
in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. Any of these occurrences could have a material
adverse impact on our operating results.
In the highly competitive international
shipping industry, we may not be able to compete for charters with new entrants or established companies with greater resources,
and as a result, we may be unable to employ our vessels profitably, which may have a material adverse effect on our business, prospects,
financial conditions, liquidity and results of operations.
The international shipping
market is highly competitive, capital intensive and highly fragmented. Competition arises primarily from other vessel owners, some
of whom have substantially greater resources than we have. Competition for the transportation of drybulk cargo is intense and depends
on price, location, size, age, condition and the acceptability of the vessel and its operators to the charterers. Due in part to
the highly fragmented market, many of our competitors with greater resources and access to capital than we have, could enter the
drybulk shipping industry and operate larger fleets than we do through consolidations or acquisitions and may be able to offer
lower charter rates and higher quality vessels than we are able to offer. If this were to occur, we may be unable to retain or
attract new charterers on attractive terms or at all, which may have a material adverse effect on our business, prospects, financial
condition, liquidity and results of operations.
Acts of piracy on ocean-going vessels
have recently increased in frequency, which could adversely affect our business.
Acts
of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian
Ocean, off the coast of West Africa and in the Gulf of Aden off the coast of Somalia. Although the frequency of sea piracy worldwide
decreased during 2014 as compared to 2013, the frequency increased in early 2015 and sea piracy incidents continue to occur, particularly
in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea, with drybulk vessels and tankers particularly
vulnerable to such attacks. If these piracy attacks occur in regions in which our vessels are deployed that insurers characterized
as “war risk” zones, or Joint War Committee “war and strikes” listed areas, premiums payable for such coverage
could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including due
to employing onboard security guards, could increase in such circumstances. Furthermore, while we believe the charterer remains
liable for charter payments when a vessel is seized by pirates, the charterer may dispute this and withhold charter hire until
the vessel is released. A charterer may also claim that a vessel seized by pirates was not “on-hire” for a certain
number of days and is therefore entitled to cancel the charter party, a claim that we would dispute.
We
may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition,
any detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability, of insurance
for our vessels, could have a material adverse impact on our business, financial condition and results of operations.
If our vessels call on ports located
in countries that are subject to restrictions imposed by the U.S. or other governments, our reputation and the market for our common
shares could be adversely affected.
From time to time on
our charterers’ instructions, our vessels may call on ports located in countries subject to sanctions and embargoes imposed
by the U.S. government and countries identified by the U.S. government as state sponsors of terrorism, such as Cuba, Iran, Sudan
and Syria. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same
covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened
over time. In 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, amended the
Iran Sanctions Act. Among other things, CISADA introduces limits on the ability of companies and persons to do business or trade
with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. In addition,
in 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or attempting to violate,
or causing a violation of any sanctions in effect against Iran or facilitating any deceptive transactions for or on behalf of any
person subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions
evader and will be banned from all contacts with the United States, including conducting business in U.S. dollars. Also in 2012,
President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act,
which created new sanctions and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensifies
existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran's petroleum or petrochemical
sector. The Iran Threat Reduction Act also includes a provision requiring the President of the United States to impose five or
more sanctions from Section 6(a) of the Iran Sanctions Act, as amended, on a person the President determines is a controlling beneficial
owner of, or otherwise owns, operates, or controls or insures a vessel that was used to transport crude oil from Iran to another
country and (1) if the person is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so
used or (2) if the person otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the
vessel was so used. Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion
from financial transactions subject to U.S. jurisdiction, and exclusion of that person's vessels from U.S. ports for up to two
years.
On November 24, 2013,
the P5+1 (the United States, United Kingdom, Germany, France, Russia and China) entered into an interim agreement with Iran entitled
the “Joint Plan of Action,” or the JPOA. Under the JPOA it was agreed that, in exchange for Iran taking certain voluntary
measures to ensure that its nuclear program is used only for peaceful purposes, the U.S. and EU would voluntarily suspend certain
sanctions for a period of six months. On January 20, 2014, the U.S. and E.U. indicated that they would begin implementing the temporary
relief measures provided for under the JPOA. These measures include, among other things, the suspension of certain sanctions on
the Iranian petrochemicals, precious metals, and automotive industries from January 20, 2014 until July 20, 2014. The U.S. initially
extended the JPOA until November 24, 2014, and it has since extended it until June 30, 2016.
Although we believe
that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance,
there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear
and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could
severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding,
or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment
policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by
the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our
common shares may adversely affect the price at which our common shares trade. Moreover, our charterers may violate applicable
sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could
in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely affected
if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S.
sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in operations associated
with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their
governments. Investor perception of the value of our common stock may be adversely affected by the consequences of war, the effects
of terrorism, civil unrest and governmental actions in these and surrounding countries.
An over-supply
of drybulk carrier capacity may lead to a further reduction in charter rates, which may limit our ability to operate our vessels
profitably.
The market supply of
drybulk carriers has been increasing in large part as a result of the delivery of numerous newbuilding orders over the last few
years, and the number of drybulk carriers on order still remains significant. These newbuildings were delivered in significant
numbers starting at the beginning of 2006 and continued to be delivered in significant numbers through 2015. As of end of March
2016, the orderbook of new drybulk vessels scheduled to be delivered represented approximately 15% of the world drybulk fleet at
that time, with most vessels on the orderbook expected to be delivered during the next three years.
An over-supply of drybulk
carrier capacity, particularly in conjunction with the currently reduced level of demand for drybulk shipping, may result in a
further reduction of charter hire rates or prolong the period during which low charter hire rates prevail. If the current low charter
rate environment persists or worsens and the drybulk global fleet capacity increases due to the delivery of newbuildings or further
redeployment of previously idle vessels, we may not be able to charter our drybulk newbuilding vessels that are scheduled to be
delivered to us during the third and fourth quarters of 2016 for which we have not yet arranged employment.
The market value of our vessels has
declined and may further decline, which could limit the amount of funds that we can borrow and has triggered and could in the future
trigger breaches of certain financial and security coverage ratio covenants that we expect will be contained in future debt agreements
and we may incur a loss if we sell vessels following a decline in their market value.
The fair market value
of our vessels has generally experienced high volatility and has declined significantly. The fair market value of our vessels may
continue to fluctuate depending on a number of factors, including:
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prevailing level of charter rates;
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general economic and market conditions affecting the shipping industry, including competition from
other shipping companies;
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types, sizes and ages of vessels;
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supply of and demand for vessels;
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other modes of transportation;
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governmental or other regulations;
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the need to upgrade secondhand and previously owned vessels as a result of charterer requirements,
technological advances in vessel design or equipment or otherwise; and
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competition from other shipping companies and the availability of other modes of transportation.
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In addition, as vessels
grow older, they generally decline in value. If the fair market value of our vessels declines further, we may not be in compliance
with certain covenants that we expect will be contained in debt agreements and we may not be able to refinance our debt or obtain
additional financing. If we are not able to comply with covenants that we expect will be contained in our debt agreements, and
are unable to remedy the relevant breach, our lenders could accelerate our debt and foreclose on our vessels. Furthermore, if
we sell any of our owned vessels at a time when prices are depressed, our business, results of operations, cash flow and financial
condition could be adversely affected. Moreover, if we sell vessels at a time when vessel prices have fallen and before we have
recorded an impairment adjustment to our financial statements, the sale may be at a price less than the vessel's carrying amount
in our financial statements, resulting in a loss and a reduction in earnings. In addition, if vessel values persist or decline
further, we may have to record an impairment adjustment in our financial statements which could adversely affect our financial
results.
Charter rates are subject to seasonal
fluctuations, which could affect our operating results and the amount of available cash with which we can pay dividends, if any,
in the future.
Our vessels operate
in markets that have historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality
may result in volatility in our operating results to the extent that we enter into new charter agreements, renew existing agreements
during a time when charter rates are weaker or operate our vessels on the spot market, which could affect the amount of dividends,
if any, that we pay to our shareholders from quarter to quarter. The drybulk carrier market is typically stronger in the fall and
winter months in anticipation of increased consumption of coal and other raw materials in the northern hemisphere during the winter
months. In addition, unpredictable weather patterns during these months tend to disrupt vessel scheduling and supplies of certain
commodities. While this seasonality has not materially affected our operating results, it could materially affect our operating
results and cash available for distribution to our shareholders as dividends, if any, in the future.
Rising fuel, or bunker prices, may
adversely affect profits.
While we generally
will not bear the cost of fuel, or bunkers, for vessels operating on time charters, fuel is a significant factor in negotiating
charter rates. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability at
the time of charter negotiation. Fuel is also a significant, if not the largest, expense in our shipping operations when vessels
are under voyage charter. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including
geopolitical developments, supply and demand for oil and gas, actions by the Organization of Petroleum Exporting Countries, or
OPEC, and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and
environmental concerns.
Further, fuel may become
much more expensive in the future, which may reduce the profitability and competitiveness of our business versus other forms of
transportation, such as truck or rail.
Compliance with safety and other
vessel requirements imposed by classification societies may be very costly and may adversely affect our business.
The hull and machinery
of every commercial vessel must be certified as being “in class” by a classification society authorized by its country
of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and
regulations of the country of registry of the vessel and the Safety of Life at Sea Convention.
A vessel must undergo
annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous
survey cycle under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to
be dry-docked every two and a half to five years for inspection of its underwater parts.
Compliance with the
above requirements may result in significant expense. If any vessel does not maintain its class or fails any annual, intermediate
or special survey, the vessel will be unable to trade between ports and will be unemployable and uninsurable, which could have
a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.
We are subject to complex laws and
regulations, including environmental regulations that can adversely affect the cost, manner or feasibility of doing business
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Our operations are
subject to numerous laws and regulations in the form of international conventions and treaties, national, state and local laws
and national and international regulations in force in the jurisdictions in which our vessels operate or are registered, which
can significantly affect the ownership and operation of our vessels. These regulations include, but are not limited to, European
Union Regulations, U.S. Oil Pollution Act of 1990, or OPA, the U.S. Comprehensive Environmental Response, Compensation and Liability
Act of 1980, or CERCLA, the U.S. Clean Air Act, the U.S. Clean Water Act and the U.S. Marine Transportation Security Act of 2002,
and regulations of the International Maritime Organization, or the IMO, including the International Convention for the Prevention
of Pollution from Ships of 1975, the International Convention for the Prevention of Marine Pollution of 1973, the IMO International
Convention for the Safety of Life at Sea of 1974 and the International Convention on Load Lines of 1966. Compliance with such laws,
regulations and standards, where applicable, may require installation of costly equipment or operational changes and may affect
the resale value or useful lives of our vessels. We may also incur additional costs in order to comply with other existing and
future regulatory obligations, including, but not limited to, costs relating to air emissions, the management of ballast waters,
maintenance and inspection, development and implementation of emergency procedures and insurance coverage or other financial assurance
of our ability to address pollution incidents. These costs could have a material adverse effect on our business, results of operations,
cash flows and financial condition. A failure to comply with applicable laws and regulations may result in administrative and civil
penalties, criminal sanctions or the suspension or termination of our operations. Environmental laws often impose strict liability
for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether
we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly
liable for the discharge of oil within the 200-mile exclusive economic zone around the United States. Furthermore, the 2010 explosion
of the
Deepwater Horizon
and the subsequent release of oil into the Gulf of Mexico, or other events, may result in further
regulation of the shipping industry, including modifications to statutory liability schemes, which could have a material adverse
effect on our business, financial condition, results of operations and cash flows. An oil spill could result in significant liability,
including fines, penalties, criminal liability, remediation costs and natural resource damages under other federal, state and local
laws, as well as third-party damages. We are required to satisfy insurance and financial responsibility requirements for potential
oil (including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental
risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have
a material adverse effect on our business, results of operations, cash flows and financial condition and our ability to pay dividends,
if any, in the future.
Risks associated with operating ocean-going
vessels could affect our business and reputation, which could adversely affect our revenues and stock price.
The operation of ocean-going
vessels carries inherent risks. These risks include the possibility of:
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environmental accidents;
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cargo and property losses or damage;
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business interruptions caused by mechanical failure, human error, war, terrorism, political action
in various countries, labor strikes or adverse weather conditions; and
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These hazards may
result in death or injury to persons, loss of revenues or property, environmental damage, higher insurance rates, damage to our
customer relationships, delay or rerouting. If our vessels suffer damage, they may need to be repaired at a dry-docking facility.
The costs of dry-dock repairs are unpredictable and may be substantial. We may have to pay dry-docking costs that our insurance
does not cover in full. The loss of earnings while these vessels are being repaired and repositioned, as well as the actual cost
of these repairs, would decrease our earnings. In addition, space at dry-docking facilities is sometimes limited and not all dry-docking
facilities are conveniently located. We may be unable to find space at a suitable dry-docking facility or our vessels may be forced
to travel to a dry-docking facility that is not conveniently located to our vessels’ positions. The loss of earnings while
these vessels are forced to wait for space or to steam to more distant dry-docking facilities would decrease our earnings. The
involvement of our vessels in an environmental disaster may also harm our reputation as a safe and reliable vessel owner and operator.
We are subject to international safety
regulations and the failure to comply with these regulations may subject us to increased liability, may adversely affect our insurance
coverage and may result in our vessels being denied access to, or detained in, certain ports.
The operation of our
vessels is affected by the requirements set forth in the United Nations’ International Maritime Organization’s International
Management Code for the Safe Operation of Ships and Pollution Prevention, or ISM Code. The ISM Code requires shipowners, ship managers
and bareboat charterers to develop and maintain an extensive “Safety Management System” that includes the adoption
of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures
for dealing with emergencies. If we fail to comply with the ISM Code, we may be subject to increased liability, may invalidate
existing insurance or decrease available insurance coverage for our affected vessels and such failure may result in a denial of
access to, or detention in, certain ports. Each of the vessels that has been delivered to us is ISM Code-certified. However, if
we are subject to increased liability for non-compliance or if our insurance coverage is adversely impacted as a result of non-compliance,
it may negatively affect our ability to pay dividends, if any, in the future. If any of our vessels are denied access to, or are
detained in, certain ports, our revenues may be adversely impacted.
In addition, vessel
classification societies also impose significant safety and other requirements on our vessels. In complying with current and future
environmental requirements, vessel owners and operators may also incur significant additional costs in meeting new maintenance
and inspection requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government
regulation of vessels, particularly in the areas of safety and environmental requirements, can be expected to become stricter in
the future and require us to incur significant capital expenditures on our vessels to keep them in compliance.
The operation of our
vessels is also affected by other government regulation in the form of international conventions, national, state and local laws
and regulations in force in the jurisdictions in which the vessels operate, as well as in the country or countries of their registration.
Because such conventions, laws, and regulations are often revised, we cannot predict the ultimate cost of complying with such conventions,
laws and regulations or the impact thereof on the resale prices or useful lives of our vessels. Additional conventions, laws and
regulations may be adopted which could limit our ability to do business or increase the cost of our doing business and which may
materially adversely affect our operations. We are required by various governmental and quasi-governmental agencies to obtain certain
permits, licenses, certificates, and financial assurances with respect to our operations.
Increased inspection procedures,
tighter import and export controls and new security regulations could increase costs and disrupt our business.
International shipping
is subject to various security and customs inspection and related procedures in countries of origin, destination and trans-shipment
points. These security procedures can result in cargo seizure, delays in the loading, offloading, trans-shipment or delivery and
the levying of customs duties, fines or other penalties against us.
It is possible that
changes to inspection procedures could impose additional financial and legal obligations on us. Changes to inspection procedures
could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types
of cargo uneconomical or impractical. Any such changes or developments may have a material adverse effect on our business, financial
condition and results of operations.
The operation of drybulk carriers
has certain unique operational risks, which could adversely affect our earnings and cash flow.
The operation of drybulk
carriers has certain unique risks. With a drybulk carrier, the cargo itself and its interaction with the vessel can be an operational
risk. By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition,
drybulk carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted
cargoes out of the hold) and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment
during unloading procedures may be more susceptible to breach to the sea. Hull breaches in drybulk carriers may lead to the flooding
of the vessels’ holds. If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and
waterlogged that its pressure may buckle the vessel’s bulkheads leading to the loss of a vessel. If we are unable to adequately
maintain our vessels we may be unable to prevent these events. Any of these circumstances or events could negatively impact our
business, financial condition, results of operations and ability to pay dividends, if any, in the future. In addition, the loss
of any of our vessels could harm our reputation as a safe and reliable vessel owner and operator.
Maritime claimants could arrest one
or more of our vessels, which could interrupt our cash flow.
Crew members, suppliers
of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by "arresting"
or "attaching" a vessel through foreclosure proceedings. For example, in November 2012, one of our vessels was arrested
due to a prior sub-charterer’s unsettled bunkering expenses. The respective vessel was detained for approximately 19 days
and was released in December 2012, after the issuance of a letter of guarantee from Allseas Marine S.A., or Allseas, a company
controlled by our Chairman, President, Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou, that
is responsible for the commercial and technical management functions for our fleet and provides the services of our executive officers,
and continued its employment. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require
us to pay large sums of money to have the arrest or attachment lifted. In addition, in some jurisdictions, such as South Africa,
under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant’s
maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could
attempt to assert “sister ship” liability against one vessel in our fleet for claims relating to another of our vessels.
Governments could requisition our
vessels during a period of war or emergency, resulting in a loss of earnings.
A government could
requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a
vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes
her charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments
may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition
of one or more of our vessels, the amount and timing of payment would be uncertain. Government requisition of one or more of our
vessels may negatively impact our revenues and reduce the amount of cash we have available for distribution as dividends, if any,
to our shareholders.
Failure to comply with the U.S. Foreign
Corrupt Practices Act could result in fines, criminal penalties and an adverse effect on our business.
We may operate in a
number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing
business in accordance with applicable anti-corruption laws and have adopted a code of business conduct and ethics which is consistent
and in full compliance with the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA. We are subject, however, to the risk that
we, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to
be in violation of such anti-corruption laws, including the FCPA. Any such violation could result in substantial fines, sanctions,
civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our business, results
of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business.
Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time
and attention of our senior management.
We conduct business in China, where
the legal system has inherent uncertainties that could limit the legal protections available to us.
Any charters that we
may enter into in the future may be subject to new regulations in China that may require us to incur new or additional compliance
or other administrative costs and may require that we pay to the Chinese government new taxes or other fees. Changes in laws and
regulations, including with regards to tax matters, and their implementation by local authorities could affect our vessels chartered
to Chinese customers as well as our vessels calling to Chinese ports and could have a material adverse impact on our business,
financial condition and results of operations.
Company Specific Risk Factors
We will not have any vessel operation
from May 2016 until we take delivery of newbuilding vessels scheduled to be delivered in the third and fourth quarter of 2016.
We have sold all of
our vessels to certain unrelated parties and an entity controlled by Mr. Michael Bodouroglou during 2015 and the first five months
of 2016 in order to settle indebtedness with our bank lenders and for the purpose of improving our liquidity. We did not take delivery
of the Ultramax newbuilding drybulk carrier with Hull number DY4050 from Yangzhou Dayang Shipbuilding Co. Ltd., or Dayang, that
was scheduled to be delivered in the fourth quarter of 2015. On April 28, 2016, Dayang served us fourteen days’ notice of
delivery for the newbuilding with Hull number DY4050 for delivery on May 12, 2016, and as per the terms of the contract, Dayang
resent the fourteen days’ notice for vessel’s delivery on May 23, 2016. Our current financial position does not allow
us to take delivery of the newbuilding vessel, which constitutes an event of default, resulting in a claim of more than $18.0 million
against us in respect of the third (delivery) instalment, interest and costs. In January 2016, we also sent notices of cancellation
to Dayang in respect of the Ultramax newbuilding drybulk carrier with Hull number DY4052 that was also scheduled to be delivered
at the end of December 2015. Dayang rejected such cancellation notices and we are in arbitration. If we are not successful in arbitration,
our potential liability relating to the third (delivery) instalment exceeds $18.0 million (excluding legal costs which are estimated
to exceed $1.0 million). Depending on the jurisdiction, Dayang may seek to obtain security of its damages against the assets of
the associated or sister companies and/or the parent company. Pursuant to our contract with Yangzijiang for the construction of
three Kamsarmax newbuilding drybulk carriers, the three Kamsarmax newbuilding drybulk carriers are scheduled for delivery between
the third and fourth quarter of 2016. Unless we acquire other vessels, we will not be able to generate any new revenue from May
2016 till the chartering of the newbuilding vessels to be delivered. We cannot assure you that we will be able to successfully
charter our newbuilding vessels at rates sufficient to allow us to meet our obligations or at all. If the current low hire rates
persist, management may have to decide to refuse to take the scheduled delivery of the newbuildings from Yangzijiang, which may
result in default damages and other incidental costs and expenses as well as postpone our revenue generation.
We may incur significant liability
from the dispute with Yangzhou Dayang Shipbuilding Co. Ltd.
We did not take delivery
of the Ultramax newbuilding drybulk carrier with Hull number DY4050 from Dayang, that was scheduled to be delivered in the fourth
quarter of 2015. On April 28, 2016, Dayang served us fourteen days’ notice of delivery for the newbuilding with Hull number
DY4050 for delivery on May 12, 2016, and as per the terms of the contract, Dayang resent the fourteen days’ notice for vessel’s
delivery on May 23, 2016. Our current financial position does not allow us to take delivery of the newbuilding vessel, which constitutes
an event of default, resulting in a liability relating to the third (delivery) instalment, interest and costs which exceeds $18.0
million. In January 2016, we also sent notices of cancellation to Dayang in respect of the Ultramax newbuilding drybulk carrier
with Hull number DY4052 that was also scheduled to be delivered at the end of December 2015. Dayang rejected such cancellation
notices and we are in arbitration. If we are not successful in arbitration, our potential liability relating to the third (delivery)
instalment exceeds $18.0 million (excluding legal costs which are estimated to exceed $1.0 million). Depending on the jurisdiction,
Dayang may seek to obtain security of its damages against the assets of the associated or sister companies and/or the parent company.
We are not in compliance with the
covenants related to the Notes and are currently in default under our obligations to the holders of our Notes. Our continued operation
between May 2016 and the resumption of our vessel chartering operation in the future is dependent upon our ability to convert the
outstanding Notes to shares of our common stock.
We are in default under
our obligations to the holders of the Notes for accrued unpaid interest of approximately $0.5 million originally due in February
2016. In addition, our Notes require us to satisfy certain covenants that we are not in compliance with. Specifically, we are not
in compliance with covenants related to (i) net borrowings to total assets and (ii) minimum net worth. We have experienced net
losses and have a shareholders’ deficit, which have affected, and which are expected to continue to affect, our ability to
satisfy our obligations under the Notes. We have also been unable to generate positive cash flows from operating activities. For
the years ended December 31, 2014 and 2015, the Company’s net cash used in operating activities was approximately $6.2 million
and $7.3 million, respectively. As of December 31, 2015, our cash and cash equivalents were nil and current liabilities amounted
to approximately $152.4 million, including approximately $144.7 million of debt. Our current financial situation
is such that it does not allow us to make interest payments on our Notes.
As a result of the
foregoing breaches, our Notes are subject to acceleration. If the amounts outstanding under our Notes are accelerated, it will
be very difficult in the current financing environment for us to refinance our Notes or obtain additional financing to pay off
the Notes.
Our continued operation
is dependent upon our ability to convert the outstanding Notes to shares of our common stock through the exchange agreements, which
we are currently in the process of attempting to secure. We cannot assure you that we will successfully exchange all the outstanding
Notes to shares of our common stock, in which event, our Notes will be subject to acceleration.
The substantial and continuing losses,
our working capital deficit and our significant operating expenses incurred in the past few years may cause us to be unable to
pursue all of our operational objectives if sufficient financing, cash from revenues and/or the exchange of Notes to shares of
our common stock is not realized. This raises doubt as to our ability to continue as a going concern.
We have a net loss
of approximately $268.7 million in 2015, compared to approximately $51.8 million in 2014. We had a working capital deficit of approximately
$130.2 million as of December 31, 2015, compared to working capital deficit of $1.1 million as of December 31, 2014, as adjusted
to reflect the reclassification of a portion of deferred financing costs against the current portion of long-term debt.
Although we have previously
been able to attract financing as needed, such financing may not continue to be available at all, or if available, on reasonable
terms as required. Further, the terms of such financing may be dilutive to existing shareholders or otherwise on terms not favorable
to us or existing shareholders. If we are unable to secure additional financing, as circumstances require, or do not succeed in
meeting our chartering objectives and/or successfully exchange the Notes to shares of our common stock, we may be required to change,
significantly reduce our operations or ultimately may not be able to continue our operations. As a result of our historical net
losses and cash flow deficits, and net capital deficiency, these conditions raise substantial doubt as to our ability to continue
as a going concern.
We may not be able to generate sufficient
cash flow to meet our obligations due to events beyond our control.
In February 2016, we
did not make interest payments with regards to our Notes. We do not expect that cash on hand and cash expected to be generated
from operations will be sufficient to reinstate interest payments on our Notes.
Our ability to make
scheduled payments on our outstanding indebtedness will depend on our ability to generate cash from operations in the future. We
will not have any vessel operation from May 2016 until we take delivery of newbuilding vessels scheduled to be delivered in the
third and fourth quarter of 2016. Unless we acquire other vessels, we will not be able to generate any new revenue from May 2016
till the chartering of the newbuilding vessels to be delivered. We cannot assure you that we will be able to successfully charter
our newbuilding vessels at rates sufficient to allow us to meet our obligations, or at all. Also, our future financial and operating
performance will be affected by a range of economic, financial, competitive, regulatory, business and other factors that we cannot
control, such as general economic and financial conditions in the drybulk shipping industry or the economy generally.
Furthermore, our financial
and operating performance, and our ability to service our indebtedness, is also dependent on our subsidiaries' ability to make
distributions to us, whether in the form of dividends, loans or otherwise. The timing and amount of such distributions will depend
on our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in various
debt agreements, the provisions of Marshall Islands law affecting the payment of dividends and other factors.
At any time that our
operating cash flows are insufficient to service our indebtedness and to fund our other liquidity needs, we may be forced to take
actions, such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, seeking
additional capital, or any combination of the foregoing. We cannot assure you that any of these actions could be effected on satisfactory
terms, if at all, or that they would yield sufficient funds to make required payments on our outstanding indebtedness and to fund
our other liquidity needs. Also, the terms of existing or future debt agreements may restrict us from pursuing any of these actions.
We will need to enter into loan and
credit facilities in connection with our newbuildings, and such loan and credit facilities will be expected to contain financial
and other covenants. If we are not able to comply with such covenants, our lenders may declare an event of default and accelerate
our outstanding indebtedness, which would impact our ability to continue to conduct our business.
In connection with
our newbuilding vessels, which are scheduled to be delivered in the third and fourth quarters of 2016, we will need to enter into
loan and credit facilities, which will be secured by mortgages on such vessels. Typically, such agreements require us to maintain
specified financial ratios mainly to ensure that the market value of the mortgaged vessels under the applicable credit facility,
as determined in accordance with the terms of that agreement, does not fall below a certain percentage of the outstanding amount
of the loan, which we refer to as a security cover ratio, and to satisfy certain other financial covenants. In general, these other
financial covenants will require us to maintain (i) minimum liquidity; (ii) a maximum leverage ratio; (iii) a minimum interest
coverage ratio; (iv) a minimum market adjusted net worth; (v) a minimum debt service coverage ratio; (vi) a minimum equity ratio;
and (vii) a minimum working capital.
A violation of the
security cover ratio, unless cured as set forth under the applicable loan or credit facility, or a violation of any of the financial
covenants contained in any such debt agreement, would constitute an event of default, which, unless waived or modified by our lenders,
we expect will provide such lender with the right to require us to post additional collateral, enhance our equity and liquidity,
increase our interest payments, pay down our indebtedness to a level where we are in compliance with our loan covenants, sell vessels
in our fleet and accelerate our indebtedness and foreclose their liens on our vessels, or may cause us to reclassify our indebtedness
as current liabilities, which would impair our ability to continue to conduct our business. Previously, as a result of intense
fluctuations in the drybulk charter market and the related fluctuation in vessel values, we were not in compliance with certain
financial and security cover ratio covenants contained in certain of our loan and credit facilities in the past, and as such, we
ultimately entered into agreements with our lenders, whereby we agreed to sell off our remaining vessels to unaffiliated third
parties, and the proceeds from such sales would constitute full and final settlement of our outstanding indebtedness to such lenders.
We
will need to
enter into loan and credit facilities in connection with our newbuildings, and such debt agreements
will be expected to contain restrictive covenants that may limit our liquidity and corporate activities.
In connection with
our newbuilding vessels, which are scheduled to be delivered in the third and fourth quarters of 2016, we will need to enter into
loan and credit facilities, which will be secured by mortgages on such vessels. Typically, such agreements, together with our outstanding
Notes, impose operating and financial restrictions on us. These restrictions may limit our ability to:
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incur additional indebtedness;
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create liens on our assets;
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sell capital stock of our subsidiaries;
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engage in mergers or acquisitions;
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make capital expenditures;
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compete effectively to the extent our competitors are subject to less onerous financial restrictions;
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adjust and alter existing charters;
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change the management of our vessels or terminate or materially amend the management agreement
relating to each vessel; and
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In addition, under
such covenants, we will likely be required to maintain minimum liquidity.
Therefore, our discretion
is limited because we may need to obtain consent from our lenders in order to engage in certain corporate actions and commercial
actions that we believe would be in the best interest of our business, and a denial of permission may make it difficult for us
to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. In addition,
our debt agreements may contain restrictions and impose maximum limits on the per share dividend that we may pay per annum and
require that we maintain certain minimum liquidity following the payment of any dividends. Our lenders’ interests may be
different from ours, and we cannot guarantee that we will be able to obtain a lenders’ consent when needed. In addition to
the above restrictions, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness
to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding
indebtedness. These potential restrictions and requirements may further limit our ability to pay dividends, if any, in the future
to you, finance our future operations, make acquisitions or pursue business opportunities.
Our ability to comply
with covenants and restrictions contained in any debt agreements may be affected by economic, financial and industry conditions
and other factors beyond our control. Any default under such debt agreements that is not waived or amended by the required lenders
could prevent us from paying dividends in the future. If we are unable to repay indebtedness, the lenders under such loan and credit
facilities could proceed against the collateral securing that indebtedness. In such case, we may be unable to repay the amounts
due under such loan and credit facilities. This could have serious consequences for our financial condition and results of operations
and could cause us to become bankrupt or insolvent. Our ability to comply with these covenants in future periods will also depend
substantially on the value of our assets, the rates we earn under our charters, our ability to obtain charters, our success at
keeping our costs low and our ability to successfully implement our overall business strategy. Any future credit agreement or amendment
or debt instrument may contain similar or more restrictive covenants.
We will need to procure additional
financing in order to complete the construction of our newbuilding vessels, which may be difficult to obtain on acceptable terms
or at all.
As of the date of this
annual report, our newbuilding program was comprised of three Kamsarmax drybulk carriers under construction at Jiangsu Yangzijiang
Shipbuilding Co., or Yangzijiang, scheduled for delivery in the third and fourth quarter of 2016. The estimated total contractual
cost of our newbuilding vessels amounted to $91.7 million, of which an aggregate of $64.2 million was outstanding as of the date
of this annual report and is due upon delivery of the vessels.
In order to complete
the construction of our newbuilding program, we will need to procure additional financing. We have not yet secured financing for
our Kamsarmax drybulk newbuilding that is expected to be delivered in the third and fourth quarter of 2016. If for any reason we
fail to take delivery of the newbuilding vessels described above, we would be prevented from realizing potential revenues from
these vessels, we may be required to forego deposits on construction, which amounted to an aggregate of $27.5 million as of the
date of this annual report, and we may incur default damages and other incidental costs and expenses.
In addition, the actual
or perceived credit quality of our charterers and any defaults by them, may materially affect our ability to obtain the additional
capital resources that we will require in order to meet our capital commitments, or may significantly increase our costs of obtaining
such capital. Our inability to obtain additional financing at all or at a higher level than the anticipated cost, may materially
affect our results of operation and our ability to implement our business strategy, including our ability to take delivery of our
vessels under construction. Should additional financing not be available on favorable terms or at all, this would have a material
adverse effect on our business, financial condition, results of operations and cash flows.
Our earnings will be adversely affected
if we are not able to successfully employ our newbuilding vessels or employ our newbuilding vessels at low charter rates.
We intend to primarily
employ our newbuilding vessels in the spot charter market, on short-term time charters or on voyage charters, ranging from 10 days
to three months. However, depending on the time charter market, we may decide from time to time to employ our vessels on medium
to long-term time charters. As of the date of this annual report, we have not yet secured employment for our three Kamsarmax drybulk
carriers under construction, which are scheduled to be delivered to us between the third and fourth quarter of 2016. As of the
date of this annual report, prevailing drybulk carrier charter rates are below historical averages. In the past, charter rates
for vessels have declined below operating costs of vessels. If our vessels become available for employment in the spot market or
under new time charters during periods when charter rates are at depressed levels, we may have to employ our vessels at depressed
charter rates, if we are able to secure employment for our vessels at all, which would lead to reduced or volatile earnings. Future
charter rates may not be at a level that will enable us to operate our vessels profitably to allow us to repay our debt and meet
our other obligations.
We may not be able to raise equity
and debt financing sufficient to meet our capital and operating needs and to comply with the covenants that we expect will be
contained in our debt agreements, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
We cannot assure you
that the net proceeds from any future equity offering or debt financing would be sufficient to satisfy our capital and operating
needs and enable us to comply with various debt covenants that we expect will be contained in debt agreements. In such case,
we may not be able to raise additional equity capital or obtain additional debt financing or refinance our existing indebtedness,
if necessary. If we are not able to comply with the covenants that we expect will be contained in our debt agreements and our lenders
choose to accelerate our indebtedness and foreclose their liens, we could be required to sell vessels in our fleet and our ability
to continue to conduct our business would be impaired.
We previously depended upon a few
charterers for a significant part of our revenues and we may continue to depend on a few charterers with our newbuilding vessels
in the future. The failure of one or more of these charterers to meet their obligations under our time charter agreements could
cause us to suffer losses or otherwise adversely affect our business and ability to comply with covenants that we expect will be
contained
in our debt agreements.
We derive a significant
part of our charter hire from a small number of customers. For the year ended December 31, 2015, we derived 24% of our voyage revenues
from one charterer, as presented in our audited consolidated financial statements, included elsewhere in this annual report. We
may continue to depend on a few charterers with our newbuilding vessels in the future. If one or more of these charterers is unable
to perform under one or more charters with us, or if a charterer exercises certain rights it may have to terminate the charter
before its scheduled termination date, we could suffer a loss of revenues that could materially adversely affect our business,
financial condition, results of operations and cash available for distribution as dividends to our shareholders.
The ability and willingness
of each of our charterers to perform its obligations under a time charter agreement with us depends on a number of factors that
are beyond our control and may include, among other things, general economic conditions, the condition of the drybulk shipping
industry, the overall financial condition of the charterer, the loss of the relevant vessel, prolonged off-hire periods or the
seizure of the relevant vessel for more than a specified number of days. In addition, charterers are sensitive to the commodity
markets and may be impacted by market forces affecting commodities, such as iron ore, coal, grain, and other minor bulks. Moreover,
in depressed market conditions, there have been reports of charterers renegotiating their charters or defaulting on their obligations
under charters, and our customers may fail to pay charter hire or attempt to renegotiate charter rates.
If our charterers fail
to meet their obligations to us or attempt to renegotiate our charter agreements, we could sustain significant losses which could
have a material adverse effect on our business, financial condition, results of operations and cash flows, as well as our ability
to pay dividends, if any, in the future, and compliance with covenants that we expect will be contained in our debt agreements,
which may require the maintenance of minimum charter rate levels and consider the termination of a charter to be an event of default.
For further discussion of our charterers, please see “Item 4. Information on the Company—B. Business Overview—Our
Customers.”
A drop in spot charter rates may
provide an incentive for some charterers to default on their charters.
When we enter into
a time charter, charter rates under that charter are fixed for the term of the charter. If the spot charter rates or short-term
time charter rates in the drybulk shipping industry become significantly lower than the time charter equivalent rates that some
of our charterers are obligated to pay us under our existing charters, the charterers may have incentive to default under that
charter or attempt to renegotiate the charter. If our charterers fail to pay their obligations, we would have to attempt to recharter
our vessels at lower charter rates, which would affect our ability to operate our vessels profitably and may affect our ability
to comply with covenants that we expect will be contained in our debt agreements.
We are subject to certain risks with
respect to our counterparties on contracts, and failure of such counterparties to meet their obligations could cause us to suffer
losses or otherwise adversely affect our business.
We have entered into
contracts with Yangzijiang for the construction of three Kamsarmax drybulk carriers scheduled for delivery in the third and fourth
quarter of 2016. The estimated total contractual cost of our newbuilding vessels amounted to $91.7 million, of which an aggregate
of $64.2 million was outstanding as of the date of this annual report and is due upon delivery of the vessels.
Since we have sold
all of our vessels, our continued vessel operation depends on Yangzijiang’s timely delivery of conforming drybulk carriers
according to our contracts with Yangzijiang. In the event Yangzijiang does not perform under its agreements with us and we are
unable to enforce certain refund guarantees with third party banks due to an outbreak of war, bankruptcy or otherwise, we may lose
all or part of our investment, which would have a material adverse effect on our results of operations, financial condition and
cash flows.
In addition, we enter
into, among other things, charter parties, credit facilities with banks and interest rate swap agreements. Such agreements also
subject us to counterparty risks. The ability of each of our counterparties to perform its obligations under a contract with us
will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions,
the condition of the shipping sector, the overall financial condition of the counterparty, charter rates received for specific
types of drybulk carriers, the supply and demand for commodities such as iron ore, coal, grain, and other minor bulks, and various
expenses. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses which
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may have difficulty properly managing
our planned growth through acquisitions of our newbuilding vessels and additional vessels.
We intend to grow our
business through the acquisition of our three contracted newbuilding vessels and we may make selective acquisitions of other additional
secondhand and newbuilding vessels. Our future growth will primarily depend on our ability to locate and acquire suitable additional
vessels, enlarge our customer base, operate and supervise newbuilding vessels we may order, obtain required debt or equity financing
on acceptable terms and manage our liabilities.
A delay in the delivery
to us of any vessel we contract to acquire, including our three newbuilding vessels, or the failure of the seller or shipyard to
deliver a vessel to us at all, could cause us to breach our obligations under a related charter and could adversely affect our
earnings. In addition, the delivery of any of these vessels with substantial defects could have similar consequences.
A shipyard could fail
to deliver a newbuilding on time or at all because of:
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work stoppages or other hostilities, political or economic disturbances that disrupt the operations
of the shipyard;
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quality or engineering problems;
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bankruptcy or other financial crisis of the shipyard;
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a backlog of orders at the shipyard;
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weather interference or catastrophic events, such as major earthquakes or fires;
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our requests for changes to the original vessel specifications or disputes with the shipyard; or
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shortages of or delays in the receipt of necessary construction materials, such as steel, or equipment,
such as main engines, electricity generators and propellers.
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In addition, we may
seek to terminate a newbuilding contract due to market conditions, financing limitations, significant delay in the delivery of
the vessels or other reasons. If for any reason we fail to take delivery of our three newbuilding vessels, we would be prevented
from realizing potential revenues from these vessels, we may be required to forego deposits on construction, which amounted to
an aggregate of $27.5 million as of the date of this annual report, and we may incur default damages and other incidental costs
and expenses.
The delivery of any
secondhand vessel we may agree to acquire could be delayed because of, among other things, hostilities or political disturbances,
non-performance of the purchase agreement with respect to the vessels by the seller, our inability to obtain requisite permits,
approvals or financing or damage to or destruction of the vessels while being operated by the seller prior to the delivery date.
During periods in which
charter rates are high, vessel values generally are high as well, and it may be difficult to consummate vessel acquisitions or
enter into newbuilding contracts at favorable prices. During periods when charter rates are low, we may be unable to fund the acquisition
of newbuilding vessels, whether through lending or cash on hand. For these reasons, we may be unable to execute our growth plans
or avoid significant expenses and losses in connection with our future growth efforts.
Our Board of Directors has determined
to suspend the payment of cash dividends as a result of market conditions in the international shipping industry and, until such
conditions improve, it is unlikely that we will reinstate the payment of dividends.
As a result of the
market conditions in the international shipping industry, our Board of Directors, beginning with the first quarter of 2011, has
suspended payment of our common share quarterly dividend. Our dividend policy is assessed by the Board of Directors from time to
time. The suspension allows us to retain cash and increase our liquidity so we are in a better position to capitalize on investment
opportunities during the weakened market conditions. Until market conditions improve, it is unlikely that we will reinstate the
payment of dividends. In addition, other external factors, including restrictions on our ability to pay dividends under the terms
that we expect will be contained in our loan and credit facilities, may limit our ability to pay dividends.
For example, certain
of our prior loan and credit facilities restricted the amount of dividends we could pay to $0.50 per share per annum and limited
the amount of quarterly dividends we could pay to 100% of our net income for the immediately preceding financial quarter. We were
also required to maintain minimum liquidity after payment of dividends equal to the greater of the next six months' debt service,
8% of the total financial indebtedness or $1.0 million per vessel. Furthermore, according to the supplemental agreement we entered
into with Unicredit Bank AG (“Unicredit”) on March 27, 2015, we were not permitted to declare or pay any dividends
until all the deferred amounts of the facility’s repayment installments have been repaid in full. We anticipate that future
loan and credit facilities will contain similar restrictions.
Furthermore, we may
not be permitted to pay dividends if we are in breach of covenants that we expect will be contained in our debt agreements. We
expect that the terms of our debt agreements will contain a number of financial covenants and general covenants that will require
us to, among other things, maintain security cover ratios, minimum cash balances and insurance including, but not limited to, hull
and machinery insurance in an amount at least equal to the fair market value of the vessels financed, as determined by third party
valuations. We expect that we may not be permitted to pay dividends in any amount under the terms of our expected debt agreements
if we are in default of any of such covenants or if we do not meet specified debt coverage ratios and minimum charter rate levels.
Moreover, the declaration
and payment of dividends, if any, in the future will depend on the provisions of Marshall Islands law affecting the payment of
dividends. Marshall Islands law generally prohibits the payment of dividends if the company is insolvent or would be rendered insolvent
upon payment of such dividend, and under Marshall Islands law, dividends may only be declared and paid out of surplus or, under
certain circumstances, net profits.
The derivative contracts we may enter
into to hedge our exposure to fluctuations in interest rates could result in higher than market interest rates and charges against
our income.
We previously entered
into, and anticipate that in the future we may enter into, interest rate swaps for purposes of managing our exposure to fluctuations
in interest rates applicable to indebtedness under credit facilities, which prior agreements were advanced at a floating rate based
on LIBOR. Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates move materially
differently from our expectations. Since future derivative contracts may not qualify for treatment as hedges for accounting purposes,
we could recognize fluctuations in the fair value of such contracts in our statement of comprehensive income / (loss). In addition,
our financial condition could be materially adversely affected to the extent we do not hedge our exposure to interest rate fluctuations
under financing arrangements. Any hedging activities we engage in may not effectively manage our interest rate exposure or have
the desired impact on our financial conditions or results of operations. As of December 31, 2015, the fair value of our interest
rate swaps was a liability of $0.02 million.
Substantial debt levels could limit
our flexibility to obtain additional financing and pursue other business opportunities.
As of December 31,
2015, we had outstanding indebtedness of $144.7 million, which subsequent to December 31, 2015, was substantially eliminated through
the sale of our remaining vessels. We expect to incur additional indebtedness in order to fund the aggregate remaining purchase
commitments for our three newbuilding vessels amounting to $64.2 million as of the date of this annual report, and any further
growth of our fleet. This level of debt could have significant adverse consequences to our business and future prospects, including
the following:
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our ability to obtain additional financing, if necessary, for working capital, capital expenditures,
acquisitions or other purposes may be impaired or such financing may be unavailable on favorable terms or at all;
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we may need to use a substantial portion of our cash from operations to make principal and interest
payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and future
dividend payments to shareholders, if any;
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we could become more vulnerable to general adverse economic and industry conditions, including
increases in interest rates, particularly given our substantial indebtedness, some of which bears interest at variable rates;
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we may not be able to meet financial ratios included in our debt agreements due to market conditions
or other events beyond our control, which could result in a default under these agreements and trigger cross-default provisions
in our other debt agreements;
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our debt level could make us more vulnerable than our competitors with less debt to competitive
pressures or a downturn in our business or the economy generally; and
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our debt level may limit our flexibility in responding to changing business and economic conditions.
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Our ability to service
our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating
income is not sufficient to service our current or future indebtedness, we will be forced to take actions, such as reducing or
delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing
our debt or seeking additional equity capital. We may not be able to affect any of these remedies on satisfactory terms, or at
all. In addition, a lack of liquidity in the debt and equity markets could hinder our ability to refinance our debt or obtain
additional financing on favorable terms in the future.
We may have difficulty effectively
managing our planned growth.
As of the date of this
annual report, we have no current vessels and our current newbuilding program consists of three Kamsarmax newbuilding drybulk carriers
that are scheduled for delivery between the third and fourth quarter of 2016.
Since we have no current
vessels, our Managers have decreased the number of staff significantly. As we acquire our newbuildings and expand our fleet, this
will require us to increase the number of our personnel. We will also have to increase our customer base to provide continued employment
for the new vessels.
Our future growth will
primarily depend on our ability to:
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locate and acquire suitable vessels;
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identify and consummate acquisitions or joint ventures;
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integrating any acquired vessels successfully with our existing operations;
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enhance our customer base;
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obtain required financing on acceptable terms; and
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manage our liabilities.
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We may not be successful
in executing our growth plans and we may incur significant expenses and losses in connection with our future growth. If we are
not able to successfully grow the size of our company or increase the size of our fleet, our financial condition and results of
operations may be adversely affected.
The expansion of our
fleet may impose significant additional responsibilities on our management and the management and staff of Allseas and Seacommercial
Shipping Services S.A., or Seacommercial, a company controlled by our Chairman, President, Chief Executive Officer and Interim
Chief Financial Officer, Mr. Michael Bodouroglou, which, together with Allseas, is responsible for the commercial and technical
management functions for our fleet. The expansion of our fleet may necessitate that we and Allseas and Seacommercial, together,
the Managers, increase the number of personnel employed. The Managers may have to increase their customer base to provide continued
employment of our fleet, and such costs will be passed on to us by the Managers.
We are dependent on Allseas
and Seacommercial for the commercial and technical management of our fleet, and are dependent on Allseas to provide us with our
executive officers, and the failure of either of our Managers to satisfactorily perform their services may adversely affect our
business.
We have entered into
an executive services agreement with Allseas, pursuant to which Allseas provides the services of our executive officers, which
include strategy, business development, marketing, finance and other services, who report directly to our Board of Directors. In
connection with the respective agreement, Allseas is entitled to an executive services fee, plus incentive compensation. On May
18, 2015, the duration of the agreement was converted from the initial term of five years to indefinite unless sooner terminated
in accordance with the provisions of the agreement.
In addition, as we
subcontract the commercial and technical management of our fleet, including crewing, maintenance and repair, to Allseas and Seacommercial,
the loss of either of the Managers services or their failure to perform their obligations to us could materially and adversely
affect the results of our operations. Although we may have rights against the Managers if they default on their obligations to
us, you will have no recourse directly against either of the Managers. Further, our loan and credit facilities require the approval
from our lenders to change our commercial and technical manager.
Since Allseas and Seacommercial
are privately held companies and there is little or no publicly available information about our Managers, an investor could have
little advance warning of potential problems that might affect the Managers that could have a material adverse effect on us.
The ability of the
Managers to continue providing services for our benefit will depend in part on their own financial strength. Circumstances beyond
our control could impair the Managers’ financial strength, and because the Managers are privately held, it is unlikely that
information about their financial strength would become public unless either of the Managers began to default on their obligations.
As a result, an investor in our shares might have little advance warning of problems affecting the Managers, even though these
problems could have a material adverse effect on us.
Our executive officers have
affiliations with Allseas, Seacommercial and Box Ships, which may create conflicts of interest that may permit them to favor the
interests of Allseas, Seacommercial and Box Ships and their affiliates above our interests and those of our shareholders.
Our Chairman, President,
Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou, is the beneficial owner of all of the issued
and outstanding capital stock of Allseas, Seacommercial and Crewcare Inc., or Crewcare, our manning agent, and our Chief Operating
Officer, Mr. George Skrimizeas, is the President and director of Allseas and Seacommercial. These responsibilities and relationships
could create conflicts of interest between us, on the one hand, and the Managers, on the other hand. These conflicts may arise
in connection with the chartering, purchase, sale and operations of the vessels in our fleet versus other vessels managed by the
Managers or other companies affiliated with the Managers and Mr. Bodouroglou. To the extent that entities affiliated with Mr. Bodouroglou,
other than us, or the Managers own or operate vessels that may compete for employment or management services in the future, the
Managers may give preferential treatment to vessels that are beneficially owned by related parties because Mr. Bodouroglou and
members of his family may receive greater economic benefits. Mr. Bodouroglou granted to us a right of first refusal over future
vessels that he or entities affiliated with him may seek to acquire in the future. However, we may not exercise our right to acquire
all or any of these vessels in the future, and such vessels may compete with our fleet.
In addition, the Managers
currently provide management services to vessels in Box Ships’ fleet as well as our fleet. We have entered into an agreement
with Box Ships and Mr. Michael Bodouroglou that provides that so long as (i) Mr. Bodouroglou is a director or executive officer
of both our Company and Box Ships and (ii) we own at least 5% of the total issued and outstanding common shares of Box Ships, Box
Ships will not, directly or indirectly, acquire or charter any drybulk carrier without our prior written consent and we will not,
directly or indirectly, acquire or charter any containership without the prior written consent of Box Ships. To the extent that
we believe it is in our interest to grant such consent and Box Ships acquires drybulk vessels, such vessels may compete with our
fleet. The Managers are not parties to the non-competition agreement described above and, under the terms of the agreement, may
provide vessel management services to drybulk vessels other than ours. These conflicts of interest may have an adverse effect on
our results of operations.
Furthermore, other
conflicts of interest may arise between Box Ships, the Managers, and their affiliates, on the one hand, and us and our shareholders,
on the other hand. For example, notwithstanding our non-competition agreement with Box Ships described above, Box Ships may claim
other business opportunities that would benefit us, such as the hiring of employees, the acquisition of other businesses, or the
entry into joint ventures, and in each case other than business opportunities in the drybulk shipping industry, and this could
have a material adverse effect on our business, results of operations and cash flows.
Moreover, Mr. Bodouroglou
also serves as the Chairman, President, Chief Executive Officer and Interim Chief Financial Officer of Box Ships. Therefore, Mr.
Bodouroglou, who advises our Board of Directors on the amount and timing of asset purchases and sales, capital expenditures, borrowings,
issuances of additional capital stock and cash reserves, each of which can affect the amount of the cash available for distribution
to our shareholders, may favor the interests of Box Ships or its affiliates and may not provide us with business opportunities
that would benefit us. In addition, our executive officers and those of our Managers will not spend all of their time on matters
related to our business.
Furthermore, Mr. Bodouroglou
has fiduciary duties to manage our business in a manner that is beneficial to us and our shareholders and he has fiduciary duties
to manage the business of Box Ships and its affiliates in a manner beneficial to such entities and their shareholders. Consequently,
he may encounter situations in which his fiduciary obligations to Box Ships and us are in conflict. We believe the principal situations
in which these conflicts may occur are in the allocation of business opportunities to Box Ships or us, such as with respect to
the allocation and hiring of employees, the acquisition of other businesses or the entry into joint ventures, and in each case
other than business opportunities in the drybulk shipping industry. The resolution of these conflicts may not always be in our
best interest or that of our shareholders and could have a material adverse effect on our business, results of operations, cash
flows and financial condition.
Although we have entered
into a non-competition agreement with Box Ships and Mr. Michael Bodouroglou, as a result of the conflicts discussed above, the
Managers may favor its own interests, the interests of Box Ships and the interests of its affiliates, and our executive officers
may favor the interests of the Managers, Box Ships and its affiliates, over our interests and those of our shareholders, which
could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Purchasing and operating secondhand
vessels may result in increased operating costs and reduced fleet utilization.
While we have the right
to inspect previously owned vessels prior to our purchase of them and we intend to inspect all secondhand vessels that we acquire
in the future, such an inspection does not provide us with the same knowledge about their condition that we would have if these
vessels had been built for and operated exclusively by us. A secondhand vessel may have conditions or defects that we were not
aware of when we bought the vessel and which may require us to incur costly repairs to the vessel. These repairs may require us
to put a vessel into dry-dock which would reduce our fleet utilization. Furthermore, we usually do not receive the benefit of warranties
on secondhand vessels.
We or our Managers may be unable
to attract and retain key management personnel and other employees in the shipping industry, which may negatively impact the effectiveness
of our management and results of operations.
Our success depends
to a significant extent upon the abilities and efforts of our management team, including our ability to retain key members of our
management team and to hire new members as may be necessary. As of the date of this annual report, we don’t have any shoreside
salaried employees and we reimburse Allseas for the services of our executive officers. The loss of any of these individuals could
adversely affect our business prospects and financial condition. Difficulty in hiring and retaining replacement personnel could
adversely affect our business, results of operations and ability to pay dividends. We do not intend to maintain “key man”
life insurance on any of our officers or other members of our management team.
We may not have adequate insurance
to compensate us if we lose our vessels or to compensate third parties.
There are a number
of risks associated with the operation of ocean-going vessels, including mechanical failure, collision, human error, war, terrorism,
piracy, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities
and labor strikes. Any of these events may result in loss of revenues, increased costs and decreased cash flows. In addition, the
operation of any vessel is subject to the inherent possibility of marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating vessels in international trade.
When we acquire our
newbuildings, we will be insured against tort claims and some contractual claims (including claims related to environmental damage
and pollution) through memberships in protection and indemnity associations or clubs, or P&I Associations. As a result of such
membership, the P&I Associations provide us coverage for such tort and contractual claims. We will also carry hull and machinery
insurance and war risk insurance for our fleet. We will insure our vessels for third-party liability claims subject to and in accordance
with the rules of the P&I Associations in which the vessels are entered. We will also maintain insurance against loss of hire,
which covers business interruptions that result in the loss of use of a vessel. We can give no assurance that we will be adequately
insured against all risks and we cannot guarantee that any particular claim will be paid.
In addition, we may
not be able to obtain adequate insurance coverage for our fleet in the future or renew our insurance policies on the same or commercially
reasonable terms, or at all. For example, more stringent environmental regulations have led in the past to increased costs for,
and in the future may result in the lack of availability of, protection and indemnity insurance against risks of environmental
damage or pollution. Any uninsured or underinsured loss could harm our business, results of operations, cash flows, financial condition
and ability to pay dividends in amounts anticipated or at all. In addition, our insurance may be voidable by the insurers as a
result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory
organizations. Furthermore, our insurance policies may not cover all losses that we incur, or that disputes over insurance claims
will not arise with our insurance carriers. Any claims covered by insurance would be subject to deductibles, and since it is possible
that a large number of claims may be brought, the aggregate amount of these deductibles could be material. In addition, our insurance
policies are subject to limitations and exclusions, which may increase our costs or lower our revenues, thereby possibly having
a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends
in amounts anticipated or at all.
The aging of our fleet may result
in increased operating costs or loss of hire in the future, which could adversely affect our earnings.
In general, the cost
of maintaining a vessel in good operating condition increases with the age of the vessel. Our newbuilding program, which will be
the only vessels we own, consists of three Kamsarmax drybulk carriers that are scheduled to be delivered in the third and fourth
quarter of 2016. As our fleet ages, we will incur increased costs. Older vessels are typically less fuel efficient and more costly
to maintain than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates increase with
the age of a vessel, making older vessels less desirable to charterers. Governmental regulations and safety or other equipment
standards related to the age of vessels may also require expenditures for alterations or the addition of new equipment to our vessels
and may restrict the type of activities in which our vessels may engage. As our vessels age, market conditions may not justify
those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.
In addition, charterers
actively discriminate against hiring older vessels. For example, Rightship, the ship vetting service maintained by Rio Tinto, Cargill
and BHP-Billiton which has become the major vetting service in the drybulk shipping industry, ranks the suitability of vessels
based on a scale of one to five stars. Most major carriers will generally not charter a vessel that Rightship has vetted with fewer
than three stars. Rightship automatically downgrades any vessel over 18 years of age to two stars, which significantly decreases
its chances of entering into a charter. Therefore, as our vessels approach and exceed 18 years of age, we may not be able to operate
these vessels profitably during the remainder of their useful lives.
Because we generate all of our revenues
in U.S. dollars but incur a portion of our expenses in other currencies, exchange rate fluctuations could have an adverse impact
on our results of operations.
We generate substantially
all of our revenues in U.S. dollars but certain of our expenses are incurred in currencies other than the U.S. dollar. This difference
could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to these other currencies, in
particular the Euro. Expenses incurred in foreign currencies against which the U.S. dollar falls in value could increase, decreasing
our net income and cash flow from operations.
If the recent volatility in LIBOR continues, it could
affect our profitability, earnings and cash flow.
We have previously
entered into, and in the future plan to enter into, interest rate swap agreements converting floating interest rate exposure into
fixed interest rates in order to economically hedge our exposure to fluctuations in prevailing market interest rates. However,
our exposure to floating interest rate is typically only partially hedged. For more information on our prior interest rate swap
agreements, refer to Note 9 to our consolidated financial statements included at the end of this annual report.
Historically, LIBOR
has been volatile, with the spread between LIBOR and the prime lending rate widening significantly at times. These conditions are
the result of the recent disruptions in the international credit markets. Because the interest rates for indebtedness fluctuate
with changes in LIBOR, if this volatility were to continue, it would affect the amount of interest payable on debt we may assume,
which in turn, could have an adverse effect on our profitability, earnings and cash flow.
Furthermore,
interest on most loan agreements in our industry has been based on published LIBOR rates. Recently, however, lenders have insisted
on provisions that entitle the lenders, in their discretion, to replace published LIBOR as the base for the interest calculation
with their cost-of-funds rate. If we are required to agree to such a provision in future loan agreements, our lending costs could
increase significantly, which would have an adverse effect on our profitability, earnings and cash flow.
We may have to pay tax on U.S.
source income, which would reduce our earnings.
Under
Section 887 of the U.S. Internal Revenue Code of 1986, as amended, (the “Code”), 50% of the gross shipping income of
a corporation that owns or charters vessels, such as ourselves and our subsidiaries, that is attributable to transportation that
either begins or ends (but that does not do both) in the United States is characterized as U.S. source shipping income. Such income
is subject to a 4% U.S. federal income tax without allowance for deductions.
The
4% tax imposed by Section 887 does not apply if the corporation qualifies for an exemption from tax under Section 883 of the Code
and the Treasury Regulations promulgated thereunder.
We
and each of our subsidiaries believe that we qualify for the exemption under Section 883 and we take this position for U.S. federal
income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the
benefit of this tax exemption and thereby become subject to U.S. federal income tax on our U.S. source shipping income. For example,
we would no longer qualify for exemption under Section 883 for a particular taxable year if shareholders resident in certain jurisdictions
with a 5% or greater interest in our common shares owned, in the aggregate, 50% or more of our outstanding common shares for more
than half the days during the taxable year. Due to the factual nature of the issues involved, we can give no assurances with regard
to our tax-exempt status or that of any of our subsidiaries.
If
we or our subsidiaries are not entitled to the tax exemption under Section 883 for any taxable year, then under Section 887 of
the Code we or our subsidiaries would be subject during those years to a 4% U.S. federal income tax on our shipping income that
is treated as from sources within the U.S. (without allowance for deduction). The imposition of this tax could have a negative
effect on our business and would result in decreased earnings available for distribution to our shareholders. In the absence of
exemption from tax under Section 883, for the year ended December 31, 2015, the tax on our U.S.-source shipping income would have
amounted to approximately $0.09 million.
See
“Item 10. Additional Information—E. Taxation—Material U.S., Marshall Islands Income Tax Considerations—
Taxation of Operating Income: In General and Exemption of Operating Income from U.S. Federal Income Taxation”, for a further
discussion of the taxation of our shipping income.
U.S. tax authorities could
treat us as a “passive foreign investment company,” which could have adverse U.S. federal income tax consequences to
U.S. shareholders.
A foreign corporation
will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes if either
(1) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at
least 50% of the average value of the corporation’s assets produce, or are held for the production of, those types of “passive
income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange
of investment property, and rents and royalties other than rents and royalties which are received from unrelated parties in connection
with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does
not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax
regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they
derive from the sale or other disposition of their shares in the PFIC.
Based on our current
and proposed method of operation, we do not believe that we will be a PFIC with respect to any taxable year. In this regard, we
intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather
than rental income. Accordingly, we believe that income from our time chartering activities does not constitute “passive
income,” and the assets that we own and operate in connection with the production of that income do not constitute assets
that produce, or are held for the production of, “passive income.”
There is, however,
no direct legal authority under the PFIC rules addressing our proposed method of operation. We believe there is substantial legal
authority supporting our position consisting of case law and U.S. Internal Revenue Service, or IRS, pronouncements concerning the
characterization of income derived from time charters and voyage charters as services income for other tax purposes. However, we
note that there is also authority which characterizes time charter income as rental income rather than services income for other
tax purposes. Accordingly, no assurance can be given that the IRS or a court of law will accept our position, and there is a risk
that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would not constitute
a PFIC for any future taxable year if there were to be changes in the nature of our operations.
If the IRS were to
find that we are or have been a PFIC for any taxable year, our U.S. shareholders would face adverse U.S. federal income tax consequences
and information reporting obligations. Under the PFIC rules, unless those U.S. shareholders make an election available under the
Code (which election could itself have adverse consequences for such U.S. shareholders), such U.S. shareholders would be liable
to pay U.S. federal income tax at the then prevailing U.S. federal income tax rates on ordinary income plus interest upon “excess
distributions” and upon any gain from the disposition of our common shares, as if such “excess distribution”
or gain had been recognized ratably over the U.S. shareholder’s holding period of our common shares. See “Item 10.
Additional Information—E. Taxation—Material U.S., Marshall Islands Income Tax Considerations—U.S. Federal Income
Taxation of U.S. Holders—Passive Foreign Investment Company Status and Significant Tax Consequences” for a more comprehensive
discussion of the U.S. federal income tax consequences to U.S. shareholders if we are treated as a PFIC.
We are a holding company, and we
depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to make dividend
payments, if any, in the future.
We are a holding company
and our subsidiaries, which are wholly-owned by us, conduct all of our operations and own all of our operating assets. We have
no significant assets other than the equity interests in our subsidiaries. As a result, our ability to make dividend payments,
if any, in the future depends on our subsidiaries and their ability to distribute funds to us. We do not intend to obtain funds
from other sources to pay dividends, if any, in the future.
In addition, the declaration
and payment of dividends by us and our Marshall Islands and Liberian subsidiaries will depend on the provisions of Marshall Islands
and Liberian law affecting the payment of dividends. Marshall Islands and Liberian law generally prohibits the payment of dividends
other than from surplus or net profits or while a company is insolvent or would be rendered insolvent upon payment of such dividend.
Our ability to pay
dividends, if any, in the future will also be subject to our satisfaction of certain financial covenants that we expect will be
contained in our debt agreements. Certain of our prior loan and credit facilities restricted the amount of dividends we could pay
to $0.50 per share per annum and limited the amount of quarterly dividends we could pay to 100% of our net income for the immediately
preceding financial quarter. We were also required to maintain minimum liquidity after payment of dividends equal to the greater
of the next six months' debt service, 8% of the total financial indebtedness or $1.0 million per vessel. Furthermore, according
to the supplemental agreement we entered into with Unicredit on March 27, 2015, we were not permitted to declare or pay any dividends
until all the deferred amounts of the facility’s repayment installments have been repaid in full. We anticipate that future
loan and credit facilities will contain similar restrictions.
As we progress our business, our
Managers may need to improve our operating and financial systems and will need to recruit suitable employees and crew for our vessels
on our behalf. If we are unable to do so, those systems may become ineffective, which could adversely affect our financial performance.
Our current operating
and financial systems may not be adequate and our attempts to improve those systems may be ineffective. In addition, as we add
new vessels, our Managers will need to recruit suitable additional seafarers and shoreside administrative and management personnel
on our behalf. While our Managers have not experienced any difficulty in recruiting to date, we cannot guarantee that our Managers
will be able to continue to hire suitable employees as we add new vessels. If we or our crewing agent encounter business or financial
difficulties, we may not be able to adequately staff our vessels. If our Managers are unable to grow our financial and operating
systems or to recruit suitable employees on our behalf as we expand our fleet, our financial performance may be adversely affected.
Because seafaring employees
are covered by industry-wide collective bargaining agreements, failure of industry groups to renew those agreements may disrupt
our operations and adversely affect our earnings.
As of December 31,
2015, 188 seafarers were employed, mainly by Crewcare, our manning agent, to crew our vessels. While we do not currently employ
any seafarers, since we recently sold all our vessels, we will employ seafarers when we acquire our newbuildings. All of the seafarers
employed on the vessels in our fleet are covered by industry-wide collective bargaining agreements that set basic standards. These
agreements may not prevent labor interruptions. Any labor interruption could disrupt our operations and harm our financial performance.
It may not be possible for
investors to enforce U.S. judgments against us.
We and all our subsidiaries
are incorporated in jurisdictions outside the United States and substantially all of our assets and those of our subsidiaries are
located outside the United States. In addition, all of our directors and officers are non-residents of the United States, and all
or a substantial portion of the assets of these non-residents are located outside the United States. As a result, it may be difficult
or impossible for U.S. investors to serve process within the United States upon us, our subsidiaries or our directors and officers
or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the
countries in which we or our subsidiaries are incorporated or where our or the assets of our subsidiaries are located (1) would
enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of
applicable U.S. federal and state securities laws or (2) would enforce, in original actions, liabilities against us or our subsidiaries
based on those laws.
We may be subject
to litigation or arbitration that, if not resolved in our favor and not sufficiently insured against, could have a material adverse
effect on us.
We may be,
from time to time, involved in various litigation or arbitration matters. In December 2013, we agreed to acquire from Allseas
shipbuilding contracts for two Ultramax newbuilding drybulk carriers with Hull numbers DY4050 and DY4052 which were under
construction at Dayang. The acquisition cost of these two newbuildings was $28.3 million per vessel. In February 2014,
we paid an amount of $5.6 million per vessel. In addition, upon commencement of the steel cutting of each vessel in the
second quarter of 2014, we paid a second installment of $3.9 million per vessel. The balance of the contract price, or $18.8
million per vessel, would be payable upon the delivery of each vessel. We did not take delivery of the newbuilding with Hull
number DY4050 that was scheduled to be delivered in the fourth quarter of 2015. On April 28, 2016, Dayang served us
fourteen days’ notice of delivery for the newbuilding with Hull number DY4050 for delivery on May 12, 2016, and as per
the terms of the contract, Dayang resent the fourteen days’ notice for vessel’s delivery on May 23, 2016.
Our current financial position does not allow us to take delivery of the newbuilding vessel, which constitutes an event
of default, resulting in a liability relating to the third (delivery) instalment, interest and costs which exceeds
$18.0 million. In January 2016, we also sent notices of cancellation to Dayang in respect of the Ultramax newbuilding
drybulk carrier with Hull number DY4052 that was also scheduled to be delivered at the end of December 2015. Dayang rejected
such cancellation notices and we are in arbitration. If we are not successful in arbitration, our potential liability
relating to the third (delivery) instalment exceeds $18.0 million (excluding legal costs which are estimated to exceed $1.0
million). Depending on the jurisdiction, Dayang may seek to obtain security of its damages against the assets of the
associated or sister companies and/or the parent company. This and other litigation or arbitration matters may include, among
other things, contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic
tort claims, employment matters, governmental claims for taxes or duties, and other litigation that arises in the ordinary
course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome
or effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the potential costs to
resolve them may have a material adverse effect on us. Insurance may not be applicable or sufficient in all cases and/or
insurers may not remain solvent which may have a material adverse effect on our financial condition.
Risks Relating to Our Common Shares
The continued downturn in the drybulk
carrier charter market has had and the suspension of our vessel operations will have a significant adverse impact on the market
price of our common shares and may affect our ability to maintain our listing on NASDAQ or other securities exchange on which our
common shares may be traded.
The continued downturn
in the drybulk carrier charter market has caused the price of our common shares to decline significantly since 2008. On November
25, 2011, we received notification from the NYSE, on which we were then listed, that we were no longer in compliance with the NYSE’s
continued listing requirements because the average closing price of our common shares had fallen below $1.00 for a consecutive
30-trading day period. In November 2012, with the approval of shareholders at our 2012 annual general meeting of shareholders,
we conducted a 10-for-1 reverse stock split of our issued and outstanding common shares in order to continue to meet the minimum
continued listing standards of the NYSE. Subsequently, the NYSE notified us that we had regained compliance on December 19, 2012.
In April of 2013, we voluntarily transferred the listing of our common stock to NASDAQ. On May 14, 2015 we received a notification
from NASDAQ that we were no longer in compliance with the NASDAQ’s minimum bid price requirement for continued listing of
$1.00 per share. On November 11, 2015, we transferred our listing to the NASDAQ Capital Market from the NASDAQ Global Market and
obtained a six month extension to regain compliance with the minimum bid price requirement. Effective March 1, 2016, we effectuated
a 38-for-1 reverse stock split of our issued and outstanding common shares, and on March 15, 2016, NASDAQ notified us that we had
regained compliance with the $1.00 per share minimum bid price requirement for continued listing. We will not have any vessel operation
until we take delivery of newbuilding vessels scheduled to be delivered in the third and fourth quarter of 2016. As a result, we
will not generate any new revenue until we charter our newbuilding vessels in the future, which may have significant impact on
the trading price of our common shares. Further declines in the trading price of our common shares may cause us to fail to meet
certain of the continuing listing standards of NASDAQ, which could result in the delisting of our common shares. If our shares
cease to be traded on the NASDAQ or on another national securities exchange, the price at which you may be able to sell your common
shares of the company may be significantly lower than their current trading price or you may not be able to sell them at all.
The market price of our common shares
has fluctuated widely and may continue to fluctuate in the future.
The market price of
our common shares has fluctuated widely since we became a public company in August 2007 and may continue to do so as a result of
many factors, including whether we can successfully charter our newbuilding vessels, our actual results of operations and perceived
prospects, the prospects of our competition and of the shipping industry in general and in particular the drybulk sector, differences
between our actual financial and operating results and those expected by investors and analysts, changes in analysts’ recommendations
or projections, changes in general valuations for companies in the shipping industry, particularly the drybulk sector, changes
in general economic or market conditions and broad market fluctuations.
The public market for our common
shares may not continue to be active and liquid enough for you to resell our common shares in the future.
An active or liquid
public market for our common shares may not continue going forward. Volatility in the stock market could have an adverse effect
on the market price of our common shares and could impact a potential sale price if holders of our common shares decide to sell
their shares.
The seaborne transportation
industry has been highly unpredictable and volatile. The market for common shares in this industry may be equally volatile. The
market price of our common shares may be influenced by many factors, many of which are beyond our control, including those already
described above, as well as the following:
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actual or anticipated fluctuations in our quarterly and annual results and those of other public
companies in our industry;
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announcements by us or our competitors of significant contracts, acquisitions or capital commitments;
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mergers and strategic alliances in the shipping industry;
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future sales of our common shares or other securities;
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market conditions in the shipping industry;
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economic and regulatory trends;
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shortfalls in our operating results from levels forecast by securities analysts;
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announcements concerning us or our competitors;
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the general state of the securities market; and
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investors’ perception of us and the drybulk shipping industry.
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As a result of these
and other factors, investors in our common shares may not be able to resell their shares at or above the price they paid for such
shares. These broad market and industry factors may materially reduce the market price of our common shares, regardless of our
operating performance.
Future sales of our common shares,
including shares issued pursuant to the exchange and securities purchase agreements we entered into with unrelated third parties,
could cause the market price of our common shares to decline and our shareholders may experience dilution as a result of our on-going
agreement to issue shares of our common shares to Loretto Finance Inc.
The market price of
our common shares could decline due to sales of a large number of shares in the market, including sales of shares by our large
shareholders, or the perception that these sales could occur. These sales could also make it more difficult or impossible for us
to sell equity securities in the future at a time and price that we deem appropriate to raise funds through future offerings of
our common shares.
In addition, in order
to incentivize Allseas’ continued services to us, we have entered into a tripartite agreement with Allseas and Loretto, a
wholly-owned subsidiary of Allseas, pursuant to which in the event of a capital increase, an equity offering or the issuance of
common shares to a third party or third parties in the future, other than common shares issued pursuant to our equity incentive
plan, we have agreed to issue, at no cost to Loretto, additional common shares to Loretto in an amount equal to 2% of the total
number of common shares issued pursuant to such capital increase, equity offering or third party issuance, as applicable. As of
the date of this annual report, we had issued a total of 12,557 of our common shares to Loretto pursuant to this agreement.
Furthermore, our shareholders
may incur additional dilution from any future equity offering and upon the issuance of additional shares of our common shares upon
the exercise of options we have granted to certain of our officers and directors or upon the issuance of additional restricted
common shares pursuant to our equity incentive plan or upon the issuance of common shares pursuant to the exchange and securities
purchase agreements we entered into with unrelated third parties.
Since we are incorporated in the
Marshall Islands, which does not have a well-developed body of corporate law, you may have more difficulty protecting your interests
than shareholders of a U.S. corporation.
Our corporate affairs
are governed by our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws and by the Marshall Islands
Business Corporations Act, or the BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states
in the United States. However, there have been few judicial cases in the Marshall Islands interpreting the BCA. The rights and
fiduciary responsibilities of directors under the laws of the Marshall Islands are not as clearly established as the rights and
fiduciary responsibilities of directors under statutes or judicial precedent in existence in the United States. The rights of shareholders
of the Marshall Islands may differ from the rights of shareholders of companies incorporated in the United States. While the BCA
provides that it is to be interpreted according to the laws of the State of Delaware and other states with substantially similar
legislative provisions, there have been few, if any, court cases interpreting the BCA in the Marshall Islands, and we cannot predict
whether Marshall Islands courts would reach the same conclusions as U.S. courts. Thus, you may have more difficulty in protecting
your interests in the face of actions by the management, directors or controlling shareholders than would shareholders of a corporation
incorporated in a U.S. jurisdiction which has developed a relatively more substantial body of case law.
Anti-takeover provisions in our organizational
documents could make it difficult for our shareholders to replace or remove our current Board of Directors or have the effect of
discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common shares.
Several provisions
of our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws could make it difficult for our shareholders
to change the composition of our Board of Directors in any one year, preventing them from changing the composition of management.
In addition, the same provisions may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable.
These provisions:
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authorize our Board of Directors to issue “blank check” preferred stock without shareholder
approval;
|
|
·
|
provide for a classified Board of Directors with staggered, three year terms;
|
|
·
|
prohibit cumulative voting in the election of directors;
|
|
·
|
authorize the removal of directors only for cause and only upon the affirmative vote of the holders
of at least 66
2
/
3
% of our outstanding common shares entitled to vote for the directors;
|
|
·
|
limit the persons who may call special meetings of shareholders;
|
|
·
|
establish advance notice requirements for nominations for election to our Board of Directors or
for proposing matters that can be acted on by shareholders at shareholder meetings; and
|
|
·
|
restrict business combinations with interested shareholders.
|
In addition, we have
adopted a shareholder rights plan pursuant to which our Board of Directors may cause the substantial dilution of any person that
attempts to acquire us without the approval of our Board of Directors. See “Item 10. Additional Information—B. Memorandum
and Articles of Association—Stockholder Rights Plan.”
The above anti-takeover
provisions, including the provisions of our shareholder rights plan, could substantially impede the ability of public shareholders
to benefit from a change in control and, as a result, may adversely affect the market price of our common shares and your ability
to realize any potential change of control premium.
|
Item 4.
|
Information on the Company
|
|
A.
|
History and development of the Company
|
We are Paragon Shipping
Inc. We were incorporated under the laws of the Republic of the Marshall Islands on April 26, 2006. Our executive offices are located
at 15 Karamanli Ave, GR 166 73, Voula, Greece. Our telephone number at that address is +30 210 891 4600.
Business Development
Effective March 1,
2016, we effectuated a 38-for-1 reverse stock split of our issued and outstanding common shares. The reverse stock split was approved
by shareholders at a special meeting of shareholders held on February 12, 2016 and by our Board of Directors on February 16, 2016.
The reverse stock split reduced the number of our issued and outstanding common shares and affected all issued and outstanding
common shares, as well as common shares underlying stock options outstanding immediately prior to the effectiveness of the reverse
stock split. The number of our authorized common shares was not affected by the reverse split. No fractional shares were issued
in connection with the reverse stock split. Shareholders who would have otherwise held a fractional share of our common stock as
a result of the reverse stock split received the next higher number of whole shares. The reverse stock split was completed in response
to a notification we received on May 14, 2015 from NASDAQ that we were no longer in compliance with the NASDAQ’s minimum
bid price requirement for continued listing of $1.00 per share. On November 11, 2015, we transferred our listing to the NASDAQ
Capital Market from the NASDAQ Global Market. Subsequent to the reverse stock split, on March 15, 2016, the NASDAQ notified us
that we had regained compliance with the $1.00 per share minimum bid price requirement for continued listing.
On
September 27, 2013, we completed a public offering of 157,895 of our common shares at $218.50 per share, including the full exercise
of the over-allotment option granted to the underwriters to purchase up to 20,595 additional common shares. The net proceeds from
the offering, which amounted to $31.9 million, net of underwriting discounts and commissions of $2.0 million and offering expenses
of $0.5 million, were used to fund the initial deposits and other costs associated with the purchase of two Ultramax newbuilding
drybulk carriers, the Hull numbers DY152 and DY153, as discussed below, and general corporate purposes.
On
February 18, 2014, we completed a public offering of 178,553 of our common shares at $237.50 per share, including the full exercise
of the over-allotment option granted to the underwriters to purchase up to 23,290 additional common shares. The net proceeds from
the offering amounted to $39.7 million, net of underwriting discounts and commissions and offering expenses payable by us.
On
May 12, 2014, our Board of Directors authorized a share buyback program of up to $10.0 million for a period of twelve months. Pursuant
to the share buyback program, as of December 31, 2014, we had purchased and cancelled 790 of our common shares at an average price
of $215.92 per share.
On August 8, 2014,
we completed the public offering of 1,000,000 of our Notes pursuant to an effective shelf registration statement. The Notes were
issued in minimum denominations of $25.00 and integral multiples of $25.00 in excess thereof, and bear interest at a rate of 8.375%
per year, payable quarterly on each February 15, May 15, August 15 and November 15, commencing on November 15, 2014. The Notes
will mature on August 15, 2021, and may be redeemed in whole or in part at any time or from time to time after August 15, 2017.
The net proceeds from the offering amounted to approximately $23.9 million, net of underwriting discounts and commissions of $812,500,
and offering expenses payable by the Company of $330,917. The Notes trade on NASDAQ Global Market under the symbol “PRGNL”.
On September 4, 2015,
we entered into an equity distribution agreement with Maxim Group LLC for the offer and sale of up to $4.0 million of our Class
A common shares. We may offer and sell the shares from time to time and at our discretion during the next twelve months. The net
proceeds of this offering are expected to be used for general corporate purposes, which may include the payment of a portion of
the outstanding contractual cost of our existing newbuilding vessels, and the repayment of debt. Under this offering, we proceeded
with the sale and issuance of 9,461 Class A common shares.
On
January 27, 2016, we entered into a securities purchase agreement with Kyros Investments Ltd. (the
“Investor”), an unrelated third party, pursuant to which, we sold a $500,000 principal amount convertible note to
the Investor for gross proceeds of $500,000. The note was convertible into our Class A common shares, par value $0.001 per
share at a conversion price equal to 65% of the lowest volume weighted average price of the Class A common shares during the
21 trading days prior to the conversion date, provided, however, that the lowest price per share that the note can be
converted into was $0.02. The note includes customary event of default provisions, and provides for a default interest rate
of 18%. As of May 9, 2016, the original principal amount was converted into common shares.
On
January 27, 2016, we entered into an exchange agreement with an unrelated third party and holder of $500,000 principal amount of
the Notes, pursuant to which the holder exchanged such Notes for a number of our Class A common shares pursuant to a formula
set forth in the exchange agreement. We agreed to pay up to $10,000 of reasonable attorneys’ fees and expenses incurred by
the holder in connection with the transaction.
On
March 18, 2016, we announced expiration of our previously announced offer to exchange all properly delivered and accepted Notes
for shares of our Class A common shares (the "Exchange Offer") at 5:00 p.m. (New York City time) on March
18, 2016. Based on information provided by the depository for the Exchange Offer, as of 5:00 p.m. (New York City time)
on Friday March 18, 2016, 184,721 Notes or approximately 18.8% of the outstanding Notes were delivered and not validly withdrawn
from the Exchange Offer. Each holder of a Note who validly delivered and did not withdraw ("Delivered") all Notes held
by such holder, received four (4) Class A common shares, which included any accrued and unpaid interest thereon. As part of the
Exchange Offer, holders who delivered their Notes also consent to the removal of certain covenants and sections of the Notes' Indenture
dated August 8, 2014. All of the Delivered Notes were settled on or about March 23, 2016.
On
April 6, 2016, we entered into an exchange agreement with an unrelated third party and holder (the “Holder”) of $1,250,000
principal amount of our issued and outstanding senior unsecured notes due 2021 that bear interest at a rate of 8.375% per year,
or 50,000 of such unsecured notes with a denomination of $25.00 each (collectively, the “Notes”), pursuant to which
the Holder exchanged such Notes for a number
of shares of our Class A common shares, par value $0.001 per share pursuant to a formula set forth in the Exchange Agreement (collectively,
the “Exchange Shares”). We agreed to pay up to $10,000 of reasonable attorneys’ fees and expenses incurred by
the Holder in connection with the transaction.
As
of May 9, 2016, we had 4,033,849 common shares outstanding.
Vessel Acquisitions and Dispositions
Below is a discussion
of our principal capital expenditures and divestitures since the beginning of our last three financial years to the date of this
annual report.
On January 29, 2013,
we took delivery of our third Handysize drybulk vessel, the M/V Priceless Seas. In January 2013, we paid an amount of $1.4 million
to the shipyard representing the final installment of the respective vessel, which was financed with cash on hand.
On
October 3, 2013, following the completion of our public offering of 157,895 common shares, we completed the acquisition of shipbuilding
contracts for two Ultramax newbuilding drybulk carriers from Allseas, the M/V Gentle Seas and the M/V Peaceful Seas. The acquisition
cost of these two newbuildings was $26.5 million per vessel. In October 2013, we paid an amount of $8.1 million per vessel, and
the balance of the contract price, or $18.4 million per vessel, was paid upon the delivery of each vessel in October 2014. We paid
to the shipyard the final installment of the two vessels, which was mainly financed from the loan facility with HSH Nordbank AG,
or HSH, dated April 4, 2014.
In December 2013, we
agreed to acquire, subject to certain closing conditions that were lifted in the first quarter of 2014, shipbuilding contracts
for two additional Ultramax newbuilding drybulk carriers from Allseas. The Ultramax newbuildings were sister ships to the two Ultramax
newbuildings we previously acquired and had a carrying capacity of 63,500 dwt each. The acquisition cost of these two newbuildings
was $28.3 million per vessel. In February 2014, we paid an amount of $5.6 million per vessel. In addition, upon commencement of
the steel cutting of each vessel in the second quarter of 2014, we paid a second installment of $3.9 million per vessel. The balance
of the contract price, or $18.8 million per vessel, would be payable upon the delivery of each vessel.
In December 2013, we
also entered into an agreement with Ouhua to cancel one of our two 4,800 TEU containership newbuilding contracts at no cost to
us, to transfer the deposit to the remaining containership and to reduce its contract price from the original $57.5 million to
$55.0 million.
On January 7, 2014,
we took delivery of our fourth Handysize drybulk vessel, the M/V Proud Seas. In January 2014, an amount of $21.6 million was paid
to the shipyard representing the final installment of the respective vessel, which was financed from the syndicated secured loan
facility led by Nordea.
In March 2014, we entered
into contracts with Yangzijiang for the construction of three Kamsarmax newbuilding drybulk carriers. The Kamsarmax newbuildings
have a carrying capacity of 81,800 dwt each, with scheduled delivery between the third and fourth quarter of 2016. The acquisition
cost of these three newbuildings is $30.6 million per vessel. In March 2014, we paid an amount of $9.2 million per vessel, and
the balance of the contract price, or $21.4 million per vessel, will be payable upon the delivery of each vessel.
On April 25, 2014,
we entered into a memorandum of agreement for the sale of our remaining 4,800 TEU containership newbuilding to an unrelated third
party for $42.5 million, less 3% commission. In May 2014, we also agreed with the shipyard to reduce the contract price of the
respective vessel by $0.8 million. The sale of the vessel and its transfer to the new owners was concluded on May 23, 2014. The
net proceeds from the sale of the vessel amounted to $10.0 million and represent the difference between the net sale price of the
vessel and the outstanding contractual obligation due to the shipyard upon delivery that was resumed by the vessel’s new
owners.
In June 2015, a special
committee consisting of our five independent directors (“Special Committee”) was assigned to investigate the block
sale of four vessels of our operating fleet, the M/V Dream Seas, the M/V Gentle Seas, the M/V Peaceful Seas and the M/V Friendly
Seas, for the purpose of improving our liquidity. The Special Committee determined it was in the best interest of the Company and
its shareholders to sell the vessel-owning subsidiaries of these vessels to an entity controlled by Mr. Michael Bodouroglou, the
Company’s Chairman, President, Chief Executive Officer and Interim Chief Financial Officer. In July 2015, the Special Committee
and Mr. Bodouroglou agreed to the sale of all of the issued and registered shares of the respective vessel-owning subsidiaries
(“Sale Transaction”). The Sale Transaction was based on a mutually agreed value of $63.2 million for the four vessels
transferred, net of a commission of 1.00% over such value, paid to Seacommercial. The sale and transfer of the respective vessel-owning
subsidiaries were concluded on July 27, 2015 (“Sale Transaction Date”). The Sale Transaction did not include the transfer
of any current assets and current liabilities existing prior to the Sale Transaction Date, apart from lubricant inventories, directly
related to the transfer of the vessels and cash received in advance relating to revenue generated subsequent to the Sale Transaction
Date.
In connection with
the settlement agreement with Commerzbank AG dated December 8, 2015, discussed in Note 8 to our consolidated financial statements
included elsewhere in this annual report, on November 9, 2015, we entered into memoranda of agreement, as further supplemented
and amended, for the sale of three vessels of our operating fleet, the M/V Sapphire Seas, the M/V Diamond Seas and the M/V Pearl
Seas, to an unrelated third party. The M/V Sapphire Seas and the M/V Diamond Seas were delivered to their new owners in December
2015, while the M/V Pearl Seas was delivered to her new owners in January 2016.
In connection with
the settlement agreement with Bank of Ireland dated January 7, 2016, discussed in Note 8 to our consolidated financial statements
included elsewhere in this annual report, on December 1, 2015, we entered into a memorandum of agreement for the sale of the M/V
Kind Seas to an unrelated third party. The M/V Kind Seas was delivered to her new owners in January 2016.
On December 23 and
December 30, 2015, we entered into memoranda of agreement for the sale of the M/V Deep Seas and M/V Calm Seas, respectively, to
an unrelated third party. Both vessels were delivered to their new owners in January 2016.
In addition, we
did not take delivery of the Ultramax newbuilding drybulk carrier with Hull number DY4050 from Yangzhou Dayang Shipbuilding
Co. Ltd., or Dayang, that was scheduled to be delivered in the fourth quarter of 2015. Furthermore, we sent to Dayang
notices for the cancellation of the Ultramax newbuilding drybulk carrier with Hull number DY4052 that was scheduled to be
delivered at the end of December 2015. Dayang rejected such cancellation notices and the case is currently under arbitration
proceedings in London.
In connection with
the settlement agreement with Nordea Bank Finland Plc dated March 9, 2016, discussed in Note 8 to our consolidated financial statements
included elsewhere in this annual report, on March 17, 2016, we entered into memoranda of agreement, for the sale of the remaining
six vessels of our operating fleet, the M/V Coral Seas, the M/V Golden Seas, the M/V Prosperous Seas, the M/V Priceless Seas, the
M/V Proud Seas and the M/V Precious Seas, to an unrelated third party. The vessels were delivered to their new owners in March,
April and May 2016.
Introduction
We are a global provider
of shipping transportation services. We specialize in transporting drybulk cargoes, including such commodities as iron ore, coal,
grain and other materials, along worldwide shipping routes.
As of the date of
this annual report, we have sold all of our vessels.
Prior to April 2011,
we owned and operated three containerships. In the second quarter of 2011, we sold these containerships to Box Ships, then our
wholly-owned subsidiary. Box Ships completed its initial public offering in April, 2011. In April and May 2015, we sold 3,437,500
shares of common stock of Box Ships which were all the Box Ships securities we owned, in two separate transactions for aggregate
net proceeds of $2.9 million.
In
addition, as of the date of this annual report, our newbuilding program consisted of three Kamsarmax drybulk carriers that are
scheduled to be delivered in the third and fourth quarter of 2016. The estimated total contractual cost of our newbuilding vessels
amounted to $91.7 million, of which an aggregate of $64.2 million was outstanding as of the date of this annual report.
Allseas
and Seacommercial are responsible for all commercial and technical management functions for our fleet, pursuant to long-term management
agreements between Allseas, Seacommercial and each of our vessel-owning subsidiaries. Allseas and Seacommercial are beneficially
owned by our Chairman, President, Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou.
Our Fleet
The following tables
present certain information concerning our fleet as of the date of this annual report.
Drybulk Newbuildings we have agreed to acquire
Vessel Name
|
|
DWT
|
|
|
Shipyard
|
|
Expected
Shipyard
Delivery
|
Kamsarmax
|
|
|
|
|
|
|
|
|
Hull no. YZJ1144
|
|
|
81,800
|
|
|
Jiangsu Yangzijiang Shipbuilding Co.
|
|
Q3 2016
|
Hull no. YZJ1145
|
|
|
81,800
|
|
|
Jiangsu Yangzijiang Shipbuilding Co.
|
|
Q4 2016
|
Hull no. YZJ1142
|
|
|
81,800
|
|
|
Jiangsu Yangzijiang Shipbuilding Co.
|
|
Q4 2016
|
Total Kamsarmax
|
|
|
245,400
|
|
|
|
|
|
Management of Our Fleet and Agreements
with Allseas and Seacommercial
Allseas and Seacommercial
provide commercial and technical management services for our fleet, pursuant to long-term management agreements between Allseas
and each of our vessel-owning subsidiaries. Technical management services include, among other things, arranging for and managing
crews, vessel maintenance, dry-docking, repairs, insurance, maintaining regulatory and classification society compliance and providing
technical support. Commercial management services include, among other things, negotiating charters for our vessels, monitoring
various types of charters, monitoring the performance of our vessels, locating, purchasing, financing and negotiating the purchase
and sale of our vessels, obtaining insurance for our vessels and finance and accounting functions.
Allseas and Seacommercial
also provide commercial and technical management services for Box Ships’ fleet. Allseas provides financial accounting and
financial reporting services for Box Ships.
Allseas, a Liberian
corporation based in Athens, Greece, was formed in 2000 as a ship management company and is wholly-owned by our Chairman, President,
Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou. We believe that Allseas has established a
reputation in the international shipping industry for operating and maintaining a fleet with high standards of performance, reliability
and safety.
Seacommercial, a Liberian company based in Athens, Greece, was formed in 2014 and is wholly-owned by Mr. Bodouroglou.
In addition, we have
entered in to an accounting agreement with Allseas, pursuant to which Allseas provides financial accounting and financial reporting
services. We have also entered into separate agreements with Allseas with respect to the provision of administrative services and
certain executive services. For additional information regarding the above-referenced agreements, and other agreements that we
have with Allseas, Seacommercial and other affiliated companies, please see “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Agreements with Our Managers.”
Chartering of our Fleet
We
primarily employ our vessels in the spot charter market, on short-term time charters or on voyage charters, ranging from 10 days
to three months. However, depending on the time charter market, we may decide from time to time to employ our vessels on medium
to long-term time charters.
Time Charters
A
time charter is a contract to charter a vessel for a fixed period of time at a specified or floating daily or index-based daily
rate and can last from a few days to several years. Under a time charter, the charterer pays for the voyage expenses, such as port
expenses, canal dues, war risk insurances and fuel costs, while the shipowner pays for vessel operating expenses, including, among
other costs, crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs and costs relating
to a vessel’s intermediate and special surveys.
Spot Charters
A spot charter generally
refers to a voyage charter or a trip charter or a short-term time charter.
Vessels operating in
the spot market typically are chartered for a single voyage, which may last up to several weeks. Under a typical voyage charter
in the spot market, the shipowner is paid an agreed-upon total amount on the basis of moving cargo from a loading port to a discharge
port. In voyage charters, the charterer generally is responsible for any delay at the loading or discharging ports, and the shipowner
is generally responsible for paying both vessel operating expenses and voyage expenses, including any bunker expenses, port fees,
cargo loading and unloading expenses, canal tolls, agency fees and commissions.
Under a typical trip
charter in the spot market, the shipowner is paid on the basis of moving cargo from a loading port to a discharge port at a set
daily rate. The charterer is responsible for paying for bunkers and other voyage expenses, while the shipowner is responsible for
paying vessel operating expenses. When the vessel is off-hire, or not available for service, the shipowner generally is not entitled
to payment, unless the charterer is responsible for the circumstances giving rise to the lack of availability.
Our Customers
Our assessment of a
charterer’s financial condition, creditworthiness, reliability and track record are important factors in negotiating employment
for our vessels. We believe that our management team’s network of relationships and more generally our Managers’ reputation
and experience in the shipping industry will continue to provide competitive employment opportunities for our vessels in the future.
For the year ended
December 31, 2015, approximately 24% of our revenue was derived from one of our charterers, Glencore Grain B.V.
The Drybulk Shipping Industry
The global drybulk
carrier fleet may be divided into seven categories based on a vessel’s carrying capacity. These categories consist of:
|
·
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Very Large Ore Carriers (VLOC)
have a carrying capacity of more than 200,000 dwt and are
a comparatively new sector of the drybulk carrier fleet. VLOCs are built to exploit economies of scale on long-haul iron ore routes.
|
|
·
|
Capesize vessels
have a carrying capacity of 110,000-199,999 dwt. Only the largest ports
around the world possess the infrastructure to accommodate vessels of this size. Capesize vessels are primarily used to transport
iron ore or coal and, to a much lesser extent, grains, primarily on long-haul routes.
|
|
·
|
Post-Panamax vessels
have a carrying capacity of 90,000-109,999 dwt. These vessels tend
to have a shallower draft and larger beam than a standard Panamax vessel with a higher cargo capacity. These vessels have been
designed specifically for loading high cubic cargoes from draught restricted ports, although they cannot transit the Panama Canal.
|
|
·
|
Panamax/Kamsarmax vessels
have a carrying capacity of 68,000-89,999 dwt. These vessels carry
coal, iron ore, grains, and, to a lesser extent, minor bulks, including steel products, cement and fertilizers. Panamax vessels
are able to pass through the Panama Canal, making them more versatile than larger vessels with regard to accessing different trade
routes. Most Panamax and Post-Panamax vessels are “gearless,” and therefore must be served by shore-based cargo handling
equipment.
|
|
·
|
Ultramax
vessels
have a carrying capacity of 60,000-67,999 dwt. Ultramax vessels
operate in a large number of geographically dispersed global trade routes, carrying primarily grains and minor bulks. Ultramax
vessels are normally offering cargo loading and unloading flexibility with on-board cranes, while at the same time possessing the
cargo carrying capability approaching conventional Panamax vessels.
|
|
·
|
Handymax/Supramax
vessels
have a carrying capacity of 40,000-59,999 dwt. Like Ultramax
vessels, Handymax vessels operate in a large number of geographically dispersed global trade routes, carrying primarily grains
and minor bulks. Within the Handymax category there is also a sub-sector known as Supramax. Supramax vessels are ships between
50,000 to 59,999 dwt, normally offering cargo loading and unloading flexibility with on-board cranes.
|
|
·
|
Handysize
vessels
have a carrying capacity of up to 39,999 dwt. These vessels are
primarily involved in carrying minor bulk cargoes. Increasingly, ships of this type operate within regional trading routes, and
may serve as trans-shipment feeders for larger vessels. Handysize vessels are well suited for small ports with length and draft
restrictions. Their cargo gear enables them to service ports lacking the infrastructure for cargo loading and unloading.
|
The drybulk shipping
market is the primary provider of global commodities transportation. Approximately one third of all seaborne trade is drybulk related.
The demand for drybulk
carrier capacity is determined by the underlying demand for commodities transported in drybulk carriers, which in turn is influenced
by trends in the global economy. Demand for drybulk carrier capacity is also affected by the operating efficiency of the global
fleet, with port congestion, which has been a feature of the market since 2004, absorbing tonnage and therefore leading to a tighter
balance between supply and demand. In evaluating demand factors for drybulk carrier capacity, we believe that drybulk carriers
can be the most versatile element of the global shipping fleets in terms of employment alternatives. Drybulk carriers seldom operate
on round trip voyages. Rather, the norm is triangular or multi-leg voyages. Hence, trade distances assume greater importance in
the demand equation.
The supply of drybulk
carriers is dependent on the delivery of new vessels and the removal of vessels from the global fleet, either through scrapping
or loss. As of end of March 2016, the orderbook of new drybulk vessels scheduled to be delivered represented approximately 15%
of the world drybulk fleet at that time, with most vessels on the orderbook expected to be delivered during the next three years.
The level of scrapping activity is generally a function of scrapping prices in relation to current and prospective charter market
conditions, as well as operating, repair and survey costs. Drybulk carriers at or over 25 years old are considered to be scrapping
candidate vessels.
Charter Hire Rates
Charter hire rates
fluctuate by varying degrees amongst the drybulk carrier size categories. The volume and pattern of trade in a small number of
commodities (major bulks) affect demand for larger vessels. Because demand for larger drybulk vessels is affected by the volume
and pattern of trade in a relatively small number of commodities, charter hire rates (and vessel values) of larger ships tend to
be more volatile. Conversely, trade in a greater number of commodities (minor bulks) drives demand for smaller drybulk carriers.
Accordingly, charter rates and vessel values for those vessels are subject to less volatility. Charter hire rates paid for drybulk
carriers are primarily a function of the underlying balance between vessel supply and demand. In addition, time charter rates will
vary depending on the length of the charter period and vessel-specific factors, such as container capacity, age, speed and fuel
consumption. Furthermore, the pattern seen in charter rates is broadly mirrored across the different charter types and between
the different drybulk carrier categories.
In the time charter
market, rates vary depending on the length of the charter period and vessel specific factors such as age, speed and fuel consumption.
In the voyage charter market, rates are influenced by cargo size, commodity, port dues and canal transit fees, as well as delivery
and re-delivery regions. In general, a larger cargo size is quoted at a lower rate per ton than a smaller cargo size. Routes with
costly ports or canals generally command higher rates than routes with low port dues and no canals to transit. Voyages with a load
port within a region that includes ports where vessels usually discharge cargo or a discharge port within a region that includes
ports where vessels load cargo also are generally quoted at lower rates. This is because such voyages generally increase vessel
utilization by reducing the unloaded portion (or ballast leg) that is included in the calculation of the return charter to a loading
area.
Within the drybulk
shipping industry, the charter hire rate references most likely to be monitored are the freight rate indices issued by the Baltic
Exchange, such as the BDI. These references are based on actual charter hire rates under charter entered into by market participants
as well as daily assessments provided to the Baltic Exchange by a panel of major shipbrokers. The Baltic Panamax Index is the index
with the longest history. The Baltic Capesize Index and Baltic Handymax Index are of more recent origin.
In 2008, the BDI declined
94% from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and has remained volatile since that time. During 2014,
the BDI remained volatile, ranging from a high of 2,113 to a low of 723. During 2015, the BDI fluctuated in a range between 471
and 1,222. In February 2016, the BDI reached its all-time low level of 290 and has since increased to 616 as of May 9, 2016.
Vessel Prices
Newbuilding prices
are determined by a number of factors, including the underlying balance between shipyard output and capacity, raw material costs,
freight markets and sometimes exchange rates. In the last few years, high levels of new ordering were recorded across all sectors
of shipping. As a result, most of the major shipyards in Japan, South Korea and China had full orderbook until the end of 2011,
although the downturn in freight rates and the lack of funding due to the wider global financial crisis has led, and is expected
to continue to lead, to some of these orders being cancelled or delayed.
Newbuilding prices
increased significantly between 2003 and 2008, due to tightness in shipyard capacity, high levels of new ordering and stronger
freight rates. However, with the sudden and steep decline in freight rates, after August 2008 and lack of new vessel ordering,
newbuilding vessel values started to decline. The values of vessels in the secondhand market rose sharply in 2004 and 2005 as a
result of the steep increase in newbuilding prices and the strength of the charter market during that period, before declining
in the early part of 2006, only to rise thereafter to reach historical highs in the third quarter of 2008. However, the significant
downturn in freight rates since August 2008 has negatively impacted secondhand values. Currently, newbuilding and secondhand values
remain well below the historically high levels reached in the third quarter of 2008.
Competition
We operate in a highly
competitive market based primarily on supply and demand. We compete for charters on the basis of price, vessel location, size,
age and condition of the vessel, as well as on our reputation. Allseas arranges our charters through the use of brokers, who negotiate
the terms of the charters based on market conditions. We compete primarily with other owners of drybulk carriers, many of which
may have more resources than us and may operate vessels that are newer, and therefore more attractive to charterers, than our vessels.
Ownership of drybulk carriers is highly fragmented and is divided among publicly listed companies, state controlled owners and
independent shipowners. Some of our publicly listed competitors include Diana Shipping Inc. (NYSE: DSX), DryShips Inc. (NASDAQ:
DRYS), Eagle Bulk Shipping Inc. (NASDAQ: EGLE), Navios Maritime Holdings Inc. (NYSE: NM), Star Bulk Inc. (NASDAQ: SBLK), Safe Bulkers
Inc. (NYSE: SB) and Scorpio Bulkers (NYSE: SALT).
In the future, entities
affiliated with our Chairman, President, Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou,
may seek to acquire drybulk carriers. One or more of these vessels may be managed by Allseas and may compete with the vessels in
our fleet. Mr. Bodouroglou and entities affiliated with him, including Allseas, might be faced with conflicts of interest with
respect to their own interests and their obligations to us.
Mr. Bodouroglou has
entered into an agreement with us pursuant to which he and the entities which he controls will grant us a right of first refusal
on any drybulk carrier that these entities may acquire in the future. In addition, we have entered into an agreement with Box Ships
and Mr. Bodouroglou that provides that so long as (i) Mr. Bodouroglou is a director or executive officer of both our Company and
Box Ships and (ii) we own at least 5% of the total issued and outstanding common shares of Box Ships, Box Ships will not, directly
or indirectly, acquire or charter any drybulk carrier without our prior written consent and we will not, directly or indirectly,
acquire or charter any containership vessel without the prior written consent of Box Ships.
Seasonality
Demand for vessel capacity
has historically exhibited seasonal variations and, as a result, fluctuations in charter rates. This seasonality may result in
quarter-to-quarter volatility in our operating results for vessels trading in the spot market. The drybulk carrier market is typically
stronger in the fall and winter months in anticipation of increased consumption of coal and other raw materials in the northern
hemisphere during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling
and supplies of certain commodities.
To the extent that
we must enter into a new charter or renew an existing charter for a vessel in our fleet during a time when seasonal variations
have reduced prevailing charter rates, our operating results may be adversely affected.
Permits and Authorizations
We are required by
various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our vessels.
The kinds of permits, licenses and certificates required depend upon several factors, including the commodity transported, the
waters where the vessel operates, the nationality of the vessel’s crew and the age of the vessel. We have obtained all permits,
licenses and certificates currently required to permit our vessels to operate. Additional laws and regulations, environmental or
otherwise, may be adopted which could limit our ability to do business or increase the cost of doing business.
Environmental and Other Regulations
Government regulation
significantly affects the ownership and operation of our vessels. We are subject to international conventions and treaties and
national, state and local laws and regulations relating to safety and health and environmental protection in force in the countries
in which our vessels may operate or are registered. These regulations include requirements relating to the storage, handling, emission,
transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage
to natural resources. Compliance with such laws, regulations and other requirements may entail significant expense, including vessel
modifications and implementation of certain operating procedures.
A variety of government,
quasi-governmental and private organizations subject our vessels to both scheduled and unscheduled inspections. These entities
include the local port authorities (applicable national authorities such as the U.S. Coast Guard and harbor masters), classification
societies, flag state administrations (countries of registry) and charterers. Some of these entities require us to obtain permits,
licenses, certificates and other authorizations for the operation of our vessels. Our failure to maintain necessary permits, licenses,
certificates or authorizations could require us to incur substantial costs or result in the operation of one or more of our vessels
being temporarily suspended.
We believe that the
heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater
inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the shipping industry.
Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. We are
required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous
training of our officers and crews and compliance with United States and international regulations. We believe that the operation
of our vessels will be in substantial compliance with applicable environmental laws and regulations and that our vessels will have
all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations. However, because
such laws and regulations are frequently changed and may impose increasingly stricter requirements, we cannot predict the ultimate
cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels.
In addition, a future serious marine incident that causes significant adverse environmental impact, such as the 2010 BP plc
Deepwater
Horizon
oil spill in the Gulf of Mexico, could result in additional legislation or regulations that could negatively affect
our profitability.
International Maritime Organization
The IMO has adopted
the International Convention for the Prevention of Marine Pollution from Ships of 1973, as modified by the related Protocol of
1978 and updated through various amendments, collectively referred to as MARPOL 73/78 and herein as MARPOL. MARPOL entered into
force on October 2, 1983. It has been adopted by over 150 nations, including many of the jurisdictions in which our vessels will
operate. MARPOL is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil leakage
or spilling; Annexes II and III relate to harmful substances carried, in bulk, in liquid or packaged form, respectively; Annexes
IV and V relate to sewage and garbage management, respectively; and Annex VI relates to air emissions. Annex VI was separately
adopted by the IMO in September of 1997.
In 2012, the IMO’s
Marine Environmental Protection Committee, or MEPC, adopted by resolution amendments to the international code for the construction
and equipment of ships carrying dangerous chemicals in bulk, or the IBC Code. The provisions of the IBC Code are mandatory under
MARPOL and SOLAS. These amendments, which entered into force in June 2014, pertain to revised international certificates of fitness
for the carriage of dangerous chemicals in bulk and identifying new products that fall under the IBC Code. We may need to make
certain financial expenditures to comply with these amendments.
In 2013 the MEPC adopted
by resolution amendments to the MARPOL Annex I Condition Assessment Scheme (CAS). These amendments became effective on October
1, 2014 and pertain to revising references to the inspections of bulk carriers and tankers after the 2011 ESP Code, which enhances
the programs of inspections, becomes mandatory. We may need to make certain financial expenditures to comply with these amendments.
Air Emissions
In September of 1997,
the IMO adopted Annex VI to MARPOL to address air pollution. Effective May 2005, Annex VI set limits on nitrogen oxide emissions
from ships whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000. It also prohibits
"deliberate emissions" of "ozone depleting substances," defined to include certain halons and chlorofluorocarbons.
"Deliberate emissions" are not limited to times when the ship is at sea; they can for example include discharges occurring
in the course of the ship's repair and maintenance. Emissions of "volatile organic compounds" from certain vessels, and
the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls)
(PCBs) are also prohibited. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas
to be established with more stringent controls of sulfur emissions known as “Emission Control Areas,” or “ECAs”
(see below).
The IMO's Maritime
Environment Protection Committee, or MEPC, adopted amendments to Annex VI on October 10, 2008, which entered into force on July
1, 2010. The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction
of the amount of sulfur contained in any fuel oil used on board ships. As of January 1, 2012, the amended Annex VI required
that fuel oil contain no more than 3.50% sulfur (from the previous cap of 4.50%). By January 1, 2020, sulfur content must not exceed
0.50%, subject to a feasibility review to be completed no later than 2018.
Sulfur content standards
are even stricter within certain ECAs. As of January 1, 2015, ships operating within an ECA may not use fuel with sulfur content
in excess of 0.10%. Amended Annex VI established procedures for designating new ECAs. The Baltic and North Seas, certain coastal
areas of North America and the United States Caribbean Sea are all within designated ECAs. If other ECAs are approved by the IMO
or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are
adopted by the U.S. Environmental Protection Agency, or the EPA, or the states where we operate, compliance with these regulations
could entail significant capital expenditures, operational changes, or otherwise increase the costs of our operations.
Amended Annex VI also
establishes new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation.
The U.S. EPA promulgated equivalent (and in some senses stricter) emissions standards in late 2009.
As of January 1,
2013 MARPOL made mandatory certain measures relating to energy efficiency for ships. This included the requirement that all new
ships utilize the Energy Efficiency Design Index, or EEDI, and all ships develop and implement Ship Energy Management Plans, or
SEEMPs.
We believe that all
our vessels will be compliant in all material respects with these regulations. Additional or new conventions, laws and regulations
may be adopted that could require the installation of expensive emission control systems and could adversely affect our business,
results of operations, cash flows and financial condition.
Ballast Water Management
The IMO adopted the
BWM Convention, in February 2004. The BWM Convention’s implementing regulations call for a phased introduction of mandatory
ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention will not become
effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than
35% of the gross tonnage of the world’s merchant shipping. To date, the BWM Convention has not yet been ratified but proposals
regarding implementation have recently been submitted to the IMO. Many of the implementation dates in the BWM Convention have already
passed, so that once the BWM Convention enters into force, the period of installation of mandatory ballast water exchange requirements
would be extremely short, with several thousand ships a year needing to install ballast water management systems, or BWMS. For
this reason, on December 4, 2013, the IMO Assembly passed a resolution revising the application dates of the BWM Convention so
that they are triggered by the entry into force date and not the dates originally in the BWM Convention. This, in effect, makes
all vessels constructed before the entry into force date “existing vessels” and allows for the installation of a BWMS
on such vessels at the first renewal survey following entry into force of the convention. Furthermore, in October 2014 the MEPC
met and adopted additional resolutions concerning the BWM Convention’s implementation. Once mid-ocean ballast exchange or
ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers and the costs of
ballast water treatments may be material. However, many countries already regulate the discharge of ballast water carried by vessels
from country to country to prevent the introduction of invasive and harmful species via such discharges. The United States for
example, requires vessels entering its waters from another country to conduct mid-ocean ballast exchange, or undertake some alternate
measure, and to comply with certain reporting requirements. Although we do not believe that the costs of such compliance would
be material, it is difficult to predict the overall impact of such a requirement on our operations.
Safety Management System Requirements
The IMO has also adopted
SOLAS and the LL Convention, which impose a variety of standards that regulate the design and operational features of ships. The
IMO periodically revises the SOLAS and LL Convention standards. Amendments to SOLAS relating to safe manning of vessels that were
adopted in May 2012 entered in force on January 1, 2014. The Convention on Limitation of Liability for Maritime Claims (LLMC) was
recently amended and the amendments went into effect on June 8, 2015. The amendments alter the limits of liability for loss of
life or personal injury claims and property claims against ship owners. We believe that all our vessels will be in substantial
compliance with SOLAS and LL Convention standards.
Our operations are
also subject to environmental standards and requirements under Chapter IX of SOLAS set forth in the ISM Code. The ISM Code requires
the owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop an extensive safety management
system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions
and procedures for operating its vessels safely and describing procedures for responding to emergencies. We rely upon the safety
management system that we and our technical manager have developed for compliance with the ISM Code. The failure of a ship owner
or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance
coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
The ISM Code requires
that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance
by a vessel’s management with the ISM Code requirements for a safety management system. No vessel can obtain a safety management
certificate under the ISM Code unless its manager has been awarded a document of compliance, issued by classification societies
under the authority of each flag state. SSM has or will obtain documents of compliance for their offices and will obtain safety
management certificates for all of our vessels for which the certificates are required by the IMO. The document of compliance and
safety management certificate are renewed every five years, but the document of compliance is subject to audit verification annually
and the safety management certificate at least every 2.5 years.
The flag state, as
defined by the United Nations Convention on Law of the Sea, has overall responsibility for implementing and enforcing a broad range
of international maritime regulations with respect to all ships granted the right to fly its flag. The “Shipping Industry
Guidelines on Flag State Performance” evaluates and reports on flag states based on factors such as sufficiency of infrastructure,
ratification, implementation, and enforcement of principal international maritime treaties and regulations, supervision of statutory
ship surveys, casualty investigations and participation at IMO and ILO meetings. All of our vessels will be flagged in the Marshall
Islands. Marshall Islands flagged vessels have historically received a good assessment in the shipping industry. We recognize the
importance of a credible flag state and do not intend to use flags of convenience or flag states with poor performance indicators.
Noncompliance with the ISM Code or other IMO regulations may subject the ship owner or bareboat charterer to increased liability,
may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention
in, some ports. The U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM
Code by the applicable deadlines will be prohibited from trading in U.S. and European Union ports, respectively. Each of our vessels
will be ISM Code certified. However, there can be no assurance that such certificate will be maintained.
Noncompliance with
the ISM Code and other IMO regulations may subject the shipowner or bareboat charterer to increased liability, may lead to decreases
in, or invalidation of, available insurance coverage for affected vessels and may result in the denial of access to, or detention
in, some ports.
Pollution Control and Liability Requirements
The IMO has negotiated
international conventions that impose liability for oil pollution in international waters and the territorial waters of the signatory
to such conventions. Many countries have ratified and follow the liability plan adopted by the IMO and set out in the International
Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocol in 1976, 1984, and 1992, and amended
in 2000, or the CLC. Under this convention and depending on whether the country in which the damage results is a party to the 1992
Protocol to the CLC, a vessel’s registered owner is strictly liable for pollution damage caused in the territorial waters
of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits
on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights. The limits on liability
have since been amended so that the compensation limits on liability were raised. The right to limit liability is forfeited under
the CLC where the spill is caused by the ship owner’s actual fault and under the 1992 Protocol where the spill is caused
by the ship owner’s intentional or reckless act or omission where the ship owner knew pollution damage would probably result.
The CLC requires ships covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner’s
liability for a single incident. We believe that our protection and indemnity insurance will cover the liability under the plan
adopted by the IMO.
The IMO adopted the
International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, to impose strict liability
on ship owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker
Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal
to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated
in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying
states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national
or other domestic laws in the jurisdiction where the events or damages occur.
IMO regulations also
require owners and operators of vessels to adopt shipboard oil pollution emergency plans and/or shipboard marine pollution emergency
plans for noxious liquid substances in accordance with the guidelines developed by the IMO.
The IMO continues to
review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO
and what effect, if any, such regulations may have on our operations.
The U.S. Oil Pollution Act of 1990
and Comprehensive Environmental Response, Compensation and Liability Act
The U.S. Oil Pollution
Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment
from oil spills. OPA affects all "owners and operators" whose vessels trade in the United States, its territories and
possessions or whose vessels operate in United States waters, which includes the United States' territorial sea and its 200 nautical
mile exclusive economic zone around the United States. The United States has also enacted the Comprehensive Environmental Response,
Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil except in certain
limited circumstances, whether on land or at sea. OPA and CERCLA both define "owner and operator" in the case of a vessel
as any person owning, operating or chartering by demise, the vessel. OPA applies to oil tankers (which are not operated by us),
as well as non-tanker ships that carry fuel oil, or bunkers, to power such ships. CERCLA also applies to our operations.
Under OPA, vessel owners
and operators are "responsible parties" and are jointly, severally and strictly liable (unless the spill results solely
from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages
arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to include:
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injury to, destruction or loss of, or loss of use of, natural resources and related assessment
costs;
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injury to, or economic losses resulting from, the destruction of real and personal property;
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net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction
or loss of real or personal property, or natural resources;
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loss of subsistence use of natural resources that are injured, destroyed or lost;
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lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal
property or natural resources; and
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net cost of increased or additional public services necessitated by removal activities following
a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.
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OPA contains statutory
caps on liability and damages; such caps do not apply to direct cleanup costs. Effective November 19, 2015, the U.S. Coast Guard
adjusted the limits of OPA liability for non-tank vessels to the greater of $1,100 per gross ton or $939,800 (subject to periodic
adjustment for inflation). These limits of liability do not apply if an incident was proximately caused by the violation of an
applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person
acting pursuant to a contractual relationship), or a responsible party's gross negligence or willful misconduct. The limitation
on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsibility
party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal
activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c),
(e)) or the Intervention on the High Seas Act.
CERCLA contains a similar
liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damage
for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and
health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from
the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300
per gross ton or $5.0 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000
for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages)
if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause
of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability
also does not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested
in connection with response activities where the vessel is subject to OPA.
OPA and CERCLA both
require owners and operators of vessels to establish and maintain with the U.S. Coast Guard, or USCG, evidence of financial responsibility
sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and
operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification
as a self-insurer or a guarantee. We plan to comply with the U.S. Coast Guard's financial responsibility regulations by providing
a certificate of responsibility evidencing sufficient self-insurance.
We currently maintain
pollution liability coverage insurance in the amount of $1 billion per incident for each of our vessels. If the damages from a
catastrophic spill were to exceed our insurance coverage, it could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
OPA specifically permits
individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries,
provided they accept, at a minimum, the levels of liability established under OPA. Some states have enacted legislation providing
for unlimited liability for oil spills. In some cases, states which have enacted such legislation have not yet issued implementing
regulations defining vessel owners' responsibilities under these laws. We intend to comply with all applicable state regulations
in the ports where our vessels call.
The 2010
Deepwater
Horizon
oil spill in the Gulf of Mexico may also result in additional legislative or regulatory initiatives, including
the raising of liability caps under OPA or more stringent operational requirements. We cannot predict what additional requirements,
if any, may be enacted and what effect, if any, such requirements may have on our operations.
Other Environmental Initiatives
The U.S. Clean Water
Act, or CWA, prohibits the discharge of oil or other substances in U.S. navigable waters unless authorized by a duly-issued permit
or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial
liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA. Furthermore,
many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person
for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be
more stringent than U.S. federal law.
The EPA regulates the
discharge of ballast water and other substances in U.S. waters under the CWA. EPA regulations require vessels 79 feet in length
or longer (other than commercial fishing and recreational vessels) to comply with a Vessel General Permit, or VGP, that authorizes
ballast water discharges and other discharges incidental to the operation of vessels. For a new vessel delivered to an owner or
operator after September 19, 2009 to be covered by the VGP, the owner must submit a Notice of Intent, or NOI, at least 30 days
before the vessel operates in U.S. waters. The VGP imposes technology and water-quality based effluent limits for certain types
of discharges and establishes specific inspection, monitoring, record keeping and reporting requirements to ensure the effluent
limits are met. The EPA renewed and revised the VGP, effective December 19, 2013. The VGP now contains numeric ballast water discharge
limits for most vessels to reduce the risk of invasive species in U.S. waters and more stringent requirements for exhaust gas scrubbers
and requires the use of environmentally acceptable lubricants.
USCG regulations adopted
under the U.S. National Invasive Species Act, or NISA, also impose mandatory ballast water management practices for all vessels
equipped with ballast water tanks entering or operating in U.S. waters. As of June 21, 2012, the USCG adopted revised ballast
water management regulations that established standards for allowable concentrations of living organisms in ballast water discharged
from ships in U.S. waters. The USCG must approve any technology before it is placed on a vessel, but has not yet approved the technology
necessary for vessels to meet the foregoing standards.
Notwithstanding the
foregoing, as of January 1, 2014, vessels are technically subject to the phasing-in of these standards. As a result, the USCG has
provided waivers to vessels which cannot install the as-yet unapproved technology. The EPA, on the other hand, has taken a different
approach to enforcing ballast discharge standards under the VGP. On December 27, 2013, the EPA issued an enforcement response policy
in connection with the new VGP in which the EPA indicated that it would take into account the reasons why vessels do not have the
requisite technology installed, but will not grant any waivers.
It should also be noted
that in October 2015, the Second Circuit Court of Appeals issued a ruling that directed the EPA to redraft the sections of the
2013 VGP that address ballast water. However, the Second Circuit stated that 2013 VGP will remains in effect until the EPA issues
a new VGP. It presently remains unclear how the ballast water requirements set forth by the EPA, the USCG, and IMO BWM Convention,
some of which are in effect and some which are pending, will co-exist.
The USCG’s revised
ballast water standards are consistent with requirements under the BWM Convention. Compliance with the EPA and the USCG regulations
could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation
of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels
from entering U.S. waters. In addition, certain states have enacted more stringent discharge standards as conditions to their required
certification of the VGP.
The U.S. Clean Air
Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, requires the EPA to promulgate standards
applicable to emissions of volatile organic compounds and other air contaminants. Our vessels will be subject to vapor control
and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in
regulated port areas. Our vessels that operate in such port areas with restricted cargoes will be equipped with vapor recovery
systems that satisfy these requirements. The CAA also requires states to adopt State Implementation Plans, or SIPs, designed to
attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Several SIPs regulate
emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. As indicated
above, our vessels operating in covered port areas will be equipped with vapor recovery systems that satisfy these existing requirements.
European Union Regulations
In October 2009, the
European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including
minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate
result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal
penalties. Member States were required to enact laws or regulations to comply with the directive by the end of 2010. Criminal liability
for pollution may result in substantial penalties or fines and increased civil liability claims. The directive applies to all types
of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in
danger.
The European Union
has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as
determined by type, age, flag, and the number of times the ship has been detained. The European Union also adopted and then extended
a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided
the European Union with greater authority and control over classification societies, by imposing more requirements on classification
societies and providing for fines or penalty payments for organizations that failed to comply.
Greenhouse Gas Regulation
Currently, the emissions
of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention
on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national
programs to reduce greenhouse gas emissions. The 2015 United Nations Convention on Climate Change Conference in Paris did not result
in an agreement that directly limited greenhouse gas emissions from ships. As of January 1, 2013, ships were required to comply
with new MEPC mandatory requirements to address greenhouse gas emissions from ships. European Parliament and Council of Ministers
are expected to endorse regulations that would require the monitoring and reporting greenhouse gas emissions from marine vessels
in the near future. For 2020, the EU made a unilateral commitment to reduce overall greenhouse gas emissions from its member states
from 20% of 1990 levels. The EU also committed to reduce its emissions by 20% under the Kyoto Protocol’s second period, from
2013 to 2020. In April 2015, a regulation was adopted requiring that large ships (over 5,000 gross tons) calling at EU ports from
January 2018 collect and publish data on carbon dioxide emissions and other information.
In the United States,
the EPA has issued a finding that greenhouse gases endanger the public health and safety, has adopted regulations to limit greenhouse
gas emissions from certain mobile sources and has proposed regulations to limit greenhouse gas emissions from large stationary
sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, the EPA is considering
a petition from the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going
vessels. Any passage of climate control legislation or other regulatory initiatives by the IMO, European Union, the U.S. or other
countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions
of greenhouse gases could require us to make significant financial expenditures which we cannot predict with certainty at this
time. Even in the absence of climate control legislation, our business may be indirectly affected to the extent that climate change
may result in sea level changes or more intense weather events.
International Labour Organization
The International Labour
Organization, or the ILO, is a specialized agency of the UN with headquarters in Geneva, Switzerland. The ILO has adopted the Maritime
Labor Convention 2006, or the MLC 2006. A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance will be required
to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 came into force
on August 20, 2013 and we are in compliance with these regulations.
Vessel Security Regulations
Since the terrorist
attacks of September 11, 2001 in the United States, there have been a variety of initiatives intended to enhance vessel security
such as the U.S. Maritime Transportation Security Act of 2002, or MTSA. To implement certain portions of the MTSA, in July 2003,
the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject
to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which
are regulated by the EPA.
Similarly, in December
2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new Chapter
V became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and mandates
compliance with the International Ship and Port Facilities Security Code, or the ISPS Code. The ISPS Code is designed to enhance
the security of ports and ships against terrorism. After July 1, 2004, to trade internationally, a vessel must attain an International
Ship Security Certificate, or the ISSC, from a recognized security organization approved by the vessel's flag state. Among the
various requirements are:
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on-board installation of automatic identification systems to provide a means for the automatic
transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship's
identity, position, course, speed and navigational status;
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on-board installation of ship security alert systems, which do not sound on the vessel but only
alert the authorities on shore;
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the development of vessel security plans;
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ship identification number to be permanently marked on a vessel's hull;
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a continuous synopsis record kept onboard showing a vessel's history including the name of the
ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship's identification
number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and
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·
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compliance with flag state security certification requirements.
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Ships operating without
a valid certificate may be detained at port until it obtains an ISSC, or it may be expelled from port, or refused entry at port.
Furthermore, additional
security measures could be required in the future which could have a significant financial impact on us. The USCG regulations,
intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided
such vessels have on board a valid ISSC that attests to the vessel's compliance with SOLAS security requirements and the ISPS Code.
Our managers intend to implement the various security measures addressed by MTSA, SOLAS and the ISPS Code, and we intend that our
fleet will comply with applicable security requirements. We have implemented the various security measures addressed by the MTSA,
SOLAS and the ISPS Code.
100% Container Screening
On August 3, 2007,
the United States signed into law the Implementing Recommendations of the 9/11 Commission Act of 2007, or the 9/11 Commission Act.
The 9/11 Commission Act amends the SAFE Port Act of 2006 to require that all containers being loaded at foreign ports onto vessels
destined for the United States be scanned by nonintrusive imaging equipment and radiation detection equipment before loading.
As a result of the
100% scanning requirements added to the SAFE Port Act of 2006, ports that ship to the United States may need to install new x-ray
machines and make infrastructure changes in order to accommodate the screening requirements. Such implementation requirements may
change which ports are able to ship to the United States and shipping companies may incur significant increased costs. It is impossible
to predict how this requirement will affect the industry as a whole, but changes and additional costs can be reasonably expected.
Inspection by Classification Societies
Every seagoing vessel
must be "classed" by a classification society. The classification society certifies that the vessel is "in class,"
signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies
with applicable rules and regulations of the vessel's country of registry and the international conventions of which that country
is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag
state, the classification society will undertake them on application or by official order, acting on behalf of the authorities
concerned.
The classification
society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state.
These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.
For maintenance of
the class certification, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special
equipment classed are required to be performed as follows:
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Annual Surveys:
For seagoing ships, annual surveys are conducted for the hull and the machinery,
including the electrical plant, and where applicable for special equipment classed, at intervals of 12 months from the date of
commencement of the class period indicated in the certificate.
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Intermediate Surveys
: Extended annual surveys are referred to as intermediate surveys and
typically are conducted two and one-half years after commissioning and each class renewal. Intermediate surveys may be carried
out on the occasion of the second or third annual survey.
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Class Renewal Surveys
: Class renewal surveys, also known as special surveys, are carried
out for the ship's hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated
by the character of classification for the hull. At the special survey, the vessel is thoroughly examined, including audio-gauging
to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification
society would prescribe steel renewals. The classification society may grant a one-year grace period for completion of the special
survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences
excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted,
a vessel owner has the option of arranging with the classification society for the vessel's hull or machinery to be on a continuous
survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. At an owner's application, the surveys
required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process
is referred to as continuous class renewal.
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All areas subject to
survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals
between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years. Vessels
under five years of age can waive drydocking in order to increase available days and decrease capital expenditures, provided the
vessel is inspected underwater.
Most vessels are also
dry-docked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any defects
are found, the classification surveyor will issue a "recommendation" which must be rectified by the ship owner within
prescribed time limits.
Most insurance underwriters
make it a condition for insurance coverage that a vessel be certified as "in class" by a classification society which
is a member of the International Association of Classification Societies, or IACS. All our vessels that we have purchased and
may agree to purchase in the future must be certified as being "in class" prior to their delivery under our standard
purchase contracts and memorandum of agreement. If the vessel is not certified on the date of closing, we have no obligation to
take delivery of the vessel.
Risk of Loss and Insurance Coverage
General
The operation of any
vessel includes risks such as mechanical and structural failure, hull damage, collision, property loss, cargo loss or damage and
business interruption due to political circumstances in foreign countries, piracy, hostilities and labor strikes. In addition,
there is always an inherent possibility of marine disaster, including oil spills and other environmental incidents, and the liabilities
arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners,
operators and demise charterers of vessels trading in the United States exclusive economic zone for certain oil pollution accidents
in the United States, has made liability insurance more expensive for ship owners and operators trading in the United States market.
When we have vessels,
we maintain hull and machinery insurance, war risks insurance, protection and indemnity cover, increased value insurance and freight,
demurrage and defense cover for each of our vessels in amounts that we believe to be prudent to cover normal risks in our operations,
we may not be able to achieve or maintain this level of coverage throughout a vessel's useful life. Furthermore, while we have,
in the past, procured what we consider to be adequate insurance coverage, not all risks can be insured against, specific claims
may not be paid and we may not be able to obtain adequate insurance coverage at reasonable rates.
Hull & Machinery and War Risks
Insurance
When we have vessels,
we maintain marine hull and machinery and war risks insurance, which will include the risk of actual or constructive total loss,
for all of our vessels. We atnticpate that each of our vessels will covered up to at least fair market value with deductibles of
$125,000 per vessel per incident. We also intend to maintain increased value coverage for most of our vessels. Under this increased
value coverage, in the event of total loss of a vessel, we will be able to recover the sum insured under the increased value policy
in addition to the sum insured under the hull and machinery policy. Increased value insurance also covers excess liabilities which
are not recoverable under our hull and machinery policy by reason of under insurance.
Protection and Indemnity Insurance
Protection and indemnity
insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations, or "clubs",
which insure our third party liabilities in connection with our shipping activities. This includes third-party liability and other
related expenses resulting from the injury or death of crew and other third parties, the loss or damage to cargo, claims arising
from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage,
towing and other related costs, including wreck removal.
When we have vessels,
we intend to procured protection and indemnity insurance coverage for pollution in the amount of $1.0 billion per vessel per incident.
The 13 principal underwriting member P&I Associations that comprise the International Group of P&I Clubs insure approximately
90% of the world's commercial tonnage and have entered into a pooling agreement to reinsure each association's liabilities. As
a member of a P&I Association, which is a member of the International Group of P&I Clubs, we are subject to calls payable
to the associations based on the group's claim records as well as the claim records of all other members of the individual associations
and members of the pool of P&I Associations comprising the International Group of P&I Clubs.
FDD (Freight / Demurrage / Defense)
cover
The cover entitles
the vessel-owning subsidiaries, or the Owners, to seek legal advice and assistance from the P&I Club and reimbursement of costs
incurred in connection with disputes or proceedings which are pursued by or against the Owners and which arise out of events which
occur during the period of the insurance.
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C.
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Organizational structure
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Paragon Shipping Inc.
is the sole owner of all of the issued and outstanding shares of the subsidiaries listed on Exhibit 8.1 to this annual report.
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D.
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Property, plants and equipment
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We do not own any material
real property. We lease office space in Athens, Greece from Granitis Glyfada Real Estate Ltd, a company beneficially owned by our
Chairman, President, Chief Executive Officer and Interim Chief Financial Officer. See “Item 7. Major Shareholders and Related
Party Transactions—B. Related Party Transactions—Lease of Office Space.” In addition, for the vessels owned and
for mortgages thereon, refer to “Our Fleet” discussed above, and “Item 5. Operating and Financial Review and
Prospects—B. Liquidity and Capital Resources—Long-Term Debt.”
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Item 4A.
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Unresolved Staff Comments
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Not applicable.
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Item 5.
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Operating and Financial Review and Prospects
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The following discussion
of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements
and their notes included elsewhere in this annual report. The financial statements have been prepared in accordance with U.S. GAAP
and are presented in U.S. Dollars unless otherwise indicated.
This discussion
includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and
uncertainties, which could cause actual events or conditions to differ materially from those currently anticipated and expressed
or implied by such forward-looking statements. For a discussion of some of those risks and uncertainties, please see the section
entitled “Forward-Looking Statements” at the beginning of this annual report and “Item 3. Key Information
—
D.
Risk Factors.”
Overview
We are a global provider
of shipping transportation services. We specialize in transporting drybulk cargoes, including such commodities as iron ore, coal,
grain and other materials, along worldwide shipping routes.
Prior to April 2011,
we owned and operated three containerships. In the second quarter of 2011, we sold these containerships to Box Ships, then our
wholly-owned subsidiary. Box Ships completed its initial public offering in April, 2011. In April and May 2015, we sold all 3,437,500
shares of Box Ships which we owned, in two separate transactions for aggregate net proceeds of $2.9 million.
During 2015, our operating
fleet consisted of eight Panamax drybulk carriers, two Ultramax drybulk carriers, two Supramax drybulk carriers and four Handysize
drybulk carriers with an aggregate capacity of 980,380 dwt, which have been sold off. In addition, as of the date of this annual
report, our newbuilding program consisted of three Kamsarmax drybulk carriers that are scheduled to be delivered in third and fourth
quarter of 2016.
Allseas and Seacommercial
are responsible for the commercial and technical management functions for our fleet, pursuant to long-term management agreements
between Allseas, Seacommercial and each of our vessel-owning subsidiaries. Allseas and Seacommercial also provide commercial and
technical management services for Box Ships’ fleet. Allseas and Seacommercial are controlled by Mr. Bodouroglou.
We primarily employ
our vessels in the spot charter market, on short-term time charters or on voyage charters, ranging from 10 days to three months.
However, depending on the time charter market, we may decide from time to time to employ our vessels on medium to long-term time
charters.
Factors Affecting our Results of Operations
Our revenues consist of earnings under the
charters on which we employ our vessels. We believe that the important measures for analyzing trends in the results of our operations
consist of the following:
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Calendar days.
We define calendar days as the total number of days in a period during which
each vessel in our fleet was owned. Calendar days are an indicator of the size of the fleet over a period and affect both the amount
of revenues and the amount of expenses that are recorded during that period.
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Available days.
We define available days as the number of calendar days in a period less
any off-hire days associated with scheduled dry-dockings or special or intermediate surveys. The shipping industry uses available
days to measure the number of days in a period during which vessels should be capable of generating revenues.
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Operating days.
We define operating days as the total available days in a period less any
off-hire days due to any reason, other than scheduled dry-dockings or special or intermediate surveys, including unforeseen circumstances.
Any idle days relating to the days a vessel remains unemployed are included in operating days. The shipping industry uses operating
days to measure the number of days in a period during which vessels actually generate revenues.
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Fleet utilization.
We calculate fleet utilization by dividing the number of operating days
during a period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company's
efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons
other than scheduled repairs, vessel upgrades, vessel positioning, dry-dockings or special or intermediate surveys.
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Charter contracts.
A period time charter and a trip time charter are generally contracts
to charter a vessel for a specific period of time at a set daily rate. Under period time charters and trip time charters, the charterer
pays substantially all of the voyage expenses, including port and canal charges, and bunkers (fuel) expenses, but the vessel owner
pays the vessel operating expenses and commissions on gross time charter revenues. A spot market voyage charter is generally a
contract to carry a specific cargo from a load port to a discharge port for an agreed upon total amount. In the case of a spot
market voyage charter, the vessel owner pays voyage expenses (less specified amounts, if any, covered by the voyage charterer),
commissions on gross revenues and vessel operating expenses. Whether our vessels are employed on time charters or on voyage charters,
we pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs. We are also responsible for each vessel’s intermediate and special survey costs. Time charter rates
are usually fixed during the term of the charter. Prevailing time charter rates fluctuate on a seasonal and year to year basis
and may be substantially higher or lower from a prior time charter contract when the subject vessel is seeking to renew that prior
charter or enter into a new charter with another charterer. Fluctuations in charter rates are caused by imbalances in the availability
of cargoes for shipment and the number of vessels available at any given time to transport these cargoes. Fluctuations in time
charter rates are influenced by changes in spot market rates.
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Charter Revenues
Charter revenues are
driven primarily by the number of vessels in our fleet, the number of operating days during which our vessels generate revenues
and the amount of daily charter hire that our vessels earn under charters. These, in turn, are affected by a number of factors,
including our decisions relating to vessel acquisitions and disposals, the amount of time that we spend positioning our vessels,
the amount of time that our vessels spend in dry-dock undergoing repairs, maintenance and upgrade work, the age, condition and
specifications of our vessels, levels of supply and demand in the shipping market and other factors affecting the charter rates
for our vessels.
Vessels operating on
period time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot
charter market during periods characterized by favorable market conditions. Vessels operating in the spot charter market generate
revenues that are less predictable but may enable us to capture increased profit margins during periods of improvements in charter
rates although we are exposed to the risk of declining charter rates, which may have a materially adverse impact on our financial
performance. Future spot market rates may be higher or lower than the rates at which we have employed our vessels on period time
charters.
Voyage Expenses
Our voyage expenses
exclude commissions and consist of all costs that are unique to a particular voyage, primarily including port expenses, canal dues,
war risk insurances, fuel costs and losses from the sale of bunkers to charterers and bunkers consumed during off-hire periods
and while traveling to and from dry-docking.
Vessel Operating Expenses
Our vessel operating
expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the costs of
spares and consumable stores, tonnage taxes and other miscellaneous expenses. We anticipate that our vessel operating expenses,
which generally represent fixed costs, will fluctuate based primarily upon the size of our fleet. Other factors beyond our control,
some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for
insurance and difficulty in obtaining crew, may also cause these expenses to increase.
Dry-docking Expenses
Dry-docking costs relate
to the regularly scheduled intermediate survey or special survey dry-docking necessary to preserve the quality of our vessels as
well as to comply with the regulations, the environmental laws and the international shipping standards. Dry-docking costs can
vary according to the age of the vessel, the location where the dry-dock takes place, the shipyard availability, the local availability
of manpower and material and the billing currency of the yard. We expense dry-docking costs as incurred.
Management Fees – Related Party
Management fees represent
fees paid to Allseas in accordance with our management agreements and accounting agreement, which are discussed in “Item
7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreements with Our Managers—Management
Agreements” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreements
with Our Managers—Accounting Agreement.”
Furthermore, in order
to incentivize Allseas’ continued services to us, on November 10, 2009, we entered into a tripartite agreement with Allseas
and Loretto, a wholly-owned subsidiary of Allseas, pursuant to which in the event of a capital increase, an equity offering or
the issuance of common shares to a third party or third parties in the future, other than the common shares issued pursuant to
our equity incentive plan, we have agreed to issue, at no cost to Loretto, additional common shares in an amount equal to 2% of
the total number of common shares issued pursuant to such capital increase, equity offering or third party issuance, as applicable.
As of the date of this annual report, we have issued a total of 12,557 of our common shares to Loretto pursuant to this agreement.
The fair value of the shares issued to Loretto is deemed share-based compensation for management services and is charged to earnings
and recognized in paid-in-capital on the date we become liable to issue the shares. See “Item 7. Major Shareholders and Related
Party Transactions—B. Related Party Transactions—Agreement with Loretto.”
Depreciation
We depreciate our vessels
on a straight-line basis over their estimated useful lives. The estimated useful life of our vessels is determined to be 25 years
from the date of their initial delivery from the shipyard. Depreciation is based on cost less an estimated residual value. Refer
to “Critical Accounting Policies—Vessel Depreciation” discussed below.
General and Administrative Expenses
General and administrative
expenses include fees payable under our administrative and executive services agreements with Allseas, which are discussed in “Item
7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreements with Our Managers—Administrative
Services Agreement” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreements
with Our Managers—Executive Services Agreement”. In addition, general and administrative expenses include directors’
fees, office rent, traveling expenses, communications, directors and officers insurance, legal, auditing, investor relations and
other professional expenses and reflect the costs associated with running a public company.
Furthermore, our general
and administrative expenses include share-based compensation. For more information on the non-vested share awards issued as incentive
compensation under our Equity Incentive Plan, please see “Item 6. Directors, Senior Management and Employees—E. Share
Ownership—Equity Incentive Plan”.
Interest and Finance Costs
We have incurred interest
expense and financing costs in connection with vessel-specific debt relating to the acquisition of our vessels. We also expect
to incur financing costs and interest expenses under our current and future credit facilities in connection with debt incurred
to finance future acquisitions, as market conditions warrant.
Inflation
We expect that inflation
will have only a moderate effect on our expenses under current economic conditions. In the event that significant global inflationary
pressures appear, these pressures would increase, among other things, our operating, general and administrative, and financing
costs. However, we expect our costs to increase based on the anticipated increased costs for crewing and lube oil.
Lack of Historical Operating Data for Vessels Before Their
Acquisition
Consistent with shipping
industry practice, other than inspection of the physical condition of the vessels and examinations of classification society records,
neither we nor our affiliated entities conduct any historical financial due diligence process when we acquire vessels. Accordingly,
neither we nor our affiliated entities have obtained the historical operating data for the vessels from the sellers because that
information is not material to our decision to make acquisitions, nor do we believe it would be helpful to potential investors
in assessing our business or profitability. Most vessels are sold under a standardized agreement, which, among other things, provides
the buyer with the right to inspect the vessel and the vessel’s classification society records. The standard agreement does
not give the buyer the right to inspect, or receive copies of, the historical operating data of the vessel. Prior to the delivery
of a purchased vessel, the seller typically removes from the vessel all records, including past financial records and accounts
related to the vessel. In addition, the technical management agreement between the seller’s technical manager and the seller
is automatically terminated and the vessel’s trading certificates are revoked by its flag state following a change in ownership.
Consistent with shipping
industry practice, we treat the acquisition of vessels, (whether acquired with or without charter) from unaffiliated parties as
the acquisition of an asset rather than a business. We intend to acquire vessels free of charter, although we have acquired certain
vessels in the past which had time charters attached, and we may, in the future, acquire additional vessels with time charters
attached. Where a vessel has been under a voyage charter, the vessel is delivered to the buyer free of charter, and it is rare
in the shipping industry for the last charterer of the vessel in the hands of the seller to continue as the first charterer of
the vessel in the hands of the buyer. In most cases, when a vessel is under time charter and the buyer wishes to assume that charter,
the vessel cannot be acquired without the charterer’s consent and the buyer entering into a separate direct agreement with
the charterer to assume the charter. The purchase of a vessel itself does not generally transfer the charter, because it is a separate
service agreement between the vessel owner and the charterer.
When we purchase a
vessel and assume or renegotiate a related time charter, we must take the following steps before the vessel will be ready to commence
operations:
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obtain the charterer’s consent to us as the new owner;
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obtain the charterer’s consent to a new technical manager;
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obtain the charterer’s consent to a new flag for the vessel;
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arrange for a new crew for the vessel;
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replace all hired equipment on board, such as gas cylinders and communication equipment;
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negotiate and enter into new insurance contracts for the vessel through our own insurance brokers;
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register the vessel under a flag state and perform the related inspections in order to obtain new
trading certificates from the flag state;
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implement a new planned maintenance program for the vessel; and
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ensure that the new technical manager obtains new certificates for compliance with the safety and
vessel security regulations of the flag state.
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The below discussion
is intended to help you understand how acquisitions of vessels affect our business and results of operations. Our business is comprised
of the following main elements:
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employment and operation of our vessels; and
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management of the financial, general and administrative elements involved in the conduct of our
business and ownership of our vessels.
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The employment and
operation of our vessels requires the following main components:
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vessel maintenance and repair;
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crew selection and training;
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vessel spares and stores supply;
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contingency response planning;
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onboard safety procedures auditing;
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vessel insurance arrangement;
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vessel hire management;
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vessel performance monitoring.
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The management of financial,
general and administrative elements involved in the conduct of our business and ownership of our vessels requires the following
main components:
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management of our financial resources, including banking relationships, such as the administration
of bank loans and bank accounts;
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management of our accounting system and records and financial reporting;
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administration of the legal and regulatory requirements affecting our business and assets; and
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management of the relationships with our service providers and customers.
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The principal factors
that affect our profitability, cash flows and shareholders’ return on investment include:
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rates and periods of charter hire;
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levels of vessel operating expenses;
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fluctuations in foreign exchange rates.
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Our Fleet – Comparison of Possible
Excess of Carrying Value Over Estimated Charter-Free Market Value of our Vessels
In “—Critical
Accounting Policies—Impairment of Long-lived Assets,” we discuss our policy for impairing the carrying values of our
vessels. Historically, the market values of vessels have experienced particular volatility, with substantial declines in many vessel
classes. As a result, the charter-free market value, or basic market value, of certain of our vessels may have declined below those
vessels’ carrying value, even though we would not impair those vessels’ carrying value under our accounting impairment
policy, due to our belief that future undiscounted cash flows expected to be earned by such vessels over their operating lives
would exceed such vessels’ carrying amounts.
The table set forth
below indicates (i) the carrying value of each of our vessels as of December 31, 2014 and 2015 (ii) which of our vessels we believe
has a basic market value below its carrying value, and (iii) the aggregate difference between carrying value and market value represented
by such vessels. This aggregate difference represents the approximate analysis of the amount by which we believe we would have
to reduce our net income if we sold all of such vessels in the current environment, on industry standard terms, in cash transactions,
and to a willing buyer where we are not under any compulsion to sell, and where the buyer is not under any compulsion to buy. For
the purposes of this calculation, we have assumed that the vessels would be sold at a price that reflects our estimate of their
current basic market values, as of December 31, 2014 and 2015, respectively. However, we are not holding our vessels for sale.
Our estimates of basic
market value assume that our vessels are all in good and seaworthy condition without need for repair and if inspected would be
certified in class without notations of any kind. Our estimates are based on information available from various industry sources,
including:
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reports by industry analysts and data providers that focus on our industry and related dynamics
affecting vessel values;
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news and industry reports of similar vessel sales;
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news and industry reports of sales of vessels that are not similar to our vessels where we have
made certain adjustments in an attempt to derive information that can be used as part of our estimates;
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approximate market values for our vessels or similar vessels that we have received from shipbrokers,
whether solicited or unsolicited, or that shipbrokers have generally disseminated;
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offers that we may have received from potential purchasers of our vessels; and
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vessel sale prices and values of which we are aware through both formal and informal communications
with shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers.
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As we obtain information
from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values
are highly volatile; as such, our estimates may not be indicative of the current or future basic market value of our vessels or
prices that we could achieve if we were to sell them.
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Dwt
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Year Built
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Carrying Value as of
December 31, 2014
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Carrying Value as of
December 31, 2015
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Vessel and Type
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Panamax
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Dream Seas (1), (2)
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75,151
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2009
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$
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34.2 million
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-
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Coral Seas (1), (4)
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74,477
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2006
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$
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21.0 million
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$
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8.7 million
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Golden Seas (1), (4)
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74,475
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2006
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$
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21.1 million
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$
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8.7 million
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Pearl Seas (1), (3)
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74,483
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2006
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$
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21.0 million
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$
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4.8 million
|
|
Diamond Seas (1), (2)
|
|
|
74,274
|
|
|
2001
|
|
$
|
17.3 million
|
|
|
-
|
|
|
Deep Seas (1), (3)
|
|
|
72,891
|
|
|
1999
|
|
$
|
22.1 million
|
|
|
$
|
2.7 million
|
|
Calm Seas (1), (3)
|
|
|
74,047
|
|
|
1999
|
|
$
|
23.0 million
|
|
|
$
|
2.8 million
|
|
Kind Seas (1), (3)
|
|
|
72,493
|
|
|
1999
|
|
$
|
23.8 million
|
|
|
$
|
3.4 million
|
|
Ultramax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gentle Seas (2)
|
|
|
63,350
|
|
|
2014
|
|
$
|
27.3 million
|
|
|
|
-
|
|
Peaceful Seas (2)
|
|
|
63,331
|
|
|
2014
|
|
$
|
27.5 million
|
|
|
|
-
|
|
Supramax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Friendly Seas (1), (2)
|
|
|
58,779
|
|
|
2008
|
|
$
|
23.2 million
|
|
|
|
-
|
|
Sapphire Seas (1), (2)
|
|
|
53,702
|
|
|
2005
|
|
$
|
17.8 million
|
|
|
|
-
|
|
Handysize
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prosperous Seas (1), (4)
|
|
|
37,293
|
|
|
2012
|
|
$
|
20.7 million
|
|
|
$
|
13.0 million
|
|
Precious Seas (1), (4)
|
|
|
37,205
|
|
|
2012
|
|
$
|
21.1 million
|
|
|
$
|
13.0 million
|
|
Priceless Seas (1), (4)
|
|
|
37,202
|
|
|
2013
|
|
$
|
22.9 million
|
|
|
$
|
14.5 million
|
|
Proud Seas (1), (4)
|
|
|
37,227
|
|
|
2014
|
|
$
|
25.0 million
|
|
|
$
|
16.0 million
|
|
Total
|
|
|
980,380
|
|
|
|
|
$
|
369.0 million
|
|
|
$
|
87.6 million
|
|
(1)
Indicates vessels
for which we believe, as of December 31, 2014, the basic charter-free market value was lower than the vessel’s carrying value.
We believe that the aggregate carrying value of these vessels exceeds their aggregate basic charter-free market value as of December
31, 2014, by approximately $93.3 million. For the year ended December 31, 2014, no impairment was recorded on these vessels under
our accounting impairment policy.
(2)
Indicates
vessels which were sold in 2015.
(3)
Indicates vessels held for
sale as of December 31, 2015. For the year ended December 31, 2015, an aggregate loss of $69.1 million was recorded on these vessels.
(4)
Indicates vessels which
were sold in March, April and May 2016. For the year ended December 31, 2015, impairment of $52.5 million was recorded on these
vessels under our accounting impairment policy.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates
and judgments in the application of our accounting policies 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 potentially result in materially different
results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies
that involve a high degree of judgment and the methods of their application. For a description of all of our significant accounting
policies, see Note 2 to our consolidated financial statements included elsewhere herein.
Vessel Depreciation:
We record the value of our vessels at their cost (which includes acquisition costs directly attributable to the vessel and
delivery expenditures, including pre-delivery expenses and expenditures made to prepare the vessel for its initial voyage) less
accumulated depreciation. We depreciate our vessels on a straight-line basis over their estimated useful lives, after considering
the estimated salvage value. We estimate the useful life of our vessels to be 25 years from the date of initial delivery from the
shipyard (secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life).
An increase in the useful life of a vessel or in its residual value would have the effect of decreasing the annual depreciation
and extending it into later periods. A decrease in the useful life of a drybulk vessel or in its residual value would have the
effect of increasing the annual depreciation and extending it into later periods.
A decrease in the useful
life of the vessel may occur as a result of poor vessel maintenance performed, harsh ocean going and weather conditions the vessel
is subjected to, or poor quality of the shipbuilding or yard. When regulations place limitations over the ability of a vessel to
trade on a worldwide basis, its remaining useful life is adjusted to end at the date such regulations preclude such vessel’s
further commercial use. Weak freight market rates result in owners scrapping more vessels, and scrapping them earlier in their
lives due to the unattractive returns. An increase in the useful life of the vessel may occur as a result of superior vessel maintenance
performed, favorable ocean going and weather conditions the vessel is subjected to, superior quality of the shipbuilding or yard,
or high freight market rates, which result in owners scrapping the vessels later due to the attractive cash flows.
Each vessel’s
salvage value is equal to the product of its lightweight tonnage and estimated scrap rate, estimated to be $300 per lightweight
ton effective October 1, 2012.
The estimated residual
value of the vessels may not represent the fair market value at any one time since market prices of scrap values tend to fluctuate.
Impairment of
Long-Lived Assets:
We review our long-lived assets held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding
interest charges, expected to be generated by the use of the asset is less than its carrying amount, we are required to evaluate
the asset for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset.
The carrying values
of our 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. Historically, both charter rates and vessel values tend
to be cyclical. Declines in the fair value of vessels, prevailing market charter rates, vessel sale and purchase considerations,
and regulatory changes in shipping industry, changes in business plans or changes in overall market conditions that may adversely
affect cash flows are considered as potential impairment indicators. Based on our estimates of basic market value as described
in “Item 5. Operating and Financial Review and Prospects—A. Operating results—Our Fleet—Comparison of Possible
Excess of Carrying Value Over Estimated Charter-Free Market Value of our Vessels”, in the event the independent market value
of a vessel is lower than its carrying value, we determine undiscounted projected net operating cash flow for such vessel and compare
it to the vessels carrying value.
The undiscounted projected
net operating cash flows for each vessel are determined by considering the contracted charter revenues from existing time charters
for the fixed vessel days and an estimated daily time charter equivalent for the unfixed days (based on the most recent ten year
historical average of similar size vessels) over the remaining estimated life of the vessel, assumed to be 25 years from the date
of initial delivery from the shipyard, net of brokerage commissions, the salvage value of each vessel, which is estimated to be
$300 per lightweight ton, expected outflows for vessels’ future dry-docking expenses and estimated vessel operating expenses,
assuming an average annual inflation rate where applicable. We use the historical ten-year average as it is considered a reasonable
estimation of expected future time charter rates over the remaining useful life of our vessels since we believe it represents a
full shipping cycle and captures the highs and lows of the market. We utilize the standard deviation in order to eliminate the
outliers of our sample before computing the historic ten-year average of the one-year time charter rate.
As of December 31,
2015, the review of the carrying amount of M/V Coral Seas, the M/V Golden Seas, the M/V Prosperous Seas, the M/V Priceless Seas,
the M/V Proud Seas and the M/V Precious Seas in connection with their sale in 2016, discussed above, indicated an impairment loss
of $52.5 million. In addition, following the cancellation of the financing of the syndicated loan facility led by Nordea Bank Finland
Plc for the two Ultramax drybulk newbuildings, an impairment loss of $43.9 million was also recognized in the 2015 consolidated
statement of comprehensive loss.
Recent Accounting Pronouncements
Regarding recent accounting
pronouncements the adoption of which would have an effect on our consolidated financial statements in the current period or future
periods, refer to Note 2 to our consolidated financial statements included at the end of this annual report.
Fleet Data and Average Daily Results
FLEET DATA
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
Calendar days for the fleet
|
|
|
4,717
|
|
|
|
5,241
|
|
|
|
5,169
|
|
Available days for the fleet
|
|
|
4,652
|
|
|
|
5,180
|
|
|
|
5,104
|
|
Operating days for the fleet
|
|
|
4,622
|
|
|
|
5,134
|
|
|
|
5,045
|
|
Average number of vessels
(1)
|
|
|
12.9
|
|
|
|
14.4
|
|
|
|
14.2
|
|
Number of vessels at end of period
|
|
|
13
|
|
|
|
16
|
|
|
|
10
|
|
Average age of fleet as of year end
|
|
|
8
|
|
|
|
7
|
|
|
|
9
|
|
Fleet utilization
(2)
|
|
|
99.4
|
%
|
|
|
99.1
|
%
|
|
|
98.8
|
%
|
AVERAGE DAILY RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Vessel operating expenses
(3)
|
|
$
|
4,401
|
|
|
$
|
4,325
|
|
|
$
|
4,110
|
|
Dry-docking expenses
(4)
|
|
|
360
|
|
|
|
418
|
|
|
|
267
|
|
Management fees - related party
(5)
|
|
|
1,245
|
|
|
|
1,196
|
|
|
|
936
|
|
General and administrative expenses
(6)
|
|
|
2,282
|
|
|
|
1,661
|
|
|
|
1,155
|
|
|
(1)
|
Average number of vessels is the number of vessels that constituted our fleet for the relevant
period, as measured by the sum of the number of calendar days each vessel was a part of our fleet during the period divided by
the number of days in the period.
|
|
(2)
|
Fleet utilization is the percentage of time that our vessels were available for generating revenue
and is determined by dividing operating days by available days of our fleet for the relevant period.
|
|
(3)
|
Daily vessel operating expenses, which include crew costs, provisions, deck and engine stores,
lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel operating expenses by fleet calendar days
for the relevant time period.
|
|
(4)
|
Daily dry-docking expenses are calculated by dividing dry-docking expenses by fleet calendar days
for the relevant time period.
|
|
(5)
|
Daily management fees - related party are calculated by dividing management fees - related party
by fleet calendar days for the relevant time period.
|
|
(6)
|
Daily general and administrative expenses are calculated by dividing general and administrative
expenses by fleet calendar days for the relevant time period.
|
YEAR ENDED DECEMBER 31, 2015 COMPARED
TO YEAR ENDED DECEMBER 31, 2014
The average number
of vessels in our fleet was 14.2 for the year ended December 31, 2015, compared to 14.4 in the year ended December 31, 2014. The
following analysis exhibits the primary driver of differences between these periods.
|
·
|
Charter revenue—Charter revenue for the year ended December 31, 2015, was $35.9 million,
compared to $58.1 million for the year ended December 31, 2014. The decrease is mainly due to the decrease in the charter rates
earned by the vessels year over year as a result of the lower contracted rates due to the continued weakness in the drybulk market
and the decrease in operating days due to the sale of four vessels end of July 2015 and the sale of two vessels in December 2015.
After deducting commissions of $2.2 million, we had net revenue of $33.7 million in 2015, compared to $54.8 million net revenue,
after deducting commissions of $3.4 million, in 2014.
|
|
·
|
Voyage expenses, net—In 2015, our voyage expenses amounted to $7.6 million, compared to $14.7
million in 2014. The decrease in our voyage expenses are due to the decrease of $5.1 million in the bunkers consumed during off-hire
periods, vessel positioning and traveling to and from dry-docking, net of gains or losses from the sale of bunkers to charterers,
a decrease of $1.3 million in port charges and other related expenses for our vessels that were employed on voyage charters during
the year ended December 31, 2015 and 2014, and a decrease of $0.7 million in extra war risks insurances.
|
|
·
|
Vessel operating expenses—Vessel operating expenses amounted to $21.2 million, or $4,110
per vessel per day, for the year ended December 31, 2015, compared to $22.7 million, or $4,325 per vessel per day, for the year
ended December 31, 2014. The decrease in our operating expenses is due to the Company’s continued cost control efficiency,
the decrease in calendar days due to the sale of four vessels in July 2015 and the sale of two vessels in December 2015 and the
favorable impact of the Euro / U.S. Dollar exchange rate fluctuations.
|
|
·
|
Dry-docking expenses—We incurred an aggregate of $1.4 million in dry-docking expenses for
the year ended December 31, 2015, compared to $2.2 million for the year ended December 31, 2014. Two Panamax and one Supramax vessels
were dry-docked during 2015, while three of our Panamax vessels underwent dry-docking during 2014, resulting in higher dry-docking
costs.
|
|
·
|
Management fees - related party—We incurred an aggregate of $4.8 million, or $936 per vessel
per day in management fees for the year ended December 31, 2015, compared to an aggregate of $6.3 million, or $1,196 per vessel
per day in management fees for the year ended December 31, 2014. The decrease in management fees mainly reflects the share based
compensation of $755 and $0.9 million that was recorded in 2015 and 2014, respectively, relating to the award of shares to Allseas,
in line with the agreement with Loretto, as described in “Item 7. Major Shareholders and Related Party Transactions–B.
Related Party Transactions–Agreements with Our Managers–Agreement with Loretto” and the favorable impact of the
Euro / U.S. Dollar exchange rate fluctuations.
|
|
·
|
Depreciation—Depreciation of vessels for the year ended December 31, 2015 amounted to $16.9
million, compared to $18.4 million for the year ended December 31, 2014, reflecting the sale of vessels in 2015, discussed above,
and the classification of four vessels as held for sale.
|
|
·
|
General and administrative expenses—General and administrative expenses for 2015 were $6.0
million, compared to $8.7 million for 2014. The decrease in general and administrative expenses relates mainly to the incentive
compensation of $0 and $1.8 million that was awarded in 2015 and 2014, respectively, and a $0.7 million decrease due to the favorable
impact of the Euro / U.S. Dollar exchange rate fluctuations.
|
|
·
|
Loss related to vessels held for sale—A loss of $116.8 million related the vessels classified
as held for sale during the year was recorded in 2015. More specifically, the loss relating to the four vessels sold in July 2015
and classified as held for sale as of June 30, 2015 amounted to $47.6 million, while the loss related to the four vessels sold
in January 2016 amounted to $69.2 million. No such loss was recorded in 2014.
|
|
·
|
Impairment loss— Impairment loss for the year ended December 31, 2015 of $96.6 million, relates
to the write-off of $23.0 million due to the cancellation of our two Ultramax newbuildings, the write down to fair value of the
contract price of our three Kamsarmax newbuildings of $20.9 million and the write down to the sale price of our six vessels sold
in March, April and May 2016 of $52.7 million. Impairment loss for the year ended December 31, 2014 of $15.7 million relates to
the write down to fair value of the contract price of the 4,800 TEU containership newbuilding.
|
|
·
|
(Gain) / loss from sale of assets—The loss of $26.7 million recorded in 2015 mainly relates
to the sale of two vessels sold in December 2015. The gain of $0.4 million for the year ended December 31, 2014 relates to the
gain on the sale of the 4,800 TEU containership newbuilding that was concluded on May 23, 2014.
|
|
·
|
Loss from marketable securities, net—Loss from marketable securities, net, for the year ended
December 31, 2015 of $0.1 million relates to the sale of 44,550 shares of Korea Line Corporation (“KLC”) at an average
sale price of $21.68 per share that was concluded in the second quarter of 2015. Loss from marketable securities, net, for the
year ended December 31, 2014 of $25,529 relates to the sale of 21,346 shares of KLC at an average sale price of $23.52 per share
that was concluded during 2014.
|
|
·
|
Other loss—Other loss for each of the years ended December 31, 2015 and 2014 of $0.2 million
relates mainly to a special contribution according to the Greek Law 4301/2014. The charge is a voluntary contribution calculated
based on the carrying capacity of our fleet, and is payable annually for four fiscal years, until 2017.
|
|
·
|
Interest and finance costs—Interest and finance costs for 2015 were $9.8 million, compared
to $9.3 million for 2014. The increase in interest and finance costs mainly reflects an increase of $1.3 million in interest charged
relating to our Unsecured Notes, partially offset with a decrease of $0.8 million in relation to the remaining credit facilities
due to the decreased indebtedness year over year and an increase of $0.5 million with respect to the write-off of unamortized financing
costs. In 2015, an amount of $2.0 million of unamortized financing costs was written-off relating to the cancellation of the undrawn
portion of the syndicated loan led by Nordea Bank Finland Plc, the extinguishment of the loans with HSBC Bank Plc and HSH Nordbank
AG, as well as the extinguishment of the loan with Commerzbank AG in relation to the two vessels sold in December 2015. In 2014,
an amount of $1.5 million of unamortized financing costs was written-off relating to the cancellation of the China Development
Bank loan facility, as well as the refinancing of the loan agreements with Bank of Scotland and Nordea Bank Finland Plc. Furthermore,
other finance costs decreased by $0.5 million year over year, mainly due to the decrease in commitment fees. In 2014, we paid to
HSH Nordbank AG commitment fees in relation to vessels M/V Gentle Seas and M/V Peaceful Seas delivered to us in October 2014 and
to Nordea Bank Finland Plc until July 2015, in relation to our newbuilding program.
|
|
·
|
Loss on derivatives, net—Loss on derivatives, net, for the year ended December 31, 2015 of
$0.2 million consists of an unrealized gain of $0.5 million, representing a gain to record the change in fair value of our interest
rate swaps for 2015, and realized expenses of $0.7 million incurred from interest rate swap settlements paid during the year. Loss
on derivatives, net, for the year ended December 31, 2014 of $0.4 million consists of an unrealized gain of $0.5 million, representing
a gain to record the change in fair value of our interest rate swaps for 2014, and realized expenses of $0.9 million incurred from
interest rate swap settlements paid during the year.
|
|
·
|
Equity in net income of affiliate—Equity in net income of affiliate for the year ended December
31, 2015 was $0.2 million, compared to $0.5 million for the previous year. The decrease is mainly associated with the sale of our
investment in Box Ships in the second quarter of 2015 and the decrease in earnings available to common shareholders of Box Ships.
|
|
·
|
Loss on investment in affiliate—Loss on investment in affiliate of $0.2 million for the year
ended December 31, 2015 relates to the sale of the total 3,437,500 shares of Box Ships at an average sale price of $0.8542 per
share that was concluded in the second quarter of 2015. Loss on investment in affiliate of $8.8 million for the year ended December
31, 2014 consists of $0.2 million, relating to the dilution effect from the Company’s non-participation in the public offering
of 5,500,000 common shares of Box Ships, which was completed on April 15, 2014, as well as the aggregate impairment in investment
in affiliate of $8.6 million, relating to the difference between the fair value and the book value of our investment in Box Ships
as of March 31, 2014, June 30, 2014 and December 31, 2014, which was considered as other than temporary.
|
|
·
|
Gain from debt extinguishment—Gain from debt extinguishment of $5.9 million for the year
ended December 31, 2015 is associated with the sale of M/V Sapphire Seas and M/V Diamond Seas in December 2015. No such gain was
recorded in 2014.
|
|
·
|
Net loss—As a result of the above factors, net loss in 2015 was $268.7 million, compared
to $51.8 million for 2014.
|
YEAR ENDED DECEMBER 31, 2014 COMPARED
TO YEAR ENDED DECEMBER 31, 2013
The average number
of vessels in our fleet was 14.4 for the year ended December 31, 2014, compared to 12.9 in the year ended December 31, 2013. The
following analysis exhibits the primary driver of differences between these periods.
|
·
|
Charter revenue—Charter revenue for the year ended December 31, 2014, was $58.1 million,
compared to $59.5 million for the year ended December 31, 2013. The increase in the average number of vessels in our fleet and
the corresponding increase in the number of operating days of our fleet from 4,622, for the year ended December 31, 2013, to 5,134,
for the year ended December 31, 2014, were offset by the decrease in the charter rates earned by the vessels year over year as
a result of the lower contracted rates due to the continued weakness in the drybulk market. After deducting commissions of $3.4
million, we had net revenue of $54.8 million in 2014, compared to $56.3 million net revenue, after deducting commissions of $3.3
million, in 2013.
|
|
·
|
Voyage expenses, net—In 2014, our voyage expenses amounted to $14.7 million, compared to
$6.7 million in 2013. The increase in our voyage expenses are due to the increased number of voyage and short-term time charters
and mainly reflects an increase of $6.6 million in the bunkers consumed during voyage charters, off-hire periods, vessel positioning
and traveling to and from dry-docking, net of gains or losses from the sale of bunkers to charterers. It also reflects an increase
of $1.3 million in port charges and other related expenses for our vessels that were employed on voyage charters during the year
ended December 31, 2014 and 2013, and an increase of $0.2 million in extra war risks insurances.
|
|
·
|
Vessel operating expenses—Vessel operating expenses amounted to $22.7 million, or $4,325
per vessel per day, for the year ended December 31, 2014, compared to $20.8 million, or $4,401 per vessel per day, for the year
ended December 31, 2013. The increase in our operating expenses reflects mainly the increase in the average number of vessels in
our fleet for 2014, compared to 2013. The decrease in the daily vessel operating expenses is due to our increasing economies of
scale as we increase our fleet size.
|
|
·
|
Dry-docking expenses—We incurred an aggregate of $2.2 million in dry-docking expenses for
the year ended December 31, 2014, compared to $1.7 million for the year ended December 31, 2013. One Panamax and two Supramax vessels
were dry-docked during 2013, while three of our Panamax vessels underwent dry-docking during 2014, resulting in higher dry-docking
costs.
|
|
·
|
Management fees - related party—We incurred an aggregate of $6.3 million, or $1,196 per vessel
per day in management fees for the year ended December 31, 2014, compared to an aggregate of $5.9 million, or $1,245 per vessel
per day in management fees for the year ended December 31, 2013. The increase in management fees mainly reflects the increase in
the average number of vessels in our fleet year over year and the corresponding increase in the number of calendar days of our
fleet.
|
|
·
|
Depreciation—Depreciation of vessels for the year ended December 31, 2014 amounted to $18.4
million, compared to $17.0 million for the year ended December 31, 2013, reflecting the increased fleet size in 2014, compared
to 2013.
|
|
·
|
General and administrative expenses—General and administrative expenses for 2014 were $8.7
million, compared to $10.8 million for 2013. The $2.1 million decrease in general and administrative expenses relates mainly to
the incentive compensation of $2.0 million that was awarded for the completion of our debt restructuring in 2013, and a $0.3 million
decrease in other general and administrative expenses, partially offset by a $0.2 million increase in share based compensation
due to the higher amortization effect of the granted share awards.
|
|
·
|
Impairment loss—Impairment loss for the year ended December 31, 2014 of $15.7 million relates
to the write down to fair value of the contract price of the 4,800 TEU containership newbuilding (refer to Note 5 to our consolidated
financial statements included at the end of this annual report).
|
|
·
|
Gain from sale of assets—The gain of $0.4 million for the year ended December 31, 2014 relates
to the gain on the sale of the 4,800 TEU containership newbuilding that was concluded on May 23, 2014. No vessels were sold in
2013.
|
|
·
|
Gain / loss from marketable securities, net—Loss from marketable securities, net, for the
year ended December 31, 2014 of $25,529 relates to the sale of 21,346 shares of KLC at an average sale price of $23.52 per share
that was concluded during 2014. Gain from marketable securities, net, for the year ended December 31, 2013 of $1.2 million includes
a gain of $3.1 million relating to the initial measurement of the 58,483 additional shares of KLC that were issued to us on May
9, 2013, pursuant to the amended KLC rehabilitation plan that was approved by the Seoul Central District Court in March 2013, partially
offset by an aggregate loss of $1.9 recognized in the third and fourth quarters of 2013 relating to the change in fair value of
the total 65,896 KLC shares, which was considered as other than temporary.
|
|
·
|
Other income / loss—Other loss for the year ended December 31, 2014 of $0.2 million relates
mainly to a special contribution, which was paid in October 2014. According to the Greek Law 4301/2014, the charge is a voluntary
contribution calculated based on the carrying capacity of our fleet, and is payable annually for four fiscal years, until 2017.
Other income for the year ended December 31, 2013 of $0.6 million relates mainly to a cash compensation of $0.4 million received
from KLC representing the present value of the total outstanding cash payments we were entitled to receive in connection with the
amended KLC rehabilitation plan that was approved by the Seoul Central District Court in March 2013, and to claim recoveries of
$0.2 million relating to a dispute regarding one of our vessels.
|
|
·
|
Interest and finance costs—Interest and finance costs for 2014 were $9.3 million, compared
to $7.4 million for the previous year. The increase in the interest and finance costs was mainly due to the cancellation of the
China Development Bank (“CDB”) loan facility dated May 17, 2013, as well as the refinancing of the loan agreements
with Bank of Scotland (dated December 4, 2007) and Nordea (dated May 5, 2011), and the resulting write off of the unamortized financing
costs of $1.5 million relating to the respective facilities (refer to Notes 5 and 9 to our consolidated financial statements included
at the end of this annual report). It is also due to the incurred interest expenses relating to our Senior Notes due 2021 that
were issued in August 2014 and bear interest at a rate of 8.375% per year.
|
|
·
|
Loss on derivatives, net—Loss on derivatives, net, for the year ended December 31, 2014 of
$0.4 million consists of an unrealized gain of $0.5 million, representing a gain to record the change in fair value of our interest
rate swaps for 2014, and realized expenses of $0.9 million incurred from interest rate swap settlements paid during the year. Loss
on derivatives, net, for the year ended December 31, 2013 of $0.1 million consists of an unrealized gain of $0.8 million, representing
a gain to record the change in fair value of our interest rate swaps for 2013, and realized expenses of $0.9 million incurred from
interest rate swap settlements paid during the year.
|
|
·
|
Interest income—Interest income for the year ended December 31, 2014 was $20,940, compared
to $0.5 million in 2013, mainly reflecting the decrease in interest charged to Box Ships relating to the unsecured loan granted
on May 27, 2011, which was fully repaid by Box Ships on October 18, 2013.
|
|
·
|
Equity in net income of affiliate—Equity in net income of affiliate for the year ended December
31, 2014 was $0.5 million, compared to $1.7 million for the previous year. The decrease in equity in net income of affiliate is
mainly associated with the decrease in earnings available to common shareholders of Box Ships for 2014, as compared to 2013.
|
|
·
|
Loss on investment in affiliate—Loss on investment in affiliate of $8.8 million for the year
ended December 31, 2014 consists of $0.2 million, relating to the dilution effect from the Company’s non-participation in
the public offering of 5,500,000 common shares of Box Ships, which was completed on April 15, 2014, as well as the aggregate impairment
in investment in affiliate of $8.6 million, relating to the difference between the fair value and the book value of our investment
in Box Ships as of March 31, 2014, June 30, 2014 and December 31, 2014, which was considered as other than temporary. Loss on investment
in affiliate of $8.6 million for the year ended December 31, 2013 consists of $0.4 million, relating to the dilution effect from
the Company’s non-participation in the public offering of 4,000,000 common shares of Box Ships, which was completed on March
18, 2013, as well as an aggregate impairment loss of $8.2 million recorded in September 2013 and December 2013, relating to the
difference between the fair value and the book value of our investment in Box Ships, which was considered as other than temporary.
|
|
·
|
Net loss—As a result of the above factors, net loss in 2014 was $51.8 million, compared to
$17.0 million for 2013.
|
|
B.
|
Liquidity and Capital Resources
|
Our principal sources
of funds are our operating cash flows, borrowings under our 8.375% Senior Notes due 2021 and loan and credit facilities, as well
as equity provided by our shareholders. Our principal uses of funds are capital expenditures to grow our fleet, maintenance costs
to ensure the quality of our vessels, compliance with international shipping standards and environmental laws and regulations,
the funding of working capital requirements, and, with the discretion of our Board of Directors the payment of dividends to our
shareholders. Beginning with the first quarter of 2011, our Board of Directors suspended the payment of our quarterly dividend
in light of the continued decline of charter rates and the related decline in asset values in the drybulk market. This suspension
allows us to retain cash and increase our liquidity. Until market conditions improve, it is unlikely that we will reinstate the
payment of dividends. In addition, restrictions under loan and credit facilities and other external factors could limit our ability
to pay dividends. See “Item 8. Financial Information—Dividend Policy.”
On February 18, 2014,
we completed a public offering of 178,553 of our common shares at $237.50 per share, including the full exercise of the over-allotment
option granted to the underwriters to purchase up to 23,290 additional common shares. The net proceeds from the offering amounted
to $39.7 million net of underwriting discounts and commissions and other offering expenses payable by us.
On August 8, 2014,
we completed the public offering of 1,000,000 of our 8.375% Senior Notes due 2021 pursuant to an effective shelf registration statement.
The Notes were issued in minimum denominations of $25.00 and integral multiples of $25.00 in excess thereof, and bear interest
at a rate of 8.375% per year, payable quarterly on each February 15, May 15, August 15 and November 15, commencing on November
15, 2014. The Notes will mature on August 15, 2021, and may be redeemed in whole or in part at any time or from time to time after
August 15, 2017. The net proceeds from the offering amounted to approximately $23.9 million, net of underwriting discounts and
commissions of $812,500, and offering expenses payable by the Company of $330,917. The Notes trade on NASDAQ Global Market under
the symbol “PRGNL”.
On January 7, 2014,
we took delivery of our fourth Handysize drybulk vessel, the M/V Proud Seas. In January 2014, an amount of $21.6 million was paid
to the shipyard representing the final installment of the respective vessel, which was financed from the syndicated secured loan
facility led by Nordea dated May 5, 2011, as described in the discussion under the heading “Long-Term Debt” below.
In March 2014, we entered
into contracts with Yangzijiang for the construction of three Kamsarmax newbuilding drybulk carriers. The Kamsarmax newbuildings
have a carrying capacity of 81,800 dwt each, with scheduled delivery in the third and fourth quarter of 2016. The acquisition cost
of these three newbuildings is $30.6 million per vessel. In March 2014, we paid an amount of $9.2 million per vessel, and the balance
of the contract price, or $21.4 million per vessel, will be payable upon the delivery of each vessel.
On April 25, 2014,
we entered into a memorandum of agreement for the sale of our remaining 4,800 TEU containership newbuilding to an unrelated third
party for $42.5 million, less 3% commission. In May 2014, we also agreed with the shipyard to reduce the contract price of the
respective vessel by $0.8 million. The sale of the vessel and its transfer to the new owners was concluded on May 23, 2014. The
net proceeds from the sale of the vessel amounted to $10.0 million and represent the difference between the net sale price of the
vessel and the outstanding contractual obligation due to the shipyard upon delivery that was resumed by the vessel’s new
owners.
In October 2014, we
took delivery of two Ultramax vessels, the M/V Gentle Seas and the M/V Peaceful Seas.
In
October 2014, an aggregate amount of $35.7 million was paid to the shipyard representing the final installment of the two vessels,
which was mainly financed from the loan facility with HSH dated April 4, 2014, following a total drawdown of $34.4 million.
In July 2015, we agreed
to sell all of the issued and registered shares of the vessel-owning companies of the M/V Dream Seas, M/V Friendly Seas, M/V Gentle
Seas and M/V Peaceful Seas to an entity controlled by Mr. Michael Bodouroglou, our Chairman, President, Chief Executive Officer
and Interim Chief Financial Officer on a mutually agreed value of $63.2 million, resulting in proceeds of $6.8 million.
In December 2015, we
entered into a settlement agreement with Commerzbank AG for the full and final settlement of the then outstanding principal amount
out of the proceeds from the sale of M/V Sapphire Seas, M/V Diamond Seas and M/V Pearl Seas to an unrelated third party. The M/V
Sapphire Seas and M/V Diamond Seas were delivered to their new owners in December 2015 and the M/V Pearl Seas was delivered to
her new owner in January 2016.
In January 2016, we
entered into a settlement agreement with Bank of Ireland to apply the net proceeds from the sale of M/V Kind Seas to an unrelated
third party towards the then outstanding principal amount. The M/V Kind Seas was delivered to her new owner in January 2016.
In January 2016, we
entered into a settlement agreement with Unicredit Bank AG, subject to definitive documentation to apply the net proceeds from
the sale of M/V Calm Seas and M/V Deep Seas to unrelated third parties towards the then outstanding principal amount. The remaining
principal amount of $3.4 million after the write-off of $4.9 million will be converted into an unsecured paid-in-kind note. The
M/V Calm Seas and M/V Deep Seas were delivered to their new owner in January 2016.
In March 2016, we entered
into a settlement agreement with Nordea Bank Finland Plc for the full and final settlement of the then outstanding principal amount
out of the proceeds from the sale of M/V Coral Seas, M/V Golden Seas, M/V Proud Seas, M/V Priceless Seas, M/V Precious Seas and
M/V Prosperous Seas. In addition, we will receive an amount of $3.9 million, as well as a further amount of $2,000 per vessel per
day for the period from March 1, 2016 until each vessel’s delivery date to her new owners for settlement of vessels’
operating expenses. The vessels were delivered to their new owners in March, April and May 2016.
As of the date of this
annual report, our newbuilding program consisted three Kamsarmax drybulk carriers that are scheduled to be delivered in the third
and fourth quarter of 2016, with a total contractual cost of $91.7 million, of which an aggregate of $64.2 million was outstanding
and expected to be due during 2016. We intend to finance the remaining construction costs of these vessels with cash on hand, operating
cash flows and additional bank debt that we intend to arrange or proceeds from future equity and debt offerings.
If the current low
charter rate environment persists or worsens, our forecasted operating cash flows, together with our existing cash and cash equivalents,
may not be sufficient to meet our liquidity needs for the next 12 months. If this event occurs, we expect to finance all of our
working capital requirements with additional bank debt and future equity or debt offerings, and we may also proceed with the sale
of the existing newbuildings contracts.
As
of December 31, 2015, we had approximately $144.7 million of outstanding indebtedness, as compared to $226.4 million of outstanding
indebtedness as of December 31, 2014. As of December 31, 2015, there aren’t any minimum principal payments for the outstanding
debt required to be made in 2016, taking into consideration the settlement agreements discussed above. Restricted cash was $13.9
million and $2.5 million as of December 31, 2014 and 2015, respectively.
We do not have any
borrowing capacity. For more information regarding our loan and credit facilities please refer to the discussion under the heading
“Long-Term Debt” below.
Our business is capital
intensive and its future success will depend on our ability to maintain a high-quality fleet through the acquisition of newer vessels
and, depending on the prevailing market conditions, the potential selective sale of older vessels. These acquisitions will be principally
subject to management’s expectation of future market conditions, as well as our ability to acquire vessels on favorable terms.
Our dividend policy will also impact our future liquidity position.
We regularly monitor
our currency exposure and, from time to time, may enter into currency derivative contracts to hedge this exposure if we believe
fluctuations in exchange rates would have a negative impact on our liquidity. As of December 31, 2015, we had no currency derivative
contracts.
We
have limited our exposure to interest rate fluctuations that will impact our future liquidity position through the swap agreements
as stated in “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” For information relating to our
swap agreements, please see Note 9 to our consolidated financial statements included at the end of this annual report.
Cash Flows
Cash and cash equivalents
as of December 31, 2015 amounted to $0, compared to $7.0 million as of December 31, 2014. We define working capital as current
assets minus current liabilities. We had a working capital deficit of $130.2 million as of December 31, 2015, compared to working
capital deficit of $1.1 million as of December 31, 2014, as adjusted to reflect the reclassification of a portion of deferred financing
costs against the current portion of long-term debt. The decrease in our working capital is mainly due to the increase in the current
portion of long-term debt of $124.7 million associated with the vessels sold in 2016 and the classification of our Notes as current,
the decrease in cash and cash equivalents and restricted cash of $11.5 million, and an aggregate decrease of $6.6 million in the
remaining current assets and current liabilities, partially offset by the increase in vessels held for sale by $13.7 million. The
overall cash position in the future may be negatively impacted by a decline in drybulk market rates if the current economic environment
persists or worsens.
Cash and cash equivalents
as of December 31, 2014 amounted to $7.0 million, compared to $31.3 million as of December 31, 2013. We define working capital
as current assets minus current liabilities. We had a working capital deficit of $1.8 million as of December 31, 2014, without
taking into consideration the reclassification of a portion of deferred financing costs against the current portion of long-term
debt, compared to working capital surplus of $20.6 million as of December 31, 2013. The decrease in our working capital is mainly
due to a decrease in cash and cash equivalents of $24.3 million, a decrease in marketable securities of $0.7 million, an increase
in the current portion of long-term debt of $3.5 million and an aggregate decrease of $0.5 million in the remaining current assets
and current liabilities, partially offset by an increase in the current portion of restricted cash by $6.6. The overall cash position
in the future may be negatively impacted by a decline in drybulk market rates if the current economic environment persists or worsens.
Operating Activities
Net cash used in operating
activities was $7.3 million during 2015, compared to net cash used in operating activities of $6.2 million during 2014. This decrease
is mainly due to a lower charter revenue net of commissions by $17.8 million, a decrease in expenses, including voyage expenses,
vessel operating expenses, dry-docking expenses, management fees – related party and general and administrative expenses,
that in the aggregate amounted to $16.5 million and the decrease in cash paid for interest and finance costs of $0.2 million.
Net cash used in operating
activities was $6.2 million during 2014, compared to net cash from operating activities of $4.6 million during 2013. This decrease
is mainly due to a lower charter revenue net of commissions by $1.5 million, an increase in expenses, including voyage expenses,
vessel operating expenses, dry-docking expenses, management fees – related party and general and administrative expenses,
that in the aggregate amounted to $8.8 million, a decrease in gain from vessel early redelivery of $2.3 million, an increase in
cash paid for interest and finance costs of $0.7 million, a decrease in interest income of $0.5 million, a decrease in dividends
received from Box Ships, excluding the return of investment in Box Ships, which is classified as cash flow from investing activities,
of $1.6 million, partially offset by an increase in cash flows from changes in trade receivables, net, and other assets and liabilities
that in the aggregate amounted to $5.1 million.
Investing Activities
Net cash from investing
activities was $23.1 million for the year ended December 31, 2015. This mainly reflects the net proceeds from the sale of vessels
in 2015 of $12.8 million, the net proceeds from the sale of investment in Box Ships and marketable securities in KLC of $3.9 million
in aggregate and the release of restricted cash of $11.4 million, offset by the capital expenditures for our newbuildings and acquisition
of other fixed assets of $5.0 million in aggregate. Net cash used in investing activities was $104.5 million for the year ended
December 31, 2014. This mainly reflects the cash outflows of $100.7 million relating to the deliveries of the M/V Proud Seas, the
M/V Gentle Seas and the M/V Peaceful Seas, the first installments for the Kamsarmax newbuilding drybulk carriers with Hull numbers
YZJ1144, YZJ1145 and YZJ1142, and the outstanding contractual cost of the 4,800 TEU containership newbuilding that was offset by
the net proceeds from the sale of the respective vessel to an unrelated third party in May 2014. It also reflects an increase in
our restricted cash of $3.9 million, and the acquisition of other fixed assets of $0.5 million, partially offset by the proceeds
from the sale of KLC share of $0.5 million.
Net cash used in investing
activities was $104.5 million for the year ended December 31, 2014. This mainly reflects the cash outflows of $100.7 million relating
to the deliveries of the M/V Proud Seas, the M/V Gentle Seas and the M/V Peaceful Seas, the first installments for the Kamsarmax
newbuilding drybulk carriers with Hull numbers YZJ1144, YZJ1145 and YZJ1142, and the outstanding contractual cost of the 4,800
TEU containership newbuilding that was offset by the net proceeds from the sale of the respective vessel to an unrelated third
party in May 2014. It also reflects an increase in our restricted cash of $3.9 million, and the acquisition of other fixed assets
of $0.5 million, partially offset by the proceeds from the sale of KLC share of $0.5 million. Net cash used in investing activities
was $6.4 million for the year ended December 31, 2013. This mainly reflects the cash outflows of $20.3 million relating to the
delivery of our Handysize newbuilding vessel, the M/V Priceless Seas, the initial deposits for the acquisition of two of our Ultramax
newbuilding drybulk carriers and other costs incurred for the remaining of vessels under construction, and the acquisition of other
fixed assets of $0.2 million, offset by a repayment from an affiliate of $14.0 million in relation to our loan agreement with Box
Ships that was repaid in full on October 18, 2013, and a return of our investment in Box Ships of $0.1 million.
Financing Activities
Net cash used in financing
activities was $22.9 million for the year ended December 31, 2015, which mainly reflects the long-term debt repayments of $22.3
million and the payment of financing costs of $0.6 million. Net cash from financing activities was $86.5 million for the year ended
December 31, 2014, which mainly reflects the proceeds from long-term debt of $179.1 million and the net proceeds of $39.7 million
from the public offering of 178,553 Class A common shares completed in February 2014, offset by the long-term debt repayments of
$128.5 million, the cash outflows of $0.2 million relating to the purchase of treasury stock pursuant to the share buyback program
that was authorized by our Board of Directors in May 2014, and the payment of financing costs of $3.8 million.
Net cash from financing
activities was $86.5 million for the year ended December 31, 2014, which mainly reflects the proceeds from long-term debt of $179.1
million and the net proceeds of $39.7 million from the public offering of 178,553 Class A common shares completed in February 2014,
offset by the long-term debt repayments of $128.5 million, the cash outflows of $0.2 million relating to the purchase of treasury
stock pursuant to the share buyback program that was authorized by our Board of Directors in May 2014, and the payment of financing
costs of $3.8 million. Net cash from financing activities was $15.5 million for the year ended December 31, 2013, which mainly
reflects the net proceeds from the issuance of common shares of $31.8 million, offset by the long-term debt repayments of $15.4
million and the payment of financing costs of $0.9 million.
Long-Term Debt
Loan and Credit Facilities
We operate in a capital
intensive industry which requires significant amounts of investment, and we fund a portion of this investment through long-term
bank debt. As of December 31, 2015, we had four outstanding bank debt facilities with a combined outstanding balance of $121.6
million. These credit facilities were settled during 2016.
For more information
regarding our loan and credit facilities as of December 31, 2015, and the settlement agreements with all of our lenders, please
see Note 8 to our consolidated financial statements included at the end of this annual report.
8.375% Senior Notes due 2021
On August 8, 2014,
we completed the public offering of 1,000,000 of our Notes pursuant to an effective shelf registration statement. The Notes were
issued in minimum denominations of $25.00 and integral multiples of $25.00 in excess thereof, and bear interest at a rate of 8.375%
per year, payable quarterly on each February 15, May 15, August 15 and November 15, commencing on November 15, 2014. The Notes
will mature on August 15, 2021, and may be redeemed in whole or in part at any time or from time to time after August 15, 2017.
The net proceeds from the offering amounted to $23.9 million, net of underwriting discounts and commissions of $0.8 million, and
offering expenses payable by the Company of $0.3 million. The Notes trade on NASDAQ Global Market under the symbol “PRGNL”.
The
indenture governing the Notes contains certain restrictive covenants, including limitations on asset sales and:
(a)
Limitation on Borrowings
. Net borrowings not to exceed 70% of our total assets.
(b)
Limitation on Minimum Net Worth
. Net worth to always exceed one hundred million dollars ($100,000,000).
As
of December 31, 2015, we were not in compliance with the covenants contained in our Notes.
As
of December 31, 2015, the covenants were calculated (based on the definitions contained in the indenture governing the Notes) as
follows:
(a)
Net borrowings of 132% of total assets
(b)
Net Worth of ($37.4) million
In
addition, if a Change of Control (as defined in the indenture governing Notes) occurs, we must repurchase the Notes at a purchase
price of 101% of the principal amount of the Notes plus accrued and unpaid interest to, but excluding the date of repurchase.
If
a Limited Permitted Asset Sale (as defined in the indenture governing the Notes) occurs, we must offer to purchase a principal
amount of the Notes equal to the Excess Proceeds (as defined in the indenture governing the Notes) of such Limited Permitted Asset
Sale at a redemption price equal to 101% of the principal amount, plus accrued and unpaid interest to, but excluding, the date
of repurchase.
In
addition, if an event of default or an event or circumstance which, with the giving of any notice or the lapse of time, would constitute
an event of default under the Notes has occurred and is continuing, or we are not in compliance with the covenant described under
“Limitation on Borrowings” or “Limitation on Minimum Net Worth” or
any
payment of dividends or any form of distribution or return of capital would result in the Company not being in compliance with
the covenant described under “(a) Limitation on Borrowings” or “(b) Limitation on Minimum Net Worth” above,
then none of the Company or any of its subsidiaries
will be permitted to declare or pay any dividends or return any capital
to
our equity holders (other than the Company or a wholly-owned subsidiary of the Company)
or authorize or make any other distribution, payment or delivery of property or cash to our equity holders (other than the Company
or a wholly-owned subsidiary of the Company), or redeem, retire, purchase or otherwise acquire, directly or indirectly, for value,
any interest of any class or series of our equity interests (or acquire any rights, options or warrants relating thereto but not
including convertible debt) now or hereafter outstanding and held by persons other than the Company or any wholly-owned subsidiary,
or repay any subordinated loans to equity holders (other than the Company or a wholly-owned subsidiary of the Company) or set aside
any funds for any of the foregoing purposes.
For
more information on our Notes, please see the section entitled “Description of Notes” in our final prospectus supplement
filed with the SEC on Form 424B5 on August 7, 2014.
In January 2016,
we entered into an exchange agreement with an unrelated third party, whereas the Notes holder exchanged 20,000 Notes for shares
of our common stock. We agreed to pay up to $10,000 of reasonable attorneys’ fees and expenses incurred by the holder in
connection with the transaction.
On March 18, 2016,
we announced expiration of our previously announced offer to exchange all properly delivered and accepted Notes for shares of our
Class A common shares (the “Exchange Offer”) at 5:00 p.m. (New York City time) on March 18, 2016. Based
on information provided by the depository for the Exchange Offer, as of 5:00 p.m. (New York City time) on Friday
March 18, 2016, 184,721 Notes or approximately 18.8% of the outstanding Notes were delivered and not validly withdrawn from the
Exchange Offer. Each holder of a Note who validly delivered and did not withdraw ("Delivered") all Notes held by such
holder, received four (4) Class A common shares, which included any accrued and unpaid interest thereon. As part of the Exchange
Offer, holders who delivered their Notes also consent to the removal of certain covenants and sections of the Notes' Indenture
dated August 8, 2014. All of the Delivered Notes were settled on or about March 23, 2016.
In April 2016,
we entered into an exchange agreement with an unrelated third party, whereas the Notes holder exchanged 50,000 Notes for
shares of our common stock. We agreed to pay up to $10,000 of reasonable attorneys’ fees and expenses incurred by the Holder
in connection with the transaction.
In relation to the
issued and outstanding Notes, we did not proceed with the interest payment of $0.5 million, which was originally due on February
15, 2016, due to lack of liquidity. Pursuant to the Notes indenture, we had a 30-day grace period to make such payment, which grace
period expired on March 17, 2016 without payment of the interest. We were still lacking the liquidity to make the interest payment.
Financial Instruments
We have entered into
interest rate swap agreements in order to hedge our variable interest rate exposure under our loan agreements discussed above.
For more information on our interest rate swap agreements, refer to Note 9 to our consolidated financial statements included at
the end of this annual report.
From time to time we
may enter into foreign derivative instruments if we have a capital commitment in foreign currency. As of December 31, 2015, we
had no currency derivative contracts.
|
C.
|
Research and Development, Patents and Licenses
|
None.
We believe the principal
factors that will affect our future results of operations are the economic, regulatory, political and governmental conditions that
affect the shipping industry generally and that affect conditions in countries and markets in which our vessels engage in business.
Other key factors that will be fundamental to our business, future financial condition and results of operations include:
|
·
|
the demand for seaborne transportation services;
|
|
·
|
the effective and efficient technical management of our vessels;
|
|
·
|
our ability to satisfy technical, health, safety and compliance standards; and
|
|
·
|
the strength of and growth in the number of our charterer relationships.
|
In addition to the factors discussed above,
we believe certain specific factors will impact our combined and consolidated results of operations. These factors include:
|
·
|
the charter hire earned by our vessels operating under our charters;
|
|
·
|
our access to capital required to acquire additional vessels and/or to implement our business strategy;
|
|
·
|
our ability to sell vessels at prices we deem satisfactory; and
|
|
·
|
our level of debt and the related interest expense and amortization of principal.
|
Please read “Item 3. Key Information—D.
Risk Factors” for a discussion of the material risks inherent in our business.
|
E.
|
Off-balance Sheet Arrangements
|
We do not have any
off-balance sheet arrangements.
|
F.
|
Contractual Obligations
|
The following table sets forth our contractual
obligations and their maturity dates as of December 31, 2015:
|
Contractual Obligations
(amounts in thousands of U.S Dollars)
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More than
5 years
|
|
|
Debt Agreements
(1)
|
|
$
|
146,551
|
|
|
$
|
121,551
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
Interest Payments
(1), (2)
|
|
|
11,777
|
|
|
|
2,094
|
|
|
|
4,188
|
|
|
|
4,188
|
|
|
|
1,307
|
|
|
Shipbuilding Contracts
(3)
|
|
|
101,701
|
|
|
|
101,701
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Management Agreements
(4)
|
|
|
1,464
|
|
|
|
1,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Executive Services
(5)
|
|
|
15,786
|
|
|
|
3,158
|
|
|
|
6,314
|
|
|
|
6,314
|
|
|
|
*
|
|
|
Accounting Services
(6)
|
|
|
1,361
|
|
|
|
273
|
|
|
|
544
|
|
|
|
544
|
|
|
|
*
|
|
|
Rental Agreements
(7)
|
|
|
70
|
|
|
|
40
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
278,710
|
|
|
$
|
230,281
|
|
|
$
|
11,076
|
|
|
$
|
11,046
|
|
|
$
|
26,307
|
|
|
*
|
Pursuant to the amended and restated Executive Services and Accounting agreements, dated May 18,
2015, the agreements shall remain in full force and effect, unless terminated in accordance with the provisions of the agreements.
These agreements do not have a finite term, however the table above reflects the respective obligations assuming a five-year term.
|
|
(1)
|
The minimum annual principal payments for our Debt Agreements and the relating Interest Payments
required to be made after December 31, 2015, take into consideration the subsequent settlement agreements with our lenders discussed
under the heading “Long-Term Debt” above and in Note 8 to our consolidated financial statements included at the end
of this annual report, except of the PIK Note with Unicredit Bank AG, which is subject to definitive documentation.
|
|
(2)
|
Interest Payments refer to our expected interest payments of our debt agreements by taking into
account our subsequent settlement agreements with our lenders, except of the PIK Note with Unicredit Bank AG, which is subject
to definitive documentation.
|
(3)
|
The amounts indicated in the above table include approximately $37,546 relating to the third
(delivery) instalment for the newbuilding vessels DY4050 and DY4052, originally due in the fourth quarter of 2015, for
which
we are in dispute with Dayang, as discussed in Note 16 to our consolidated financial statements included at the end of this
annual report.
|
|
(4)
|
The amounts indicated in the above table are the minimum contractual obligations based on a daily
management fee of €666.45 (or $725.56 based on the Euro/U.S. dollar exchange rate of €1.0000:$ 1.0887 as of December
31, 2015) per vessel, and includes the 1.25% charter hire commission for the vessels in our fleet under their time charters as
of December 31, 2015, that will be paid to Seacommercial, based on the estimated redelivery dates assuming no off-hire days. Third
party commissions on revenues are not included in the table above. In addition, the amounts also include minimum contractual obligations
based on the management agreements with Allseas relating to the supervision of each of the contracted newbuildings pursuant to
which we will pay: (1) a flat fee will be paid on a pro rata basis until we accept delivery of the respective vessel, and (2) a
daily fee of €115.00 (or $125.20 based on the Euro/U.S. dollar exchange rate of €1.0000:$ 1.0887 as of December 31, 2015)
per vessel, commencing from the date of the vessel’s shipbuilding contract until we accept delivery of the respective vessel.
The daily management fee and the daily newbuilding supervision fee do not incorporate any inflationary increases in the rates or
changes which may be agreed in the future.
|
|
(5)
|
The amounts indicated in the above table are the executive services fee of €2.9 million (or
$3.2 million based on the Euro/U.S. dollar exchange rate of €1.0000:$ 1.0887 as of December 31, 2015) per annum, and do not
include any incentive compensation which our Board of Directors, at their discretion, may agree to pay.
|
|
(6)
|
The amounts indicated in the above table are the financial and accounting services fee of €250,000
(or $272,175 based on the Euro/U.S. dollar exchange rate of €1.0000:$ 1.0887 as of December 31, 2015) per annum, and do not
include the financial reporting fee of $30,000 per vessel per annum, in connection with the provision of services under the accounting
services agreement.
|
|
(7)
|
We lease office space in Athens, Greece. The term of the lease will expire on September 30,
2017 and the monthly rental is €3,055.16 (or $3,326.15 based on the Euro/U.S. dollar exchange rate of €1.0000:$ 1.0887
as of December 31, 2015) including 3.6% tax, which will be adjusted thereafter annually for inflation increases. For the future
minimum rent commitments, we excluded inflation increases as the impact on future results of operations will not be material.
|
See the section entitled
“Forward Looking Statements” at the beginning of this annual report.
|
Item 6.
|
Directors, Senior Management and Employees
|
|
A.
|
Directors and Senior Management
|
Set forth below are
the names, ages and positions of our directors and executive officers. Our Board of Directors is elected annually, and each director
elected holds office for a three-year term or until his successor shall have been duly elected and qualified, except in the event
of his death, resignation, removal or the earlier termination of his term of office. Officers are elected from time to time by
vote of our Board of Directors and hold office until a successor is elected. The Board of Directors elected Mr. Michael Bodouroglou
as the Company’s Interim Chief Financial Officer effective as of February 9, 2016. The business address for each director
and executive officer is c/o Paragon Shipping Inc., 15 Karamanli Ave, GR 166 73, Voula, Greece.
Name
|
|
Age
|
|
Position
|
Michael Bodouroglou
|
|
61
|
|
Chairman, President, Chief Executive Officer, Interim Chief Financial Officer and Class C Director
|
George Skrimizeas
|
|
50
|
|
Chief Operating Officer
|
Nigel D. Cleave
|
|
57
|
|
Class B Director
|
Dimitrios Sigalas
|
|
71
|
|
Class A Director
|
George Xiradakis
|
|
51
|
|
Class A Director
|
Biographical information with respect to
each of our directors and executive officers is set forth below.
Michael Bodouroglou,
our founder, has been involved in the shipping industry in various capacities for more than 35 years. He has served as our
Chairman, President, Chief Executive Officer and director since our formation in April 2006. Mr. Bodouroglou has been appointed
to act as our Interim Chief Financial Officer since March 2015. Mr. Bodouroglou also serves as the Chairman, President and Chief
Executive Officer of Box Ships Inc., an affiliated company. Mr. Bodouroglou has owned and operated tanker and drybulk vessels since
1993. He is the founder of Allseas, which serves as the technical and commercial managing company to our fleet. Prior to 1993,
Mr. Bodouroglou was employed as a technical superintendent supervising both tanker and drybulk vessels for various shipping companies.
In 1977, Mr. Bodouroglou graduated with honors from the University of Newcastle-upon-Tyne in the United Kingdom with a Bachelor
of Science in Marine Engineering and in 1978 he was awarded a Master of Science in Naval Architecture. Mr. Bodouroglou is a member
of the Cayman Islands Shipowners' Advisory Council, the DNV GL Greek Committee and the Lloyd's Register Hellenic Advisory Committee.
He is also a member of China Classification Society Mediterranean Committee (CCS), the RINA Hellenic Advisory Committee (Registro
Italiano Navale) and the Greek Committee of Nippon Kaiji Kyokai (ClassNK). He is also member of the Board of the Swedish P&I
Club and the Union of Greek Shipowners. Mr. Bodouroglou is the Honorary Consul for the Slovak Republic in Piraeus, the President
of the Hellenic-Australian Business Council (HABC) and an Honorary Fellow of the Institute of Chartered Shipbrokers.
George Skrimizeas
has been our Chief Operating Officer since November 2006. Mr. Skrimizeas has been general manager of Allseas since May 2006. From
1996 to 2006, Mr. Skrimizeas has held various positions in Allseas, Eurocarriers and their affiliates, including general manager,
accounts and human resources manager, and finance and administration manager. Mr. Skrimizeas worked as accounts manager for
ChartWorld Shipping from 1995 to 1996 and as accounts and administration manager for Arktos Investments Inc. from 1994 to 1995.
From 1988 to 1994, Mr. Skrimizeas was accounts and administration manager for Candia Shipping Co. S.A. and accountant and chief
accounting officer—deputy human resources manager in their Athens, Romania, Hong Kong and London offices. Mr. Skrimizeas
received his Bachelor of Science degree in Business Administration from the University of Piraeus, Greece in 1988 and completed
the coursework necessary to obtain his Master of Science in Finance from the University of Leicester, in the United Kingdom, in
2002. Mr. Skrimizeas is a member of the Hellenic Chamber of Economics, the Hellenic Management Association and the Hellenic Association
of Chief Executive Officers.
Nigel D. Cleave
has served as a non-executive director of the Company since November 2006. In January 2011, Mr. Cleave was appointed to his current
position of chief executive officer of Videotel, the leading provider of e-learning maritime blended training systems. Prior to
this, Mr. Cleave held the position of chief executive officer of Elias Marine Consultants Limited, providing a broad range of professional
services. In 2006, Mr. Cleave was appointed chief executive officer of PB Maritime Services Limited, a ship management and marine
services company, having previously served as group managing director of Dobson Fleet Management Limited from 1993 to 2006, a ship
management company based in Cyprus. From 1991 to 1993, Mr. Cleave held the position of deputy general manager at Cyprus based ship
management company Hanseatic Shipping Co. Ltd. and from 1988 to 1991, held various fleet operation roles based in London. From
1975 to 1986, Mr. Cleave held various positions at The Cunard Steamship Company plc, including serving in the ranks of navigating
cadet officer to second officer, as well as financial and planning assistant, assistant to the group company secretary and assistant
operations manager. Mr. Cleave graduated from the Riversdale College of Technology in the United Kingdom with an O.N.C. in Nautical
Science and today is a Fellow of the Chartered Institute of Shipbrokers and the Chairman of the Cayman Islands Shipowners' Advisory
Council.
Dimitrios Sigalas
has served as a non-executive director of the Company since March 2008. Mr. Sigalas served as a maritime journalist for the Greek
daily newspaper “Kathimerini” from 1985 to 2008. Mr. Sigalas also served within the chartering department of Glafki
(Hellas) Maritime Corporation, an Athens based shipowning company, from 1972 to 2006. In 1980 Mr. Sigalas was appointed to Head
of the Dry and Tanker Chartering Department within Glafki (Hellas) Maritime Corporation. Mr. Sigalas graduated from Cardiff University,
Wales, with a diploma in Shipping. Mr. Sigalas is also a member of the Institute of Freight Forwarders UK, and has served in the
Merchant Navy after his graduation from the Navigation Academy of Hydra.
George Xiradakis
has served as a non-executive director of the Company since July 2008. In his banking career (1991-1998) he served as Vice President
of Credit Lyonnais Shipping Group and Head of European Shipping finance activities and as Head of Greek, Indian and Middle East
Shipping. Since 1999, Mr. Xiradakis has been the Managing Director of XRTC Business Consultants Ltd., a consulting firm providing
financial advice to the maritime industry. Mr. Xiradakis also provides financial advice to international shipping banks, shipping
companies, as well as international and state organizations. Mr. Xiradakis has a certificate as a Deck Officer from the Hellenic
Merchant Marine and he is a graduate of the Nautical Marine Academy of Aspropyrgos, Greece. He also holds a postgraduate Diploma
in Commercial Operation of Shipping from London Metropolitan University, formerly known as City of London Polytechnic, and a Master
of Science in Maritime Studies from the University of Wales College of Cardiff. Mr. Xiradakis is the President of the International
Propeller Club of the United States – International Port of Piraeus Board, General Secretary of the Association of Banking
and Shipping Executives of Hellenic Shipping, Board member of the Greek-China Friendship Association, and also a member of the
Mediterranean Committee of China Classification Society, HELMEPA, the Marine Club of Piraeus, and the Sino-Greek Chamber of Commerce.
In the past, Mr. Xiradakis also served as the Chairman and President of the National Center of Port Development in Greece and as
the Chairman and President of Hellenic Public Real Estate Corporation. Mr. Xiradakis was a member of the Board of Directors of
DryShips Inc. (NASDAQ: DRYS) and a member of the Board of Directors of Aries Maritime Transport.
Each
of our non-employee directors receives annual compensation in the aggregate amount of €45,000 per annum (or $48,992 based
on the Euro/U.S. dollar exchange rate of
€1.0000:$ 1.0887
as
of December 31, 2015), plus reimbursements for actual expenses incurred while acting in their capacity as a director. We do not
have a retirement plan for our officers or directors. In addition, each of our non-employee directors is also entitled to incentive
compensation, at the discretion of our Board of Directors.
Effective
January 1, 2011, we entered into an executive services agreement with Allseas, pursuant to which Allseas provides the services
of our executive officers, which include strategy, business development, marketing, finance and other services, who report directly
to our Board of Directors. Under the amended agreement, after January 1, 2013, Allseas was entitled to an executive services fee
of €2.7 million (or $2.9 million based on the Euro/U.S. dollar exchange rate of
€1.0000:$ 1.0887
as
of December 31, 2015) per annum, payable in equal monthly installments, plus incentive compensation. Effective January 1, 2014,
the executive services fee was adjusted to €2.9 million (or $3.2 million based on the Euro/U.S. dollar exchange rate of
€1.0000:$
1.0887
as of December 31, 2015). On May 18, 2015, we entered into an amended
and restated executive services agreement with Allseas, pursuant to which the duration of the agreement was converted from the
fixed term of five years to indefinite unless terminated in accordance with the provisions of the agreement. The fees under the
amended and restated executive services agreement remained unchanged. See “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party Transactions—Agreements with Our Managers—Executive Services Agreement.”
In order to incentivize
Allseas’ continued services to us, on November 10, 2009, we entered into a tripartite agreement with Allseas and Loretto,
a wholly-owned subsidiary of Allseas, pursuant to which in the event of a capital increase, an equity offering or the issuance
of common shares to a third party or third parties in the future, other than common shares issued pursuant to our equity incentive
plan, we have agreed to issue, at no cost to Loretto, additional common shares to Loretto in an amount equal to 2% of the total
number of common shares issued pursuant to such capital increase, equity offering or third party issuance, as applicable. As of
the date of this annual report, we had issued a total of 12,557 of our common shares to Loretto pursuant to this agreement. See
“Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreement with Loretto.”
Our Board of Directors
consists of the four directors named above. Our Board of Directors is elected annually, and each director elected holds office
for a three-year term or until his successor shall have been duly elected and qualified, except in the event of his death, resignation,
removal or the earlier termination of his term of office. The term of our Class A directors, Messrs. Sigalas and Xiradakis, expires
at our 2016 annual general meeting of shareholders. The term of our Class B director, Mr. Cleve, expires at our 2017 annual general
meeting of shareholders. The term of our Class C director, Mr. Bodouroglou, expires at our 2018 annual general meeting of shareholders.
In keeping with the
corporate governance rules of NASDAQ, from which we have derived our definition for determining whether a director is independent,
our Board of Directors has determined that each of Messrs. Cleave, Sigalas and Xiradakis, constituting a majority of our Board
of Directors, is independent. Under the corporate governance rules of NASDAQ, a director is not considered independent unless the
Board of Directors affirmatively determines that the director has no direct or indirect material relationship with us or our affiliates.
In making this determination, our Board of Directors has broadly considered all facts and circumstances the Board of Directors
deems relevant from the standpoint of the director and from that of persons or organizations with which the director has an affiliation.
We have established
an audit committee comprised of three directors, each of whom our Board of Directors has determined to be independent under Rule
10A-3 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as NASDAQ’s independence rules. Our
Board of Directors has also determined that each member of the audit committee has the financial experience required by Rule 5605
of NASDAQ’s Equity Rules and other relevant experience necessary to carry out the duties and responsibilities of our audit
committee. The members of the audit committee are Messrs. Cleave, Sigalas and Xiradakis. Mr. Cleave serves as the chairman of our
audit committee. Our audit committee has designated Mr. Xiradakis as our “audit committee financial expert,” as such
term is defined in Item 407 of SEC Regulation S-K promulgated by the SEC.
The audit committee
is responsible for reviewing our accounting controls and recommending to the Board of Directors the engagement of our outside auditors,
as well as for assisting our Board of Directors with its oversight responsibilities regarding the integrity of our financial statements,
our compliance with legal and regulatory requirements, our independent registered public accounting firm’s qualifications
and independence, and the performance of our internal audit functions.
We have established
a compensation committee comprised of three independent directors, which is responsible for recommending to the Board of Directors
our senior executive officers’ compensation and benefits. The members of the compensation committee are Messrs. Cleave, Sigalas
and Xiradakis.
We have also established
a nominating and corporate governance committee comprised of three independent directors, which is responsible for recommending
to the Board of Directors nominees for directors for appointment to board committees and advising the Board of Directors with regard
to corporate governance practices. The members of the nominating and corporate governance committee are Messrs. Cleave, Sigalas
and Xiradakis.
We do not maintain
any service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
|
D.
|
Crewing and Shore Employees
|
As of December 31,
2013, 2014 and 2015, we had two, two and one shoreside salaried employees, respectively. Allseas provides the services of our executive
officers, who report directly to our Board of Directors, pursuant to an executive services agreement entered into between the Company
and Allseas. As of each of December 31, 2013, 2014 and 2015, we had three shoreside executive officers. In addition, Mrs. Aikaterini
Stoupa serves as our Corporate Secretary.
Allseas is responsible
for recruiting, either directly or through a crewing agent, the senior officers and all other crew members for our vessels. Allseas
subcontracts crewing services relating to our vessels to Crewcare, a company beneficially owned by Mr. Bodouroglou. We believe
the streamlining of crewing arrangements helps to ensure that all our vessels will be crewed with experienced seamen that have
the qualifications and licenses required by international regulations and shipping conventions.
Each of our vessel-owning
subsidiaries has entered into manning agreements with Crewcare, pursuant to which Crewcare provides manning services and crew for
each of our vessels. As of December 31, 2013, 2014 and 2015, 252, 345 and 188 people were employed mainly by Crewcare to crew the
vessels in our fleet, respectively. We have not experienced any material work stoppages due to labor disagreements since we commenced
operations in April 2006.
With respect to the
total amount of common shares owned by all of our executive officers and directors, individually and as a group, see “Item
7. Major Stockholders and Related Party Transactions—A. Major Shareholders.”
Equity Incentive Plan
On October 11, 2006,
we adopted an equity incentive plan, as amended and restated, under which our and our affiliates’ officers, key employees,
directors and consultants are eligible to receive equity awards. On October 15, 2012, we further amended and restated our amended
and restated equity incentive plan to, among other things, increase the number of common shares reserved for issuance under the
plan by 4,466,733 common shares to 9,966,733 common shares, which, after the 10-for-1 reverse stock split discussed elsewhere in
this annual report, was adjusted to 996,673 common shares, subject to further adjustment in the event of any future distribution,
recapitalization, split, merger, consolidation or the like. On March 26, 2014, our Board of Directors approved to cancel the remaining
common shares reserved for issuance under the equity incentive plan.
In addition, on March
26, 2014, we adopted a new equity incentive plan, under which our and our affiliates’ officers, key employees, directors
and consultants are eligible to receive equity awards. A total of 2,000,000 common shares are reserved for issuance under the plan.
Our Board of Directors administers the plan. Under the terms of the plan, our Board of Directors is able to grant new options exercisable
at a price per common share to be determined by our Board of Directors but in no event less than fair market value of the common
share as of the date of grant. All options will expire ten years from the date of the grant. The plan also permits our Board of
Directors to award restricted stock, restricted stock units, stock appreciation rights and unrestricted stock. The plan will expire
on the tenth anniversary of the date the plan was adopted by our Board of Directors. As of the date of this annual report, we had
44,790 common shares remaining for issuance under the plan.
Options
There were no unvested
options to purchase common shares as of December 31, 2015. As of December 31, 2015, there were outstanding and exercisable 2,800
options to purchase common shares, with an exercise price of $4,560, which vested in 2010.
Non-vested Share Awards
All the non-vested
share awards granted by us are conditioned upon the holder's continued service as an employee of the Company or our Managers or
a director of the Company, as applicable, through the applicable vesting date.
Details of our non-vested
share awards granted subsequent to January 1, 2015 are noted below:
On February 26, 2015,
we granted an aggregate of 1,842 non-vested share awards to employees of Allseas, with a grant date fair value of $70.87 per share,
which will vest ratably over a two-year period commencing on December 31, 2015.
On March 17, 2015,
we granted an aggregate of 790 non-vested share awards to executive officers of Allseas, with a grant date fair value of $49.78
per share, which will vest ratably over a two-year period commencing on December 31, 2015.
For more information
on our non-vested share awards, refer to Note 12 to our consolidated financial statements included at the end of this annual report.
|
Item 7.
|
Major Shareholders and Related Party Transactions
|
As of May 9, 2016,
there were no beneficial owners of more than five percent of outstanding common shares that we are aware of.
As of May 9, 2016,
we had 48 shareholders of record, six of which were located in the United States and held an aggregate of 3,842,429 of our common
shares, representing 95.25% of our outstanding common shares. However, one of the U.S. shareholders of record is CEDE & CO.,
a nominee of The Depository Trust Company, which held 3,842,421 of our common shares as of May 9, 2016. Accordingly, we believe
that the shares held by CEDE & CO. include common shares beneficially owned by both holders in the United States and non-U.S.
beneficial owners. We are not aware of any arrangements the operation of which may at a subsequent date result in our change of
control.
|
B.
|
Related Party Transactions
|
Agreements with Our Managers
Management Agreements
Management Agreement with Allseas
We have entered into
separate management agreements with Allseas for each of the vessels in our operating fleet, pursuant to which Allseas is responsible
for the commercial and technical management functions of our fleet.
Our management agreements
with Allseas were amended and restated effective January 2, 2015. Effective from January 2, 2015, we and Allseas mutually agreed
to cease a portion of the services that were provided by Allseas under the terms of the original management agreements, which were
taken over by Seacommercial on substantially similar terms, as discussed further below. Allseas will be still responsible for the
technical management and certain aspects of commercial management including, among other things, operations and freight collection
services, obtaining insurance for our vessels and finance and accounting functions. Technical management services provided by Allseas
includes, among other things, arranging for and managing crews, vessel maintenance, dry-docking, repairs, insurance, maintaining
regulatory and classification society compliance and providing technical support. Our Chairman, President, Chief Executive Officer
and Interim Chief Financial Officer, Mr. Michael Bodouroglou, is the sole shareholder of Allseas.
Under the terms of
the amended and restated management agreements, Allseas has agreed to use its best efforts to provide management services upon
our request in a commercially reasonable manner and may provide these services directly to us or subcontract for certain of these
services with other entities. Allseas has in-house technical management capabilities, which it continues to expand. Allseas remains
responsible for any subcontracted services under the management agreements. We have agreed to indemnify Allseas for losses it incurs
in connection with the provision of these services, excluding losses caused by the gross negligence or willful misconduct of Allseas,
its employees, subcontractors or agents. Under the agreements, Allseas’ liability for losses caused solely by its gross negligence
or willful default, or that of its employees, agents or subcontractors, is limited to ten times the annual management fee payable
under the management agreements, except where such loss resulted from Allseas’ intentional or reckless act or omission.
Each amended and restated
management agreement has an initial term of five years and automatically renews for additional five-year periods, unless in each
case, at least 30 days’ advance written notice of termination is given by either party.
Under
the amended and restated management agreements, Allseas is entitled to a technical management fee of €666.45 per vessel, per
day (or $725.56 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887 as of December 31, 2015), for the twelve months
commencing June 1, 2015, payable on a monthly basis in advance, pro rata either for the calendar days these vessels are owned by
us if the vessels are second-hand purchases, or from the date of the memorandum of agreement if the vessels are purchased directly
from a shipyard. The technical management fee is adjusted annually based on the Eurozone inflation rate. Allseas is also entitled
to (i) a superintendent fee of €500 per day (or $544 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887 as
of December 31, 2015), for each day in excess of five days per calendar year for which a superintendent performed on site inspection;
and (ii) a lump sum fee of $15,000 for pre-delivery services, including legal fees, crewing and manning fees, manual preparation
costs and other expenses related to preparing the vessel for delivery, rendered during the period from the date a memorandum of
agreement is signed for the purchase of any such vessel until the delivery date. We have also entered into management agreements
with Allseas relating to the supervision of each our contracted newbuilding vessels, pursuant to which Allseas is entitled to:
(i) a flat fee of $375,000 per vessel for the first 12 month period commencing from the respective steel cutting date of each vessel
and thereafter the flat fee will be paid on a pro rata basis until the vessels’ delivery to us; (ii) a daily fee of €115
(or $125.20 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887
as of December
31, 2015) per vessel commencing from the date of the vessel’s shipbuilding contract until we accept delivery of the respective
vessel; and (iii) €500 (or $544 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887
as
of December 31, 2015) per day for each day in excess of five days per calendar year for which a superintendent performed on site
inspection. The term of the management agreements expires on the completion of the construction and delivery of the vessels to
us and the agreements may be terminated by either party upon 30 days’ advance written notice.
Additional vessels
that we may acquire in the future may be managed by Allseas or unaffiliated management companies.
Brokerage Agreement with Seacommercial
On January 2, 2015,
we entered into a Sale & Purchase (“S&P”) and Charter Brokerage Services Agreement with Seacommercial, a Liberian
company, pursuant to agreements with each vessel owning subsidiary. Mr. Michael Bodouroglou, the Company's Chairman, President,
Chief Executive Officer and Interim Chief Financial Officer, is the sole shareholder and Managing Director of Seacommercial. The
services provided under these agreements include, among other things, negotiating charters for our vessels, monitoring various
types of charters, monitoring the performance of our vessels under charter, locating, purchasing, financing and negotiating the
purchase and sale of our vessels. These agreements have an initial term of five years and automatically extend for successive five
year term, unless, in each case, at least 30 days' advance written notice of termination is given by either party. In addition,
the agreements may be terminated by either party for cause, as set forth in the agreements, on at least 30 days’ advance
written notice. The agreements provide for (i) a fee equal to 1.25% of the gross freight, demurrage and charter hire collected
from the employment of our vessels; and (ii) a fee equal to 1.00% calculated on the price as stated in the relevant memorandum
of agreement for any vessel bought or sold on our behalf.
Compensation Agreements
Compensation Agreement with Allseas
We
have entered into a compensation agreement with Allseas, which was amended and restated effective January 2, 2015, whereby in the
event that Allseas is involuntarily terminated as the manager of our fleet, we shall compensate Allseas with a sum equal to (i)
three years of management fees and commissions, based on the fleet at the time of termination; and (ii) €3.0 million (or $3.3
million based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887
as of December
31, 2015), provided that Allseas will not receive this termination fee in the event that we terminate the agreements with Allseas
for cause. The agreement shall continue for so long as Allseas serves as a manager of our fleet and may be terminated at any time
by the mutual agreement of the parties or by either party in the event of a material breach of the terms and provisions by the
other party.
Compensation Agreement with Seacommercial
On January 2, 2015,
we entered into a Compensation Agreement with Seacommercial, whereby in the event that Seacommercial is involuntarily terminated
as the broker of our fleet (including the termination by Seacommercial of the agreements for cause), we shall compensate Seacommercial
with an amount equal to the sum of three years of charter brokerage commissions, based on the fleet at the time of termination,
provided that Seacommercial will not receive this termination fee in the event that we terminate the agreements with Seacommercial
for cause.
Administrative Services Agreement
We have entered into
an administrative service agreement with Allseas, pursuant to which Allseas provides telecommunication services, secretarial and
reception personnel and equipment, security facilities, office cleaning services and information technology services. Allseas is
entitled to reimbursement on a quarterly basis of all costs and expenses incurred in connection with the provisions of its services
under the agreement.
Accounting Agreement
We
have entered into an accounting agreement with Allseas pursuant to which Allseas is entitled to a fee of €250,000 (or $272,175
based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887
as of December 31, 2015)
per annum, payable quarterly, for the provision of financial accounting services, and a fee of $30,000 per vessel per annum, payable
quarterly, for the provision of financial reporting services. On May 18, 2015, we entered into an amended and restated accounting
agreement with Allseas, pursuant to which the duration of the agreement was converted from the fixed term of one year to indefinite
unless terminated in accordance with the provisions of the agreement. The fees under the amended and restated accounting agreement
remained unchanged. If the respective agreement is terminated by Allseas either for “good reason” or as a result of
“change in control”, as such terms are defined in the agreement, or terminated by us without “cause”, as
defined in the agreement, Allseas will be entitled to receive (i) its fee payable through the “termination date”, as
defined in the agreement, and (ii) compensation equal to three years’ annual financial accounting services fee and financial
reporting fee then applicable.
Agreement with Loretto
We, Allseas, and Loretto,
a wholly-owned subsidiary of Allseas, have entered into a tripartite agreement, pursuant to which in the event of a capital increase,
an equity offering or the issuance of common shares to a third party or third parties in the future, other than common shares issued
pursuant to our equity incentive plan (as the same may be further amended, amended and restated, supplemented or otherwise modified)
or any future equity incentive plans we may adopt, we have agreed to issue, at no cost to Loretto, additional common shares in
an amount equal to 2% of the total number of common shares issued pursuant to such capital increase, equity offering or third party
issuance, as applicable. In accordance with the terms of the agreement, any common shares to be issued to Loretto under the agreement
may only be issued once the capital increase, equity offering or third party issuance giving rise to the obligation to issue shares
to Loretto under the agreement has closed and any applicable contingencies, forfeiture rights or conditions precedent relating
to such capital increase, equity offering or third party issuance have lapsed or expired or have been cancelled or terminated,
unless otherwise agreed by the mutual agreement of the parties. Accordingly, as of the date of this annual report, we have issued
to Loretto a total of 12,557 of our common shares.
Executive Services Agreement
We have entered into
an executive services agreement with Allseas, pursuant to which Allseas provides the services of our executive officers, which
include strategy, business development, marketing, finance and other services, who report directly to our Board of Directors. Allseas
is entitled to an executive services fee of €2.9 million (or $3.2 million based on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887
as of December 31, 2015) per annum. On May 18, 2015, we entered into an amended and restated executive services agreement with
Allseas, pursuant to which the duration of the agreement was converted from the fixed term of five years to indefinite unless terminated
in accordance with the provisions of the agreement. The fees under the amended and restated executive services agreement remained
unchanged. If the respective agreement is terminated by Allseas either for “good reason” or as a result of “change
in control”, as such terms are defined in the agreement, or terminated by us without “cause”, as defined in the
agreement, Allseas will be entitled to receive (i) its fee payable through the “termination date”, as defined in the
agreement, (ii) compensation equal to three years’ annual executive services fee then applicable, and (iii) 78,948 of our
common shares, issued for no consideration on the date of termination.
Manning Agreements
Allseas subcontracts
crewing services relating to our vessels to Crewcare, a Philippines company beneficially owned by our Chairman, President, Chief
Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou. Each of our vessel-owning subsidiaries has entered
into a manning agreement with Crewcare. Manning services are provided under the agreements in exchange for a monthly fee of $95
per seaman for all officers and crew who served on board each vessel, plus a recruitment fee of $120 per seaman, payable on a one-off
basis. In addition, the agreements also provide for a fee of $30 per seaman for in-house training and a fee of $50 per seaman for
extra in-house training. The fees under the manning agreements are subject to amendment on an annual basis.
Cadetship Program Agreement
On October 5, 2013,
each of our ship-owning subsidiaries entered into a cadetship program agreement with Crewcare, pursuant to which Crewcare, at its
own cost, is responsible for recruiting and training cadets to be assigned to the vessels. These services are being provided in
exchange for a lump sum fee of $5,000 per cadet employed on board the vessel for one-year on board training. The agreement has
an initial term of one year with the option to renew for one more year by mutual agreement.
Vessels Sale Agreement
On June 25, 2015, a
special committee consisting of our five independent directors (“Special Committee”) was assigned to investigate the
en block sale of four vessels of our operating fleet, the M/V Dream Seas, the M/V Gentle Seas, the M/V Peaceful Seas and the M/V
Friendly Seas, for the purpose of improving our liquidity. The Special Committee determined it was in the best interest of us and
our shareholders to sell the vessel-owning subsidiaries of these vessels to an entity controlled by Mr. Michael Bodouroglou, the
Company’s Chairman, President, Chief Executive Officer and Interim Chief Financial Officer. In July 2015, the Special Committee
and Mr. Bodouroglou agreed to the sale of all of the issued and registered shares of the respective vessel-owning subsidiaries
(“Sale Transaction”). The Sale Transaction was based on a mutually agreed value of $63.2 million for the four vessels
transferred, net of a commission of 1.00% over such value, paid to Seacommercial, resulting in net proceeds to us, after settlement
of all existing indebtedness under our credit facilities secured by the vessels, of $6.1 million. The sale and transfer of the
respective vessel-owning subsidiaries were concluded on July 27, 2015 (“Sale Transaction Date”). The Sale Transaction
did not include the transfer of any current assets and current liabilities existing prior to the Sale Transaction Date, apart from
lubricant inventories, directly related to the transfer of the vessels and cash received in advance relating to revenue generated
subsequent to the Sale Transaction Date.
Right of First Refusal
Our Chairman, President,
Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael Bodouroglou, has entered into a letter agreement with
us which includes a provision requiring Mr. Bodouroglou to use commercially reasonable efforts to cause each company controlled
by Mr. Bodouroglou to allow us to exercise a right of first refusal to acquire any drybulk carrier, after Mr. Bodouroglou or an
affiliated entity of his enters into an agreement that sets forth terms upon which he or it would acquire a drybulk carrier. Pursuant
to this letter agreement, Mr. Bodouroglou will notify a committee of our independent directors of any agreement that he or an affiliated
entity has entered into to purchase a drybulk carrier and will provide the committee of our independent directors a 7 calendar
day period in respect of a single vessel transaction, or a 14 calendar day period in respect of a multi-vessel transaction, from
the date that he delivers such notice to our audit committee, within which to decide whether or not to accept the opportunity and
nominate a subsidiary of ours to purchase the vessel or vessels, before Mr. Bodouroglou will accept the opportunity or offer
it to any of his other affiliates. The opportunity offered to us will be on no less favorable terms than those offered to Mr. Bodouroglou
and his affiliates. A committee of our independent directors will require a simple majority vote to accept or reject this offer.
Loan Agreement with Box Ships
On May 27, 2011, we
agreed to make available to Box Ships an unsecured loan of up to $30.0 million for the purpose of partly financing the acquisition
of Box Ships’ initial fleet and general corporate purposes, including meeting working capital needs, which Box Ships drew
in full in May 2011. On March 11, 2013, we agreed to amend the terms of the loan agreement. Pursuant to the amended agreement,
we agreed to extend the maturity of the loan for one year, from April 19, 2013 to April 19, 2014. During the remaining term of
the loan, Box Ships was required to make quarterly principal installment payments in the amount of $1.0 million each, commencing
on April 19, 2013, with a final balloon payment due on the maturity date. In consideration for the amendment of the loan agreement,
Box Ships agreed to pay an amendment fee of $65,000 and to increase the margin from 4.0% to 5.0%.
On
October 18, 2013, Box Ships proceeded with the full repayment of the outstanding balance of the respective loan.
Non-Competition Agreement with Box Ships
and Our Chairman, President, Chief Executive Officer and Interim Chief Financial Officer
We have entered into
an agreement with Box Ships and our Chairman, President, Chief Executive Officer and Interim Chief Financial Officer, Mr. Michael
Bodouroglou, reflecting, among others, for so long as (i) Mr. Bodouroglou is a director or executive officer of both our Company
and Box Ships and (ii) we own at least 5% of the total issued and outstanding common shares of Box Ships, Box Ships will not, directly
or indirectly, acquire or charter any drybulk carrier without our prior written consent, and we will not, directly or indirectly,
acquire or charter any containership without the prior written consent of Box Ships.
In addition, the agreement
also provides that for so long as Mr. Michael Bodouroglou is a member of the Board of Directors of Box Ships Inc., neither Mr.
Michael Bodouroglou nor any entity controlled by Mr. Michael Bodouroglou shall, directly or indirectly, acquire, charter, enter
into any proposal or agreement to acquire or charter or enter into contract for the construction of any containership vessel or
any business related to the ownership or operation of container vessels without the prior written consent of Box Ships.
Notwithstanding this
agreement, Box Ships may claim business opportunities that would benefit us, such as the hiring of employees, the acquisition of
other businesses, or the entry into joint ventures, and in each case other than business opportunities in the drybulk shipping
industry, and this could have a material adverse effect on our business, results of operations, cash flows, financial condition
and ability to pay dividends.
If we no longer beneficially
own shares representing at least 5% of the total issued and outstanding common shares of Box Ships or Mr. Michael Bodouroglou is
no longer a director or executive officer of both our Company and Box Ships, then our obligations under this agreement will terminate.
Vessel Option Agreement with Box Ships
We entered into an
agreement with Box Ships, pursuant to which we granted Box Ships the option to acquire our initial two 4,800 TEU containerships
under construction, both of which were scheduled to be delivered to us during the second quarter of 2014, by way of a novation
of the relevant construction contract from us at any time prior to the applicable vessel’s delivery to us, or purchase of
such vessel at any time after its delivery to us, so long as the vessel is owned by us at such time. In December 2013, with the
consent of Box Ships, we entered into an agreement with Ouhua to cancel one of our two 4,800 TEU containership newbuilding contracts
at no cost to us, to transfer the deposit to the remaining vessel and to reduce the contract price from the original $57.5 million
to $55.0 million. In addition, following Box Ships’ consent, on April 25, 2014, we entered into a memorandum of agreement
for the sale of the remaining 4,800 TEU containership newbuilding to an unrelated third party for $42.5 million, less 3% commission.
The sale of the vessel and its transfer to the new owners was concluded on May 23, 2014. Following such sale, the vessel option
agreement with Box Ships was terminated.
On April 25, 2014,
we entered into a memorandum of agreement for the sale of the remaining 4,800 TEU containership newbuilding to an unrelated third
party for $42.5 million, less 3% commission. In May 2014, we also agreed with the shipyard to reduce the contract price of the
respective vessel by $0.8 million. The sale of the vessel and its transfer to the new owners was concluded on May 23, 2014.
Registration Rights Agreements
In addition, in connection
with the private placement to Innovation Holdings that closed on December 24, 2012, we entered into a registration rights agreement,
dated as of December 24, 2012, with Innovation Holdings, pursuant to which we granted certain customary registration rights to
Innovation Holdings in respect of the common shares issued and sold to Innovation Holdings in the private placement. Under the
registration rights agreement, Innovation Holdings, or its transferees, have the right, subject to certain terms and conditions,
to require us to register under the Securities Act for offer and sale to the public, including by way of underwritten public offering,
the common shares issued and sold to Innovation Holdings pursuant to the purchase agreement we entered into with Innovation Holdings
in connection with the private placement.
Lease of Office Space
We
have entered into a rental agreement to lease office space in Athens, Greece, with Granitis Glyfada Real Estate Ltd., a company
beneficially owned by our Chairman, President, Chief Executive Officer and Interim Chief Financial Officer. The term of the lease
is for five years, expiring on September 30, 2017. Effective October 1, 2015, the monthly rental was €2,949 (or $3,211 based
on the Euro/U.S. dollar exchange rate of €1.0000:$1.0887
as of December 31, 2015), plus
3.6% tax, and thereafter would be adjusted annually for inflation increases in accordance with the official Greek inflation rate.
For more information
on our related party transactions, refer to Note 4 to our consolidated financial statements included at the end of this annual
report.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
Item 8.
|
Financial information
|
|
A.
|
Consolidated statements and other financial information
|
See “Item 18.
Financial Statements.”
Legal Proceedings
To our knowledge, we
are not currently a party to any material lawsuit that, if adversely determined, would have a material adverse effect on our financial
position, results of operations or liquidity. As such, we do not believe that pending legal proceedings, taken as a whole, should
have any significant impact on our financial statements. From time to time in the future, we may be subject to legal proceedings
and claims in the ordinary course of business, principally personal injury and property casualty claims. Those claims, even if
lacking merit, could result in the expenditure of significant financial and managerial resources. We have not been involved in
any legal proceedings which may have, or have had a significant effect on our financial position, results of operations or liquidity,
and we are not aware of any proceedings that are pending or threatened which may have a significant effect on our financial position,
results of operations or liquidity.
Dividend Policy
In light of the continued
decline of charter rates and the related decline in asset values in the drybulk market, as well as a highly challenged financing
environment, our Board of Directors, beginning with the first quarter of 2011, has suspended payment of our common share quarterly
dividend. Our dividend policy will be assessed by the Board of Directors from time to time. The suspension allows us to retain
cash and increase our liquidity so we are in a better position to capitalize on investment opportunities during the weakened market
conditions. Until market conditions improve, it is unlikely that we will reinstate the payment of dividends. In addition, other
external factors, such as our lenders imposing restrictions on our ability to pay dividends under the terms of our debt agreements,
may limit our ability to pay dividends.
Our previous dividend
policy was to declare and pay quarterly dividends to the holders of our common shares in March, May, August and November of each
year in amounts substantially equal to our available cash flow from operations during the previous quarter, less cash expenses
for that quarter (principally vessel operating expenses and interest expense) and any reserves our Board of Directors determined
we should maintain for reinvestment in our business to cover, among other things, dry-docking, intermediate and special surveys,
liabilities and other obligations, interest expense and debt amortization, acquisitions of additional assets and working capital.
The declaration and
payment of any dividend is subject to the discretion of our Board of Directors. The timing and amount of future dividend payments,
if any, will depend on our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, the
restrictions in our debt agreements, the provisions of Marshall Islands law affecting the payment of dividends and other factors.
Because we are a holding
company with no material assets other than the shares of our subsidiaries, which will directly own the vessels in our fleet, our
ability to pay dividends will depend on the earnings and cash flow of our subsidiaries and their ability to pay dividends to us.
We cannot assure you that, after the expiration or termination of our charters, we will have any sources of income from which dividends
may be paid
.
We believe that, under
current law any future dividend payments we make from our then current and accumulated earnings and profits, as determined under
U.S. federal income tax principles, would constitute “qualified dividend income” and, as a consequence, non-corporate
U.S. shareholders would generally be subject to the same preferential U.S. federal income tax rates applicable to long-term capital
gains with respect to such dividend payments. Distributions in excess of our earnings and profits, as so calculated, will be treated
first as a non-taxable return of capital to the extent of a U.S. shareholder’s tax basis in its common shares on a dollar-for-dollar
basis and thereafter as a capital gain. Please see “Item 10. Additional Information—E. Taxation” for additional
information relating to the tax treatment of our dividend payments.
There have been no
significant changes since the date of the annual consolidated financial statements included in this annual report.
Our
common shares commenced trading on the NASDAQ Global Market on August 9, 2007 under the symbol “PRGN.” On March 24,
2010, our common shares stopped trading on the NASDAQ Global Market and commenced trading on the NYSE under the symbol “PRGN”.
On April 19, 2013, our common shares stopped trading on the NYSE and commenced trading on the NASDAQ Global Market under the symbol
“PRGN.” In addition, our Notes started trading on the NASDAQ
Global Market
on September 5, 2014 under the ticker symbol “PRGNL”. I
n November 2015, we transferred the listing of our common
shares to the NASDAQ Capital Market from the NASDAQ Global Market.
The
following table sets forth the high and low closing prices for each of the periods indicated for our shares of common stock, as
adjusted for the 38-for-1 reverse stock split effective March 1, 2016.
For the year ended December 31,
|
|
High
|
|
|
Low
|
|
2011
|
|
$
|
1,307.20
|
|
|
$
|
224.20
|
|
2012
|
|
$
|
361.00
|
|
|
$
|
74.86
|
|
2013
|
|
$
|
346.18
|
|
|
$
|
97.28
|
|
2014
|
|
$
|
307.42
|
|
|
$
|
87.78
|
|
2015
|
|
$
|
101.08
|
|
|
$
|
3.42
|
|
For the quarter ended
|
|
High
|
|
|
Low
|
|
March 31, 2014
|
|
$
|
307.42
|
|
|
$
|
229.14
|
|
June 30, 2014
|
|
$
|
262.20
|
|
|
$
|
188.48
|
|
September 30, 2014
|
|
$
|
226.48
|
|
|
$
|
151.62
|
|
December 31, 2014
|
|
$
|
144.78
|
|
|
$
|
87.78
|
|
March 31, 2015
|
|
$
|
101.08
|
|
|
$
|
36.10
|
|
June 30, 2015
|
|
$
|
34.20
|
|
|
$
|
25.84
|
|
September 30, 2015
|
|
$
|
43.70
|
|
|
$
|
12.16
|
|
December 31, 2015
|
|
$
|
12.16
|
|
|
$
|
3.42
|
|
March 31, 2016
|
|
$
|
6.08
|
|
|
$
|
0.59
|
|
For the month ended
|
|
High
|
|
|
Low
|
|
November 2015
|
|
$
|
9.88
|
|
|
$
|
4.18
|
|
December 2015
|
|
$
|
8.36
|
|
|
$
|
3.42
|
|
January 2016
|
|
$
|
6.08
|
|
|
$
|
3.42
|
|
February 2016
|
|
$
|
3.04
|
|
|
$
|
1.52
|
|
March 2016
|
|
$
|
3.62
|
|
|
$
|
0.59
|
|
April 2016
|
|
$
|
2.64
|
|
|
$
|
0.26
|
|
May 2016
(1)
|
|
$
|
1.51
|
|
|
$
|
1.90
|
|
|
(1)
|
Through and including May 9, 2016.
|
|
Item 10.
|
Additional Information
|
Not applicable.
|
B.
|
Memorandum and articles of association
|
Our Amended and Restated
Articles of Incorporation were filed as Exhibit 1 to our Report on Form 6-K filed with the SEC on April 21, 2010 and incorporated
by reference into Exhibit 3.1 to our Registration Statement on Form F-3 (Registration No. 333-164370) declared effective by the
SEC on February 5, 2010. We filed Articles of Amendment to our amended and restated articles of incorporation on Form 6-K filed
with the SEC on November 6, 2012, which were incorporated by reference into our Registration Statement on Form F-3 (Registration
No. 333-164370), pursuant to which we effectuated a 10-for-1 reverse stock split of our issued and outstanding common shares, par
value $0.001 per share, effective as of the close of trading on the NYSE on November 5, 2012. Our common shares commenced trading
on the NYSE on a split-adjusted basis upon the open of trading on November 6, 2012. The reverse stock split was approved by shareholders
at our annual general meeting of shareholders held on October 24, 2012. The reverse stock split reduced the number of our issued
and outstanding common shares from approximately 61.0 million to approximately 6.1 million and affected all issued and outstanding
common shares, as well as common shares underlying stock options outstanding immediately prior to the effectiveness of the reverse
stock split. The number of our authorized common shares was not affected by the reverse split. No fractional shares were issued
in connection with the reverse stock split. We again filed Articles of Amendment to our Amended and Restated Articles of Incorporation,
following approval by our shareholders, pursuant to which we effectuated a 38-for-1 reverse stock split of our issued and outstanding
common shares, par value $0.001 per share, effective as of March 1, 2016. As a result of the reverse stock split, every 38 shares
of the Company’s pre-reverse split class A common stock was combined and reclassified into one share of the Company’s
class A common stock. The number of our authorized common shares was not affected by the reverse split. No fractional shares were
issued in connection with the reverse stock split.
Our Amended and Restated
Bylaws were filed as Exhibit 99.1 to our Report on Form 6-K filed with the SEC on February 29, 2016. The information contained
in these exhibits is incorporated by reference herein.
A description of the
material terms of our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws is included in the section
entitled “Description of Capital Stock” in our Registration Statement on Form F-3 (Registration No. 333-152979) and
is incorporated by reference herein, provided that since the date of that Registration Statement, certain information regarding
our authorized capitalization, stockholder rights agreement and the listing of our common shares has been amended as follows:
Authorized Capitalization
Under our amended and
restated articles of incorporation, our authorized capital stock consists of 780,000,000 registered shares of stock, of which:
|
·
|
750,000,000 shares are designated as Class A common stock, par value $0.001 per share;
|
|
·
|
5,000,000 shares are designated as Class B Common stock, par value $0.001 per share;
|
|
·
|
25,000,000 shares are designated as preferred stock, par value $0.001 per share, of which 1,000,000
shares are designated Series A Participating Preferred Stock in connection with the adoption of our Stockholders Rights Agreement
described under “—Stockholders Rights Agreement.”
|
As of May 9, 2016,
we had issued and outstanding 4,033,849 common shares.
Stockholder Rights Plan
We adopted a stockholder
rights plan on January 4, 2008, and declared a dividend distribution of one preferred stock purchase right to purchase one one-thousandth
of our Series A Participating Preferred Stock for each outstanding share of our common stock, par value $0.001 per share to shareholders
of record at the close of business on February 1, 2008. Each right entitles the registered holder, upon the occurrence of certain
events, to purchase from us one one-thousandth of a share of Series A Participating Preferred Stock at an exercise price of $75,
subject to adjustment, or additional common shares. The rights will expire on the earliest of (i) February 1, 2018 or (ii) redemption
or exchange of the rights. The plan was designed to enable us to protect shareholder interests in the event that an unsolicited
attempt is made for a business combination with or takeover of us. We believe that the shareholder rights plan should enhance the
Board of Directors' negotiating power on behalf of shareholders in the event of a coercive offer or proposal. We are not currently
aware of any such offers or proposals and adopted the plan as a matter of prudent corporate governance. On December 16, 2009, we
amended the plan to exclude Innovation Holdings, Michael Bodouroglou, and their affiliated entities, from the definition of “acquiring
person.”
Listing
Our
common shares and Notes are listed on the NASDAQ Capital Market and NASDAQ Global Market under the symbols “PRGN” and
“PRGNL”, respectively.
We refer you to “Item
5. Operating and Financial Review and Prospects—B. Liquidity and capital resources—Loan and Credit Facilities”
and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” for a discussion
of our material agreements that we have entered into during the two-year period immediately preceding the date of this annual report.
Other than the agreements
discussed in the aforementioned sections of this annual report, we have no material contracts, other than contracts entered into
in the ordinary course of business, to which we or any member of the group is a party.
Under Marshall Islands
law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to non-resident holders of our common stock.
MATERIAL U.S. AND MARSHALL ISLANDS INCOME
TAX CONSIDERATIONS
The following is a
discussion of the material U.S. and Marshall Islands income tax considerations applicable to us, and to a U.S. Holder and a Non-U.S.
Holder, each as defined below, of the ownership of our common shares. This discussion does not purport to deal with the tax consequences
of owning our common shares to all categories of shareholders, some of which, such as dealers in securities, investors whose functional
currency is not the U.S. dollar and investors that own, actually or under applicable constructive ownership rules, 10% or more
of our common shares, may be subject to special rules. This discussion deals only with shareholders who hold our common shares
as capital assets. Shareholders are encouraged to consult their own tax advisors concerning the overall tax consequences arising
in their particular situation under U.S. federal, state, local or foreign law of the ownership of our common shares.
Marshall Islands Tax Considerations
We are incorporated
in the Republic of the Marshall Islands. Under current Marshall Islands law, we are not subject to tax on income or capital gains,
and no Marshall Islands withholding tax will be imposed upon payments of dividends by us to our shareholders.
U.S. Federal Income Tax Considerations
The following are the
material U.S. federal income tax consequences to us of our activities and to U.S. Holders and Non-U.S. Holders, each as defined
below, of the ownership of our common shares. The following discussion of U.S. federal income tax matters is based on the Code,
judicial decisions, administrative pronouncements, and existing and proposed regulations issued by the U.S. Department of the Treasury,
or the Treasury Regulations, all of which are subject to change, possibly with retroactive effect. The discussion below is based,
in part, on the description of our business as provided above and assumes that we conduct our business as described therein. References
in the following discussion to the “Company,” “we” and “us” are to Paragon Shipping Inc.
and its subsidiaries on a consolidated basis.
U.S. Federal Income Taxation of the
Company
Taxation of Operating Income: In
General
Unless exempt from
U.S. federal income taxation under Code section 883 (discussed below), a foreign corporation is subject to U.S. federal income
tax on income that is derived from (i) the use of vessels, (ii) the hiring or leasing of vessels for use on a time, voyage or bareboat
charter basis, (iii) the participation in a pool, partnership, strategic alliance, joint operating agreement, code-sharing arrangements
or other joint venture it directly or indirectly owns or participates in that generates such income, or (iv) the performance of
services directly related to those uses (collectively, “shipping income”). A foreign corporation pays U.S. tax on its
shipping income (if not exempt) to the extent that such income is derived from sources within the United States.
Shipping income attributable
to transportation that both begins and ends in the United States is considered to be 100% from sources within the United States.
We are not permitted by law to engage in transportation that would produce income considered to be 100% from sources within the
United States.
Shipping income attributable
to transportation exclusively between non-U.S. ports is considered to be 100% derived from sources outside the United States. Shipping
income derived from sources will not be subject to any U.S. federal income tax. Much of our income consists of such non-U.S. source
income.
In the case of transportation
that either begins or ends, but that does not both begin and end, in the United States, 50% of the income generated by such transportation
is considered to be shipping income from sources within the United States. Some of our income will consist of such income, which
we refer to as our “U.S.-source shipping income”.
In the absence of exemption
from tax under Section 883 (discussed in the next section), our gross U.S.-source shipping income (without allowances for
deductions) would be subject to a 4% tax, as discussed further below.
Exemption of Operating Income from
U.S. Federal Income Taxation
Under Section 883,
our U.S.-source shipping income will be exempt from U.S. federal income taxation in any taxable year if:
|
(i)
|
We are organized in a “qualified foreign country” – a foreign country that grants
to U.S. corporations an exemption from taxation that is “equivalent” to the exemption that the U.S. grants to foreign
corporations under Section 883, (the “Country of Organization Requirement”); and
|
|
(ii)
|
We can satisfy either of the following stock ownership requirements for more than half the days
during the taxable year:
|
|
·
|
one or more classes of our stock are “primarily and regularly” traded on an established
securities market located in the United States or a qualified foreign country, (the “Publicly-Traded Test”); or
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more than 50% of our stock, in terms of value, is beneficially owned by individuals who are residents
of a qualified foreign country and/or foreign corporations that satisfy the Country of Organization requirement and the Publicly-Traded
test, (the “50% Ownership Test”).
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Country of Organization
Requirement.
The U.S. recognizes the Marshall Islands and Liberia, the jurisdictions where we and our ship-owning subsidiaries
are incorporated, as granting an “equivalent exemption” to U.S. corporations. Accordingly, we and our ship-owning subsidiaries
satisfy the Country of Organization Requirement. Therefore, we will be exempt from U.S. federal income taxation on our U.S.-source
shipping income if we satisfy either the 50% Ownership Test or the Publicly-Traded Test.
The 50% Ownership
Test.
We did not satisfy the 50% Ownership Test for the 2015 Taxable Year.
The Publicly-Traded
Test
. As noted above, to satisfy the Publicly Traded Test a corporation’s stock must be “primarily traded”
and “regularly traded” on an established securities market.
Stock of a foreign
corporation will be considered to be “primarily traded” on an established securities market (under Treasury Regulations
issued under Section 883) if the number of shares of each class of stock that are traded during any taxable year on all established
securities markets in a country exceeds the number of shares of each such class that are traded during that year on established
securities markets in any other country. During 2014, our common shares were “primarily traded” on the NASDAQ.
Stock of a foreign
corporation will be considered to be “regularly traded” on an established securities market if one or more classes
of its stock representing more than 50% of its outstanding shares (by total combined voting power and by total value), is listed
on the established securities market (the “listing requirement”). For each class of stock relied upon to meet the listing
requirement: (i) such class must be traded on the market, other than in minimal quantities, on at least 60 days during
the taxable year or 1/6 of the days in a short taxable year, (the “trading frequency test”) and (ii) the aggregate
number of shares of such class of stock traded on such market must equal at least 10% of the average number of shares of such class
of stock outstanding during such year (as appropriately adjusted in the case of a short taxable year), (the “trading volume
test”). Treasury Regulations also provide that the trading frequency and trading volume tests will be deemed satisfied by
a class of stock that is traded on an established securities market and regularly quoted by dealers making a market in such stock.
We believe our common shares will meet the trading frequency test and the trading volume test (or will be deemed to meet these
tests) and, therefore, satisfy the regularly-traded test.
Even if we meet the
regularly-traded test as described above, our common shares will not be treated as “regularly traded” on an established
securities market (and therefore we will not satisfy the “Publicly Traded” test) for any taxable year in which 50%
or more of our outstanding common shares are owned, actually or constructively (under specified stock attribution rules), on more
than half the days during the taxable year by persons who each own 5% or more of our common shares (the “5% Shareholder Override
Rule”).
In determining the
persons who own 5% or more of our outstanding common shares (our “5% Shareholders”) Treasury Regulations permit us
to rely on Schedule 13G and Schedule 13D filings with the SEC to identify persons who have a 5% or more beneficial interest
in our common shares.
In the event the 5%
Shareholder Override Rule is triggered, it nevertheless will not apply if we can establish, in accordance with specified ownership
certification procedures, that within the group of 5% Shareholders there are sufficient “qualified shareholders” (shareholders
from a qualified foreign country) to preclude “non-qualified shareholders” in such group from owning (actually or constructively)
50% or more of our common shares for more than half the number of days during the taxable year.
We believe that during
2015 we satisfied the regularly-traded test (and were not subject to the 5% Shareholder Override Rule) and, therefore, we met the
Publicly-Traded Test. Therefore, we believe that we were exempt from U.S. federal income tax on our U.S. source shipping income
for the 2015 taxable year. However, the Publicly Traded test is applied on a yearly basis and there is no assurance that we will
qualify for the Section 883 exemption for a future taxable year. For example, if during a particular taxable year 5% Shareholders
were to own 50% or more of our outstanding common shares on more than half the days of that taxable year, we would become subject
to the 5% Shareholder Override Rule and we would not satisfy the Publicly-Traded Test or qualify for the Section 883 exemption
unless we could establish that during the year there were sufficient qualified 5% Shareholders to preclude nonqualified shareholders
from owning 50% or more of our common shares on more than half the days. To establish that, we and our shareholders would have
to satisfy substantiation requirements regarding the identity of our shareholders. Because those requirements are onerous, there
is no assurance that we would be able to satisfy them.
Taxation in Absence of Exemption
under Section 883
4% tax on gross
U.S.-source income.
If the tax exemption of Section 883 is unavailable, our U.S.-source shipping income (if not considered
to be “effectively connected” with the conduct of a U.S. trade or business, as discussed below) would be subject to
a 4% tax imposed by Section 887 of the Code on a gross basis, without the benefit of deductions, which we refer to as the
“4% gross tax regime.” Since under the sourcing rules described above, no more than 50% of our shipping income would
be treated as U.S.-source shipping income, under the 4% gross tax regime the maximum effective rate of U.S. federal income tax
on our shipping income would never exceed 2%. In the year ended December 31, 2015, approximately 13.0% of our shipping income was
attributable to the transportation of cargoes either to or from a U.S. port; accordingly, 50% of that income, or approximately
6.5% of our shipping income was U.S.-source shipping income. In the absence of exemption from tax under Section 883, we would have
been subject to a 4% tax on our gross U.S.-source shipping income (or a tax of approximately $0.09 million) for the year ended
December 31, 2015.
Tax on effectively-connected
income.
If the exemption under Section 883 is unavailable and if our U.S.-source shipping income is considered to be “effectively
connected” with the conduct of a U.S. trade or business, as described below, any such “effectively connected”
U.S.-source shipping income, net of applicable deductions, would be subject to the U.S. federal corporate income tax currently
imposed at rates of up to 35% (rather than to the 4% gross tax regime). In addition, we may be subject to the 30% “branch
profits” tax on earnings “effectively connected” with the conduct of such trade or business, as determined after
allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of our U.S. trade or
business. (However, under all of our charter party agreements, these taxes would be recovered from the charterers.)
Our U.S.-source shipping
income would be considered “effectively connected” with the conduct of a U.S. trade or business only if:
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we have, or are considered to have, a fixed place of business in the United States involved in
the earning of shipping income; and
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substantially all of our U.S.-source shipping income is attributable to regularly scheduled transportation,
such as the operation of a vessel that follows a published schedule with repeated sailings at regular intervals between the same
points for voyages that begin or end in the United States.
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We do not intend to
have any vessel operating to or from the United States on a regularly scheduled basis. Based on the foregoing and on the expected
mode of our shipping operations and other activities, we believe that none of our U.S.-source shipping income will be “effectively
connected” with the conduct of a U.S. trade or business.
U.S. Taxation of Gain on Sale of
Vessels
Regardless of whether
we qualify for exemption under Section 883, we will not be subject to U.S. federal income tax with respect to gain realized
on a sale of a vessel, provided the sale is considered to occur outside of the United States under U.S. federal income tax principles.
In general, a sale of a vessel will be considered to occur outside of the United States for this purpose if title to the vessel,
and risk of loss with respect to the vessel, pass to the buyer outside of the United States. It is expected that any sale of a
vessel by us will be considered to occur outside of the United States.
U.S. Federal Income Taxation of U.S.
Holders
As used herein, the
term “U.S. Holder” means a beneficial owner of our common shares that is a U.S. citizen or resident, U.S. corporation
or other U.S. entity taxable as a corporation, an estate the income of which is subject to U.S. federal income taxation regardless
of its source, or a trust if a court within the United States is able to exercise primary jurisdiction over the administration
of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
If a partnership holds
our common shares, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities
of the partnership. If you are a partner in a partnership holding our common shares, you are encouraged to consult your tax advisor.
Distributions
Subject to the discussion
of PFICs below, any distributions made by us with respect to our common shares to a U.S. Holder will generally constitute dividends,
which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent
of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess
of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax
basis in its common shares on a dollar-for-dollar basis, and thereafter as capital gain. Because we are not a U.S. corporation,
U.S. Holders that are corporations will not be entitled to claim a dividends received deduction with respect to any distributions
they receive from us. Dividends paid with respect to our common shares will generally be treated as “passive category income”
or, in the case of certain types of U.S. Holders, “general category income” for purposes of computing allowable foreign
tax credits for U.S. foreign tax credit purposes.
Dividends paid on our
common shares to a U.S. Holder who is an individual, trust or estate, or a U.S. Individual Holder, will generally be treated as
“qualified dividend income” that is taxable to such U.S. Individual Holder at preferential tax rates provided that:
(1) we are not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (which
we do not believe we are, have been or will be); (2) the common shares are readily tradable on an established securities market
in the United States (such as the NASDAQ, on which our common shares are listed), and (3) the U.S. Individual Holder has owned
the common shares for more than 60 days in the 121-day period beginning 60 days before the date on which the common shares
become ex-dividend. There is no assurance that any dividends paid on our common shares will be eligible for these preferential
rates in the hands of a U.S. Individual Holder.
Special rules may apply
to any “extraordinary dividend,” generally a dividend in an amount which is equal to or in excess of 10% of a shareholder’s
adjusted basis (or fair market value in certain circumstances) in its common shares. If we pay an “extraordinary dividend”
on our common shares and such dividend is treated as “qualified dividend income,” then any loss derived by a U.S. Individual
Holder from the sale or exchange of such common shares will be treated as long-term capital loss to the extent of such dividend.
Sale, Exchange or other Disposition
of Our Common Shares
Assuming we do not
constitute a PFIC for any taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other
disposition of our common shares in an amount equal to the difference between the amount realized by the U.S. Holder from such
sale, exchange or other disposition and the U.S. Holder’s tax basis in such common shares. Such gain or loss will be treated
as long-term capital gain or loss if the U.S. Holder’s holding period in such common shares is greater than one year at the
time of the sale, exchange or other disposition. Otherwise, such gain or loss will be treated as short-term capital gain or loss.
Such capital gain or loss will generally be treated as U.S. source income or loss, as applicable, for U.S. foreign tax credit purposes.
A U.S. Individual Holder’s ability to deduct capital losses is subject to certain limitations.
Passive Foreign Investment Company
Status and Significant Tax Consequences
Special U.S. federal
income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a PFIC for U.S. federal income
tax purposes. In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S.
Holder held our common shares, either:
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at least 75% of our gross income (regardless of geographical source) for such taxable year consists
of passive income (
e.g.
, dividends, interest, capital gains, and rents derived other than in the active conduct of a rental
business); or
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at least 50% of the average value of the assets held by the corporation during such taxable year
produce, or are held for the production of, passive income (including cash).
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For purposes of determining
whether we are a PFIC, we will be treated as earning and owning our proportionate share of the income and assets, respectively,
of any of our subsidiary corporations in which we own at least 25% of the value of the subsidiary’s stock. Income earned,
or deemed earned, by us in connection with the performance of services would not constitute passive income. By contrast, rental
income would generally constitute passive income unless we were treated under specific rules as deriving our rental income in the
active conduct of a trade or business.
Based on our current
operations and future projections, we do not believe that we have been or are, nor do we expect to become, a PFIC with respect
to any taxable year. Although there is no legal authority directly on point, and we are not relying upon an opinion of counsel
on this issue, our belief is based principally on the position that, for purposes of determining whether we are a PFIC, the gross
income we derive, or are deemed to derive, from the time chartering and voyage chartering activities of our wholly-owned subsidiaries
should constitute services income, rather than rental income. Correspondingly, such income should not constitute passive income,
and the assets that we or our wholly-owned subsidiaries own and operate in connection with the production of such income, in particular,
the vessels, should not constitute assets that produce, or are held for the production of, passive income. We believe there is
substantial legal authority supporting our position consisting of case law and IRS pronouncements concerning the characterization
of income derived from time charters and voyage charters as services income for other tax purposes. However, there is also authority
which characterizes time charter income as rental income rather than services income for other tax purposes. In the absence of
any legal authority specifically relating to the statutory provisions governing PFICs, the IRS or a court could disagree with our
position. In addition, although we intend to conduct our affairs in a manner that prevents us from being classified as a PFIC with
respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future.
As discussed more fully
below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to different taxation rules depending
on whether the U.S. Holder makes an election to treat us as a “qualified electing fund,” (a “QEF election”).
As an alternative to making a QEF election, a U.S. Holder could elect to mark our common shares to market (a “mark-to-market
election”), as discussed below.
If we were to be treated
as a PFIC,
a U.S. Holder of our shares would also be required to file an annual information return
containing information regarding the PFIC as required by applicable Treasury Regulations
, as discussed below
.
Under specified constructive
ownership rules, if we are treated as a PFIC, then a U.S. Holder will be treated as owning its proportionate share of the stock
of any our subsidiaries that are treated as PFICs. Such a U.S. Holder would be permitted to make a QEF election in respect of any
such PFIC subsidiary, so long as we timely provide the information necessary for such election, which we currently intend to do
in such circumstances. However, such a U.S. Holder would not be permitted to make a mark-to-market election in respect of such
U.S. Holder’s indirect interest in any such PFIC subsidiary. The application of the PFIC rules is complicated and U.S. Holders
are encouraged to consult with their tax advisors regarding the application of such rules in their particular circumstances.
Taxation of U.S. Holders Making a
Timely QEF Election
If a U.S. Holder makes
a timely QEF election (an “Electing Holder”), the Electing Holder must report each year for U.S. federal income tax
purposes its pro rata share of our ordinary earnings and net capital gain, if any, for our taxable year that ends with or within
the taxable year of such Electing Holder, regardless of whether or not distributions were received from us by the Electing Holder.
The Electing Holder’s adjusted tax basis in the common shares would be increased to reflect taxed but undistributed earnings
and profits. Distributions of earnings and profits previously taxed will result in a corresponding reduction in the adjusted tax
basis in the common shares and will not be taxed again once distributed. An Electing Holder would generally recognize capital gain
or loss on the sale, exchange or other disposition of our common shares. A U.S. Holder would make a QEF election with respect to
any taxable year that we are a PFIC by filing IRS Form 8621 with its U.S. federal income tax return. If we were aware that
we were to be treated as a PFIC for any taxable year, we would provide each U.S. Holder with all necessary information in order
to make the QEF election described above. A U.S. Holder who is treated as constructively owning shares in any of our subsidiaries
which are treated as PFICs would be required to make a separate QEF election with respect to each such PFIC subsidiary.
Taxation of U.S. Holders Making a
Mark-to-Market Election
Alternatively, if we
were to be treated as a PFIC for any taxable year and our common shares are treated as “marketable stock,” as we believe
is the case, a U.S. Holder would be allowed to make a mark-to-market election with respect to our common shares, provided the U.S.
Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If
that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the
fair market value of the common shares at the end of the taxable year over such U.S. Holder’s adjusted tax basis in the common
shares. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted
tax basis in the common shares over its fair market value at the end of the taxable year, but only to the extent of the net amount
from those shares previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in
its common shares would be adjusted to reflect any such income or loss amounts. Gain realized on the sale, exchange or other disposition
of our common shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the
common shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously
included by the U.S. Holder. Under existing interpretations of the PFIC rules, a mark-to-market election would not be available
for any of our subsidiaries that are treated as PFICs.
Taxation of U.S. Holders Not Making
a Timely QEF or Mark-to-Market Election
Finally, if we were
to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a mark-to-market election
for such taxable year (a “Non-Electing Holder”) would be subject to special rules with respect to: (1) any excess
distribution (
i.e.
, the portion of any distributions received by the Non-Electing Holder on our common shares in a taxable
year in excess of 125% of the average annual distributions received by such Non-Electing Holder in the three preceding taxable
years, or, if shorter, the Non-Electing Holder’s holding period for the common shares), and (2) any gain realized on the
sale, exchange or other disposition of our common shares. Under these special rules:
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the excess distribution or gain would be allocated ratably over the Non-Electing Holders’
aggregate holding period for the common shares;
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the amount allocated to the current taxable year and any taxable year before we became a PFIC would
be taxed as ordinary income; and
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the amount allocated to each of the other taxable years would be subject to U.S. federal income
tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed
tax deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.
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These penalties would
not apply to a pension or profit sharing trust or other tax-exempt organization that did not borrow funds or otherwise utilize
leverage in connection with its acquisition of our common shares. If a Non-Electing Holder who is an individual dies while owning
our common shares, such Non-Electing Holder’s successor generally would not receive a step-up in tax basis with respect to
such common shares.
U.S. Federal Income Taxation of Non-U.S.
Holders
A beneficial owner
of common shares that is not a U.S. Holder (other than a foreign partnership) is referred to herein as a Non-U.S. Holder.
Dividends on Common Shares
A Non-U.S. Holder generally
will not be subject to U.S. federal income or withholding tax on dividends received from us with respect to our common shares,
unless that income is “effectively connected” with such Non-U.S. Holder’s conduct of a trade or business in the
United States. If the Non-U.S. Holder is entitled to the benefits of a U.S. income tax treaty with respect to those dividends,
such income is subject to U.S. federal income tax only if it is attributable to a permanent establishment maintained by such Non-U.S.
Holder in the United States.
Sale, Exchange or Other Disposition
of Our Common Shares
Non-U.S. Holders generally
will not be subject to U.S. federal income or withholding tax on any gain realized upon the sale, exchange or other disposition
of our common shares, unless:
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the gain is “effectively connected” with the Non-U.S. Holder’s conduct of a trade
or business in the United States. If the Non-U.S. Holder is entitled to the benefits of a U.S. income tax treaty with respect to
that gain, that gain is subject to U.S. federal income tax only if attributable to a permanent establishment maintained by such
Non-U.S. Holder in the United States; or
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the Non-U.S. Holder is an individual who is present in the United States for 183 days or more
during the taxable year of disposition and other conditions are met.
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If the Non-U.S. Holder
is engaged in a U.S. trade or business for U.S. federal income tax purposes, the income from the common shares, including dividends
and any gain from the sale, exchange or other disposition of the common shares that is “effectively connected” with
the conduct of that U.S. trade or business will generally be subject to regular U.S. federal income tax in the same manner as discussed
in the previous section relating to the U.S. federal income taxation of U.S. Holders. In addition, in the case of a corporate Non-U.S.
Holder, earnings and profits attributable to such “effectively connected” income, with certain adjustments, may be
subject to an additional “branch profits” tax at a rate of 30%, or at a lower rate as may be specified by an applicable
U.S. income tax treaty.
Backup Withholding and Information Reporting
In general, dividend
payments, or other taxable distributions, made within the United States will be subject to information reporting requirements.
Such payments will also be subject to “backup withholding” if paid to a non-corporate U.S. Holder who:
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fails to provide an accurate taxpayer identification number;
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is notified by the IRS that it has failed to report all interest or dividends required to be shown
on its U.S. federal income tax returns; or
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in certain circumstances, fails to comply with applicable certification requirements.
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Non-U.S. Holders may
be required to establish their exemption from information reporting and backup withholding by certifying their status on an appropriate
IRS Form W-8.
If a shareholder sells
its common shares to or through a U.S. office or broker, the payment of the proceeds is subject to both U.S. backup withholding
and information reporting unless the shareholder certifies under penalties of perjury that it is a non-U.S. person or the shareholder
otherwise establishes an exemption. If the shareholder sells its common shares through a non-U.S. office of a non-U.S. broker and
the sales proceeds are paid to the shareholder outside the United States, then information reporting and backup withholding generally
will not apply to that payment. However, U.S. information reporting requirements, but not backup withholding, will apply to a payment
of sales proceeds, even if that payment is made to the shareholder outside the United States, if the shareholder sells its common
shares through a non-U.S. office of a broker that is a U.S. person or has certain other contacts with the United States.
Backup withholding
is not an additional tax. Rather, a taxpayer generally may obtain a refund of any amounts withheld under backup withholding rules
that exceed the taxpayer’s U.S. federal income tax liability by filing a refund claim with the IRS.
U.S. Holders and Non-U.S.
Holders should consult their own tax advisors regarding information that must be provided to us or to our paying agent in order
to avoid backup withholding.
Individuals
who are U.S. Holders (and to the extent specified in applicable Treasury regulations, certain individuals who are Non-U.S. Holders
and certain U.S. entities) who hold “specified foreign financial assets” (as defined in Section 6038D of the Code)
are required to file IRS Form 8938 with information relating to the asset for each taxable year in which the aggregate value
of all such assets exceeds $75,000 at any time during the taxable year or $50,000 on the last day of the taxable year (
higher
thresholds for reporting apply to different categories of taxpayers
or as prescribed by applicable
Treasury regulations). Specified foreign financial assets would include, among other assets, the common shares, unless the shares
are held through an account maintained with a U.S. financial institution. Substantial penalties apply to any failure to timely
file IRS Form 8938, unless the failure is shown to be due to reasonable cause and not due to willful neglect. Additionally,
in the event an individual U.S. Holder (and to the extent specified in applicable Treasury regulations, an individual Non-U.S.
Holder or a U.S. entity) that is required to file IRS Form 8938 does not file such form, the statute of limitations on the
assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years
after the date that the required information is filed. U.S. Holders (including U.S. entities) and Non-U.S. Holders are encouraged
consult their own tax advisors regarding their obligations to file Form 8938.
Other Taxes
We encourage each shareholder
to consult with its own tax advisor as to the particular tax consequences to it of holding and disposing of our common shares,
including the applicability of any state, local or foreign tax laws and any proposed changes in applicable law.
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F.
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Dividends and paying agents
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Not applicable.
Not applicable.
We
file reports and other information with the SEC. These materials, including this annual report and the accompanying exhibits, may
be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549,
or from the SEC’s website
http://www.sec.gov
. You may obtain information on the operation
of the public reference room by calling 1 (800) SEC-0330 and you may obtain copies at prescribed rates. Our filings are also available
on our website at http://www.paragonship.com. This web address is provided as an inactive textual reference only. Information on
our website does not constitute a part of this annual report.
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I.
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Subsidiary information
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Not applicable.
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Item 11.
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Quantitative and Qualitative Disclosures about Market Risk
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Concentration of Credit Risk
Financial instruments,
which potentially subject us to significant concentrations of credit risk, consist principally of trade accounts receivable, amounts
due from related parties and cash and cash equivalents. We limit our credit risk with accounts receivable by performing ongoing
credit evaluations of our customers’ financial condition and generally do not require collateral for our trade accounts receivable.
In addition, we also limit our exposure by diversifying among customers. The amounts due from related parties mainly relate to
advance payments to Allseas to cover working capital equal to one month’s worth of estimated operating expenses. We place
our cash and cash equivalents with high credit quality financial institutions. We are exposed to credit risk in the event of non-performance
by counterparties to derivative instruments. However, we limit our exposure by diversifying among counterparties considering their
credit ratings.
Interest Rates
The international drybulk
and containership industries are capital intensive industries, requiring significant amounts of investment. Much of this investment
is provided in the form of long term debt. Our debt usually contains interest rates that fluctuate with London Inter-Bank Offered
Rate, or LIBOR. Increasing interest rates could adversely impact future earnings. In order to mitigate this specific market risk
we entered into interest rate swap agreements. The purpose of the agreements was to manage interest cost and the risk associated
with changing interest rates by limiting our exposure to interest rate fluctuations within the ranges stated below. During 2014
and 2015, LIBOR was below the floor rates and thus we paid the floor rates. As an indication of the extent of our sensitivity to
interest rates changes based upon our debt level and interest rate swap agreements, a 100 basis points increase in interest rates
would have resulted in a net increase in interest expense (including interest rate swap agreements) of approximately $1.4 million
and $1.6 million for the years ended December 31, 2014 and 2015, respectively.
Foreign exchange
rate fluctuation
We generate all of
our revenues in U.S. dollars and incurred approximately 27% and 28% of our expenses in currencies other than U.S. dollars (mainly
in Euros) for each of the years ended December 31, 2014 and 2015. This increase mainly relates to the increase in the amounts that
were payable in Euros under our Agreements with Allseas as discussed in “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party Transactions”. For accounting purposes, expenses incurred in currencies other than into U.S. dollars, are converted
into U.S. dollars at the exchange rate prevailing on the date of each transaction. We do not normally hedge currency exchange risks
relating to operations and our operating results could be adversely affected as a result. However, due to our relatively low percentage
exposure to currencies other than our base currency, which is the U.S. dollar, we believe that such currency movements will not
have a material effect on us and as such we do not hedge these exposures as the amounts involved do not make hedging economic.
The impact of a 10% increase in exchange rates, on the level of expenses incurred for the years ended December 31, 2014 and 2015
in currencies other than U.S. dollars, would be approximately $1.1 million and $0.9 million, respectively.
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Item 12.
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Description of Securities Other than Equity Securities
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Not applicable.
Not applicable.
Not applicable.
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D.
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American depository shares
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Not applicable.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
Effective March 1, 2016, the Company effectuated
a 38-for-1 reverse stock split on its issued and outstanding common stock. All share and per share amounts disclosed in the consolidated
financial statements give effect to the respective stock split retroactively, for all the periods presented.
The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and include the accounts of Paragon Shipping Inc. and its wholly-owned subsidiaries (collectively the “Company”)
as discussed below, as of December 31, 2014 and 2015 and for the years ended December 31, 2013, 2014 and 2015.
(1) In July 2015, the vessel owning subsidiaries
Paloma Marine S.A., Eris Shipping S.A., Alcyone International Marine Inc. and Neptune International Shipping & Trading S.A.,
owning companies of vessels Friendly Seas, Dream Seas, Gentle Seas and Peaceful Seas, respectively, were sold and transferred to
an entity controlled by Mr. Michael Bodouroglou, as discussed in Note 6
(1) In March and April 2015, the Company
proceeded with the dissolution of the respective subsidiaries since they were no longer active
(2) Companies previously owning vessels
M/V Sapphire Seas and M/V Diamond Seas, which were sold in December 2015
The Company outsources the technical and
commercial management of its vessels to Allseas Marine S.A. (“Allseas”) and Seacommercial Shipping Services S.A. (“Seacommercial”),
both related parties wholly owned by Mr. Michael Bodouroglou, the Company’s Chairman, President, Chief Executive Officer
and Interim Chief Financial Officer (refer to Note 4).
As of December 31, 2015, Mr. Michael Bodouroglou
beneficially owned 28.0% of the Company’s common stock.
The undiscounted projected
net operating cash flows for each vessel are determined by considering the contracted charter revenues from existing charters for
the fixed vessel days and an estimated daily time charter equivalent for the unfixed days (based on the most recent ten year historical
average of similar size vessels) over the remaining estimated life of the vessel, assumed to be 25 years from the date of initial
delivery from the shipyard, net of brokerage commissions, the salvage value of each vessel, which is estimated to be $300 per lightweight
ton, expected outflows for vessels’ future dry-docking expenses and estimated vessel operating expenses, assuming an average
annual inflation rate where applicable. The Company uses the historical ten-year average as it is considered a reasonable estimation
of expected future charter rates over the remaining useful life of the Company’s vessels since it represents a full shipping
cycle that captures the highs and lows of the market. The Company utilizes the standard deviation in order to eliminate the outliers
of the sample before computing the historic ten-year average of the one-year time charter rate.
Management estimates the useful
life of the Company’s vessels to be 25 years from the date of initial delivery from the shipyard, including secondhand vessels.
Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life.
Revenue is recognized when a
charter agreement exists, the vessel is made available to the charterer and collection of the related revenue is reasonably assured.
The Company discontinues cash
flow hedge accounting if the hedging instrument expires and it no longer meets the criteria for hedge accounting or designation
is revoked by the Company. At that time, any cumulative gain or loss on the hedging instrument recognized in equity is kept in
equity until the forecasted transaction occurs. When the forecasted transaction occurs, any cumulative gain or loss on the hedging
instrument is recognized in current period earnings. If a hedged transaction is no longer expected to occur, the net cumulative
gain or loss recognized in equity is transferred to current period earnings as financial income or expense.
During the fourth quarter of 2015 and first
quarter of 2016, the Company reached agreements for the extinguishment and restructuring of its debt obligations with all of its
lenders, as discussed in Note 8.
The Company has experienced net losses
and has a shareholders’ deficit, which have affected, and which are expected to continue to affect, its ability to satisfy
its obligations under the senior unsecured notes. The Company has also been unable to generate positive cash flows from operating
activities. For the years ended December 31, 2014 and 2015, the Company’s net cash used in operating activities was $6,181,843
and $7,262,133, respectively. As of December 31, 2015, the Company’s cash and cash equivalents were nil and current liabilities
amounted to $152,428,834 including $144,673,901 of debt. As described in Note 8, the Company is in default under its senior unsecured
notes obligations. Thus, as of December 31, 2015, the Company has classified its long-term debt, net of deferred financing costs,
as current, along with the associated restricted cash and interest rate swap liabilities. Furthermore, based on the Company’s
cash flow projections, cash on hand and cash provided by operating activities will not be sufficient to cover the liquidity needs
that become due in the twelve-month period ending December 31, 2016. The Company’s existence is dependent upon its ability
to convert the outstanding senior unsecured notes to shares of its common stock through the exchange agreements, discussed in Note
8, which the Company is currently in the process of attempting to secure. If repayment of all of the Company’s indebtedness
was accelerated as a result of its current event of default, the Company may not have sufficient funds at the time of acceleration
to repay its indebtedness and it may not be able to find additional or alternative financing to refinance any such accelerated
obligations on terms acceptable to the Company or on any terms, which could have a material adverse effect on its ability to continue
as a going concern.
The above conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The Company is also exploring several alternatives aiming
to manage its working capital requirements and other commitments, including additional bank debt, future equity or debt security
offerings including convertible notes, and potential sale of assets. If the Company is unable to arrange debt financing for its
newbuilding vessels or extend the respective deliveries from the shipyards, it is probable that the Company may also consider selling
the respective newbuilding contracts. As management believes that the negotiations will be successful, the consolidated financial
statements were prepared assuming that the Company will continue as a going concern. Therefore, the accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities,
or any other adjustments that might result in the event the Company is unable to continue as a going concern.
On July 27, 2015, the Company proceeded
with the sale and transfer of all of the issued and registered shares of the vessel-owning subsidiaries of the M/V Dream Seas,
the M/V Gentle Seas, the M/V Peaceful Seas and the M/V Friendly Seas to an entity controlled by Mr. Michael Bodouroglou, the Company’s
Chairman, President, Chief Executive Officer and Interim Chief Financial Officer based on a mutually agreed value of $63,200,000
(refer to Note 6).
The following transactions with related
parties occurred during the years ended December 31, 2013, 2014 and 2015:
The following amounts charged
by Allseas were capitalized and are included in vessels cost and advances for vessels under construction in the accompanying 2014
consolidated balance sheet: technical management and superintendent fees relating to newbuilding vessels (refer to 5–Newbuilding
Supervision Agreement), and vessel purchase commissions, which in the aggregate amounted to $3,804,918.
During the year ended December
31, 2015, Allseas charged technical management and superintendent fees relating to newbuilding vessels of $1,845,161, which were
capitalized and are included in advances for vessels under construction in the accompanying 2015 consolidated balance sheet.
In January 2015, the Company’s
vessel owning subsidiaries signed amended and restated management agreements with Allseas, according to which a portion of the
services that were previously provided by Allseas have been ceased. Pursuant to the terms of the amended and restated management
agreements, effective January 2015, Allseas is no longer providing chartering and sale and purchase services, and as such the fees
related to these services have been terminated. More specifically, the commissions representing the 1.25% of the gross freight,
demurrage and charter hire collected from the employment of the vessels (“Charter Hire Commission”), and the 1.00%
of the price of any vessel bought, constructed or sold on behalf of the Company, calculated in accordance with the relevant memorandum
of agreement (“Vessel Commission”) are no longer payable to Allseas.
In connection with the at-the-market
offering of up to $4,000,000 of Class A common shares discussed in Note 11, effective December 18, 2015, 190 Class A common shares
were granted to Loretto. The fair value of such shares based on the average of the high-low trading price of the shares on December
18, 2015 was recorded as share based compensation and is included in Management fees – related party in the accompanying
consolidated statement of comprehensive loss for the year ended December 31, 2015.
Each month, the Company funds
a payment to Allseas to cover working capital needs equal to one month of estimated operating expenses. At each balance sheet date,
the excess of the amount funded to Allseas over payments made by Allseas for operating expenses is reflected as Due from related
parties. As of December 31, 2014, and 2015, $843,510 and $220,568, respectively, was due from Allseas.
Charter hire commissions charged
by Seacommercial for the year ended December 31, 2015, amounted to $437,817 and are included in Commissions in the 2015 consolidated
statement of comprehensive loss.
In the third quarter of 2015,
following the sale of all of the issued and registered shares of the vessel-owning subsidiaries of the M/V Dream Seas, M/V Gentle
Seas, M/V Peaceful Seas and M/V Friendly Seas to an entity controlled by Mr. Michael Bodouroglou as discussed above, the Company
proceeded with the payment of 1.00% Vessel Commission, or $632,000, to Seacommercial, which is included in Loss related to vessels
held for sale in the 2015 consolidated statement of comprehensive loss. In addition, an amount of $143,050 relating to 1.00% Vessel
Commission on the sale of vessels M/V Pearl Seas, M/V Kind Seas, M/V Calm Seas and M/V Deep Seas is included in Loss related to
vessels held for sale and paid to Seacommercial in January 2016 following the delivery of vessels to their new owners.
In December 2015, following the
sale of the M/V Sapphire Seas and the M/V Diamond Seas discussed in Note 6, the Company proceeded with the payment of a 1.00% Vessel
Commission, or $70,000, to Seacommercial, which is included in (Gain) / loss from sale of assets.
The balances due to Crewcare
amounted to $166,354 and $1,247,676 as of December 31, 2014 and 2015, respectively.
On May 27, 2011, the Company
granted Box Ships an unsecured loan of $30,000,000. The loan bore interest at LIBOR plus a margin of 4.00%. As of December 31,
2012, the outstanding loan balance due from Box Ships was $14,000,000. On February 28, 2013, Box Ships prepaid an amount of $1,000,000
and reduced the outstanding balance of the respective loan to $13,000,000. In addition, on March 11, 2013, the Company agreed to
amend certain terms of the loan agreement. Pursuant to the amended agreement, the Company agreed to extend the maturity of the
loan for one year, from April 19, 2013 to April 19, 2014. During the remaining term of the loan, Box Ships was required to make
quarterly principal installments in the amount of $1,000,000 each, with a final balloon payment of $9,000,000 due on the maturity
date. In consideration for the amendment of the loan agreement, Box Ships agreed to pay an amendment fee of $65,000, which is included
in Interest income in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2013, and to
increase the margin from 4.00% to 5.00%. In April 2013, Box Ships paid the amendment fee of $65,000. Pursuant to the amended loan
agreement, on April 19, 2013 and on July 19, 2013, Box Ships proceeded with the first two quarterly principal installment payments
of $1,000,000 each. In addition, on August 5, 2013, Box Ships prepaid an amount of $5,000,000 and reduced the outstanding balance
of the respective loan to $6,000,000, which was fully repaid on October 18, 2013. For the year ended December 31, 2013, interest
charged on the respective loan amounted to $439,326.
Advances for vessels under construction
relate to the installments paid that were due to the respective shipyard including capitalized expenses.
As of December 31, 2014,
the Company’s newbuilding program consisted of two Ultramax drybulk carriers (Hull numbers DY4050 and DY4052) and three Kamsarmax
drybulk carriers (Hull numbers YZJ1144, YZJ1145 and YZJ1142) with scheduled delivery in 2015.
The Company has agreed with Jiangsu
Yangzijiang Shipbuilding Co., or Yangzijiang, to extend the deliveries of its three Kamsarmax newbuilding drybulk carriers
(Hull numbers YZJ1144, YZJ1145 and YZJ1142), to the third and fourth quarter of 2016, subject to certain conditions, at no
extra cost to the Company. In addition, the Company did not take delivery of the Ultramax newbuilding drybulk carrier with
Hull number DY4050 from Yangzhou Dayang Shipbuilding Co. Ltd., or Dayang, that was scheduled to be delivered in the fourth
quarter of 2015. Furthermore, the Company sent to Dayang notices for the cancellation of the Ultramax newbuilding drybulk
carrier with Hull number DY4052 that was scheduled to be delivered at the end of December 2015. Dayang rejected such
cancellation notices and the case is currently under arbitration proceedings in London.
Based on the Company’s cash flow
projections and taking into consideration the cancellation of the undrawn portion of the syndicated loan facility led by Nordea
Bank Finland Plc for an amount of up to $78,000,000 relating to the Company’s newbuilding contracts as discussed in Note
8, cash on hand and cash provided by operating activities will not be sufficient to cover the capital expenditures relating to
the Company’s newbuilding contracts that become due in 2016. The Company assessed as probable the potential sale of the three
remaining newbuilding contracts and following the cancellation of the financing for the Ultramax newbuildings, an aggregate impairment
loss of $43,878,294 was recorded and is included in Impairment loss in the 2015 accompanying consolidated statement of comprehensive
loss (refer to Note 10).
All Company’s vessels were first-priority
mortgaged as collateral to the loans and credit facilities and related interest rate swaps outstanding as of December 31, 2015.
On June 25, 2015, a special committee consisting
of the Company’s five independent directors (“Special Committee”) was assigned to investigate the block sale
of four vessels of the Company’s operating fleet, the M/V Dream Seas, the M/V Gentle Seas, the M/V Peaceful Seas and the
M/V Friendly Seas, for the purpose of improving the Company’s liquidity. The Special Committee determined it was in the best
interest of the Company and its shareholders to sell the vessel-owning subsidiaries of these vessels to an entity controlled by
Mr. Michael Bodouroglou, the Company’s Chairman, President, Chief Executive Officer and Interim Chief Financial Officer.
In July 2015, the Special Committee and Mr. Bodouroglou agreed to the sale of all of the issued and registered shares of the respective
vessel-owning subsidiaries (“Sale Transaction”). The Sale Transaction was based on a mutually agreed value of $63,200,000
for the four vessels transferred, net of a commission of 1.00% over such value, paid to Seacommercial. The sale and transfer of
the respective vessel-owning subsidiaries were concluded on July 27, 2015 (“Sale Transaction Date”). The Sale Transaction
did not include the transfer of any current assets and current liabilities existing prior to the Sale Transaction Date, apart from
lubricant inventories, directly related to the transfer of the vessels and cash received in advance relating to revenue generated
subsequent to the Sale Transaction Date. As of June 30, 2015, the Company assessed that all the held for sale criteria were met
for the assets and liabilities associated with the Sale Transaction. As of June 30, 2015, the Company reviewed the carrying amount
in connection with the fair market value less cost to sell of the M/V Dream Seas, the M/V Gentle Seas, the M/V Peaceful Seas and
the M/V Friendly Seas. The review indicated that such carrying amounts were in excess of the fair value less cost to sell such
vessels. Therefore, a loss of $47,639,830 and $19,772 was recorded and is included in Loss related to vessels held for sale and
Loss from sale of assets, respectively, in the 2015 accompanying consolidated statement of comprehensive loss. The Company accounted for the Sale Transaction as sale of assets.
In connection with the settlement agreement
with Commerzbank AG dated December 8, 2015 discussed in Note 8, on November 9, 2015, the Company entered into memoranda of agreement,
as further supplemented and amended, for the sale of three vessels of its operating fleet, the M/V Sapphire Seas, the M/V Diamond
Seas and the M/V Pearl Seas, to an unrelated third party. The M/V Sapphire Seas and the M/V Diamond Seas were delivered to their
new owners in December 2015, and a loss of $26,513,082 was incurred and is included in Loss from sale of assets in the 2015 accompanying
consolidated statement of comprehensive loss. The M/V Pearl Seas was delivered to her new owners in January 2016.
In connection with the settlement agreement
with Bank of Ireland dated January 7, 2016 discussed in Note 8, on December 1, 2015, the Company entered into a memorandum of agreement
for the sale of the M/V Kind Seas to an unrelated third party. The M/V Kind Seas was delivered to her new owners in January 2016.
On December 23 and December 30, 2015, the
Company entered into memoranda of agreement for the sale of the M/V Deep Seas and M/V Calm Seas, respectively, to an unrelated
third party. Both vessels were delivered to their new owners in January 2016.
As of December 31, 2015, the Company assessed
that all the held for sale criteria were met for the M/V Pearl Seas, M/V Kind Seas, M/V Deep Seas and M/V Calm Seas and reviewed
the carrying amount in connection with their fair market value less cost to sell. The review indicated that such carrying amounts
were in excess of the fair value less cost to sell such vessels. Therefore, a loss of $69,125,569 was recorded and is included
in Loss related to vessels held for sale in the 2015 accompanying consolidated statement of comprehensive loss. Furthermore, liabilities associated with the vessels held for sale are separately presented under Liabilities
associated with vessels held for sale in the 2015 accompanying consolidated balance sheet. The major class of liabilities classified
as associated with assets held for sale, consist of their respective long-term debt, net of unamortized financing costs with a
carrying amount of $47,587,119 (refer to Note 8).
In connection with the settlement
agreement with Nordea Bank Finland Plc dated March 9, 2016 discussed in Note 8, on March 17, 2016, the Company entered into
memoranda of agreement, for the sale of the remaining six vessels of its operating fleet, the M/V Coral Seas, the M/V Golden
Seas, the M/V Prosperous Seas, the M/V Priceless Seas, the M/V Proud Seas and the M/V Precious Seas, to an unrelated third
party. As of December 31, 2015, the Company reviewed the carrying amount in connection with the sale price of the vessels and
a loss of $52,467,630 was recorded and is included in Impairment loss in the 2015 accompanying consolidated statement of
comprehensive loss. The vessels were delivered to their new owners in March, April and May 2016.
Due to the sale of vessels,
discussed above, other fixed assets of $23,144, $297,727 and $127,661 were written-off and are included in Loss related to vessels
held for sale, Impairment loss and Loss from sale of assets, respectively, in the 2015 accompanying consolidated statement of comprehensive
loss.
The following table is a reconciliation
of the Company’s investment in affiliate as presented on the accompanying consolidated balance sheets:
As of December 31, 2014, the Company held
3,437,500 shares or 11.0% of Box Ships’ common stock.
In the second quarter of 2015, the Company
proceeded with the sale of the total 3,437,500 shares of Box Ships at an average sale price of $0.8542 per share. The net proceeds
from the sale of such shares amounted to $2,936,196. A loss on investment in affiliate of $206,835, which consists of the difference
between the fair value, as determined by the sale proceeds, and the book value of the shares of Box Ships of $193,056, as well
as the previously recognized other comprehensive loss of affiliate of $13,779, was recorded and is included in the 2015 accompanying
consolidated statement of comprehensive loss.
Summarized financial information in respect
of Box Ships Inc. is set out below:
The table below presents a breakdown of
the Company’s long-term debt as of December 31, 2014 and 2015:
As of December 31, 2015, the minimum annual
principal payments for the outstanding debt required to be made after the balance sheet date, taking into consideration the settlement
agreements discussed below, are as follows:
On May 29, 2015, the syndicate
led by Nordea Bank Finland Plc agreed to reduce the threshold of the security cover ratio covenant from 135% to 110%, effective
from January 1, 2015 until March 31, 2015. The syndicate also agreed that any breach of the financial covenants contained in the
respective facility for the test period ending March 31, 2015, shall not be deemed as an event of default. In addition, on July
31, 2015, the Company entered into a loan supplemental agreement and agreed, subject to certain conditions, to amended terms with
the syndicate led by Nordea Bank Finland Plc, including the deferral of one and a portion of two of its scheduled quarterly installments
due in the third quarter of 2015 through the first quarter of 2016. The deferred amounts would be settled along with the balloon
installment. The Company also agreed to cancel the available borrowing capacity of up to $78,000,000 with respect to the undrawn
portion of the facility for the partial financing of its outstanding newbuilding contracts. In addition, effective from April 1,
2015 until March 31, 2016, the syndicate agreed to waive the application of the ratio of market value adjusted shareholders’
equity to the market value adjusted total assets, to amend the definition of the minimum working capital requirement to include
only the trade working capital, to amend the definition of the minimum liquidity requirement to be equal to or greater than $250,000
per vessel owned, and to reduce the threshold of the security cover ratio covenant from 135% to 105%. On March 9, 2016, the Company
entered into a settlement agreement with Nordea Bank Finland Plc for the full and final settlement of the then outstanding principal
amount of the respective facility of $73,928,185. According to the agreement, the facility was settled with the total net proceeds
from the sale of the mortgaged vessels, namely the M/V Coral Seas, the M/V Golden Seas, the M/V Prosperous Seas, the M/V Precious
Seas, the M/V Priceless Seas and the M/V Proud Seas in line with the memoranda of agreement dated March 17, 2016, as discussed
in Note 6. This resulted in a gain from debt extinguishment of approximately $680,000 relating to unpaid and accrued interest,
which will be recognized in the first and second quarter of 2016. In addition, in accordance with the terms of the settlement agreement,
the Company received $3,850,000, as well as a further amount of $2,000 per vessel per day for the period from March 1, 2016
until each vessel’s delivery date to her new owners for settlement of vessels’ operating expenses.
The
indenture governing the Notes contains certain restrictive covenants, including limitations on asset sales and:
As of December 31, 2015, the
Company was not in compliance with the covenants described above.
In January 2016, the Company
entered into an exchange agreement with an unrelated third party, whereas the Notes holder exchanged 20,000 Notes for shares of
the Company’s common stock.
In February 2016, the Company
commenced an offer to exchange all Notes for shares of its common stock (the “Exchange Offer”). As part of the
Exchange Offer, holders were also required to consent to the removal of certain covenants and sections of the Notes’ indenture
(together with the Exchange Offer, “Exchange Offer and Consent Solicitation”). The Exchange Offer and Consent Solicitation
expired in March 2016. On March 18, 2016, 184,721 Notes or approximately 18.8% of the outstanding Notes were delivered and not
validly withdrawn from the Exchange Offer.
In April 2016, the Company
entered into an exchange agreement with an unrelated third party, whereas the Notes holder exchanged 50,000 Notes for shares of
the Company’s common stock.
In relation to the issued and
outstanding Notes, the Company did not proceed with the interest payment of $523,438, which was originally due on February 15,
2016, due to lack of liquidity. Pursuant to the Notes indenture, the Company was under a 30-day grace period to make such payment
that expired on March 17, 2016. The Company was still lacking the liquidity to make the interest payment upon the expiration of
the said grace period.
Based on the Company’s cash flow
projections for 2016, cash on hand and cash provided by operating activities will not be sufficient to cover scheduled interest
payments relating to its Notes due in 2016. The Company is exploring several alternatives aiming to manage its working capital
requirements and other commitments.
The interest cost charged for the years
ended December 31, 2013, 2014 and 2015 amounted to $6,129,911, $7,451,854 and $8,039,677, respectively.
The capitalized interest for the years
ended December 31, 2013, 2014 and 2015 amounted to $786,263, $1,618,836 and $1,704,937, respectively.
The weighted average interest rate for
the years ended December 31, 2013, 2014 and 2015 was 3.21%, 3.53% and 4.07%, respectively.
The Company entered into interest rate
swap transactions to manage interest costs and the risk associated with changing interest rates with respect to its variable interest
rate loans and credit facilities. These interest rate swap transactions fix the interest rates as described below.
As of December 31, 2014 and 2015, the Company's
outstanding interest rate swaps had a combined notional amount of $56,208,157 and $10,840,781, respectively. Details of the interest
rate swap agreements which were effective during 2014 and 2015 are outlined below:
As of December 31, 2014 and 2015, the Company
had no interest rate swaps qualified for hedge accounting.
Following the extinguishment of the loan
facilities with HSH Nordbank AG and HSBC Bank Plc as discussed in Note 8, in July 2015, the Company also proceeded with the cancellation
of the respective swap agreements. The cancellation of these swap agreements resulted in an aggregate loss of $155,300, which is
included in Loss on derivatives, net, in the 2015 accompanying consolidated statement of comprehensive loss. Following the settlement
agreement with Nordea Bank Finland Plc, in March 2016, the respective interest rate swaps were cancelled.
The principal financial assets of the Company
consist of restricted cash and trade receivables. The principal financial liabilities of the Company consist of long-term bank
loans, senior unsecured notes due 2021, interest rate swaps, trade accounts payable, amounts due to related parties and accrued
liabilities.
The Company’s Notes trade on NASDAQ
Global Market under the symbol “PRGNL” and therefore are considered Level 1 items in accordance with the fair value
hierarchy. As of December 31, 2015, the fair value of the Company’s Notes based on their quoted close price of $4.35 per
Note was $4,350,000 in the aggregate.
When the interest rate swap contracts do
not qualify for hedge accounting, the Company recognizes their fair value changes in current period statement of comprehensive
income / (loss).
Information on the location and amounts
of derivative fair values in the consolidated balance sheets and derivative gains / (losses) in the consolidated statements of
comprehensive income / (loss) and shareholders’ equity are shown below:
There was no ineffective portion of the
gain / (loss) on the hedging instruments for the years ended December 31, 2014 and 2015. No hedge accounting was applicable for
the year ended December 31, 2015.
The fair value of the Company’s interest
rate swap agreements (refer to Note 9) is determined using a discounted cash flow approach based on market-based LIBOR swap yield
rates. LIBOR swap rates are observable at commonly quoted intervals for the full terms of the swaps and therefore are considered
Level 2 items in accordance with the fair value hierarchy.
The following table summarizes the valuation
of the Company’s interest rate swaps as of December 31, 2014 and 2015:
As of December 31, 2014, the Company held
44,550 KLC shares. The fair value of the KLC shares was based on quoted prices of KLC share of stock (Korea SE: KS) and was considered
to be determined through Level 1 inputs of the fair value hierarchy.
During the second quarter of 2015, the
Company sold the total of 44,550 KLC shares at an average sale price of $21.68 per share. The total cash received from the sale
of these shares amounted to $958,215, net of commissions. A loss from marketable securities, net, of $134,529 was recorded and
is included in the 2015 accompanying consolidated statement of comprehensive loss.
During the year ended December 31, 2015,
in accordance with the accounting guidance relating to long-lived assets held and used, the Company recognized an impairment loss
on the advances for vessels under construction relating to the five newbuilding vessels with Hull numbers DY4050, DY4052, YZJ1144,
YZJ1145 and YZJ1142 as discussed in Note 5.
Details for the impairment charge on the
advances for vessels under construction are noted in the table below:
The fair value is based on the Company’s
best estimate of the value of the vessels on a time charter free basis, and is supported by the reported resale prices of an independent
shipbroker as of December 31, 2015, which are mainly based on recent sales and purchase transactions of similar vessels.
As of December 31, 2015, the Company reviewed
the carrying amount in connection with the estimated recoverable amount for the remaining six vessels. Due to the sale of vessels
in 2016, the review indicated that such carrying amount was not recoverable and was written down to $73,928,185 and an impairment
charge of $52,467,630 was recorded and is included in Impairment loss in the 2015 accompanying consolidated statement of comprehensive
loss. The fair value of the vessels was based on the memoranda of agreement, discussed in Note 6, and was considered to be determined
through Level 2 inputs of the fair value hierarchy.
As of December 31, 2015, the Company reviewed
the carrying amount in connection with the estimated recoverable amount for the vessels classified as held for sale. Due to the
sale of vessels in 2016, the review indicated that such carrying amount was not recoverable and was written down to $13,740,200
and a loss of $69,125,569 was recorded and is included in Loss related to vessels held for sale in the 2015 accompanying consolidated
statement of comprehensive loss. The fair value of the vessels was based on the memoranda of agreement, discussed in Note 6, and
was considered to be determined through Level 2 inputs of the fair value hierarchy.
As of December 31, 2014 and 2015, the Company
did not have any assets or liabilities measured at fair value on a recurring or non-recurring basis, other than the ones discussed
above.
Under the amended and restated articles
of incorporation, the Company's authorized common stock consists of 755,000,000 shares of common stock, par value $0.001 per share,
divided into 750,000,000 Class A common shares and 5,000,000 Class B common shares.
Each holder of Class A common shares
is entitled to one vote on all matters submitted to a vote of shareholders. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of Class A common shares are entitled to receive ratably all dividends, if
any, declared by the Company's Board of Directors out of funds legally available for dividends. Upon dissolution, liquidation or
sale of all or substantially all of the Company's assets, after payment in full of all amounts required to be paid to creditors
and to the holders of preferred stock having liquidation preferences, if any, Class A common shareholders are entitled to
receive pro rata the Company's remaining assets available for distribution. Holders of Class A common shares do not have conversion,
redemption or pre-emptive rights.
Effective February 15, 2013, 2,580 Class
A common shares, representing the 2.0% of the 128,999 newly-issued Class A common shares sold to Innovation Holdings in December
2012, an entity beneficially owned by Mr. Michael Bodouroglou, the Company’s Chairman, President, Chief Executive Officer
and Interim Chief Financial Officer, were granted to Loretto. The fair value of such shares based on the average of the high-low
trading price of the shares on February 15, 2013, was $335,784, which was recorded as share based compensation and is included
in Management fees – related party in the accompanying consolidated statement of comprehensive loss for the year ended December
31, 2013.
On September 27, 2013, the Company completed
a public offering of 157,895 of its Class A common shares at $218.50 per share, including the full exercise of the over-allotment
option granted to the underwriters to purchase up to 20,595 additional common shares. The net proceeds from the offering, which
amounted to $31,881,984, net of underwriting discounts and commissions of $2,070,000 and other offering expenses of $548,016, would
be used to fund the initial deposits and other costs associated with the purchase of two Ultramax newbuilding drybulk carriers,
the Hull numbers DY152 and DY153 and general corporate purposes. In connection with the offering, effective September 27, 2013,
3,158 Class A common shares, representing the 2.0% of the 157,895 Class A common shares sold in the public offering, were granted
to Loretto. The fair value of such shares based on the average of the high-low trading price of the shares on September 27, 2013,
was $714,000, which was recorded as share based compensation and is included in Management fees – related party in the accompanying
consolidated statement of comprehensive loss for the year ended December 31, 2013.
On February 18, 2014, the Company completed
a public offering of 178,553 of its Class A common shares at $237.50 per share, including the full exercise of the over-allotment
option granted to the underwriters to purchase up to 23,290 additional common shares. The net proceeds from the offering amounted
to $39,741,152, net of underwriting discounts and commissions and other offering expenses payable by the Company. In connection
with the offering, effective February 18, 2014, 3,571 Class A common shares, representing the 2.0% of the 178,553 Class A common
shares sold in the public offering, were granted to Loretto. The fair value of such shares based on the average of the high-low
trading price of the shares on February 18, 2014, was $880,015, which was recorded as share based compensation and is included
in Management fees – related party in the accompanying consolidated statement of comprehensive loss for the year ended December
31, 2014.
On May 12, 2014, the Company’s Board
of Directors authorized a share buyback program of up to $10,000,000 for a period of twelve months. Pursuant to the share buyback
program, as of December 31, 2014, the Company had purchased and cancelled 790 of its common shares at an average price of $215.92
per share. Following the expiration of the twelve-month period, on May 12, 2015, the share buyback program was ended.
On September 4, 2015, the Company entered
into an equity distribution agreement with Maxim Group LLC for the offer and sale of up to $4,000,000 of its Class A common shares.
The Company may offer and sell the shares from time to time and at its discretion during the next twelve months. The net proceeds
of this offering are expected to be used for general corporate purposes, which may include the payment of a portion of the outstanding
contractual cost of the Company’s existing newbuilding vessels, and the repayment of debt. Under this offering, the Company
proceeded with the sale and issuance of 9,461 Class A common shares. In connection with this offering, effective December 18, 2015,
190 Class A common shares were granted to Loretto. The fair value of such shares based on the average of the high-low trading price
of the shares on December 18, 2015, was $755, which was recorded as share based compensation and is included in Management Fees
– related party in the accompanying consolidated statement of comprehensive loss for the year ended December 31, 2015.
As of December 31, 2014 and 2015, the Company
had a total of 652,873 and 664,458 Class A common shares outstanding, respectively, and no other class of shares outstanding.
Under the amended and restated articles
of incorporation, the Company's authorized preferred stock consists of 25,000,000 shares of preferred stock, par value $0.001 per
share, and there was none issued and outstanding at December 31, 2014 and 2015.
On March 26, 2014, the Company adopted
an equity incentive plan, under which the officers, key employees and directors of the Company will be eligible to receive options
to acquire shares of Class A common shares. A total of 2,000,000 Class A common shares were reserved for issuance under the
plan. The Board of Directors administers the plan. Under the terms of the plan, the Board of Directors are able to grant new options
exercisable at a price per Class A common share to be determined by the Board of Directors but in no event less than fair
market value as of the date of grant. The plan also permits the Board of Directors to award non-vested share units, non-qualified
options, stock appreciation rights and non-vested shares.
As of December 31,
2014 and 2015, there were 2,800 options with an exercise price of $4,560 outstanding and exercisable, which vested in 2010. Their
weighted average remaining contractual life was 0.89 years as of December 31, 2015.
Until the forfeiture of any non-vested
share award, all non-vested share awards regardless of whether vested, the grantee has the right to vote such non-vested share
awards, to receive and retain all regular cash dividends paid on such non-vested share awards with no obligation to return the
dividend if employment ceases and to exercise all other rights provided that the Company will retain custody of all distributions
other than regular cash dividends made or declared with respect to the non-vested share awards. All share awards are conditioned
upon the option holder's continued service as an employee of the Company, or a director through the applicable vesting date. The
Company estimates the forfeitures of non-vested share awards to be immaterial. The Company will, however, re-evaluate the reasonableness
of its assumption at each reporting period.
The accounting guidance relating to the
Share based payments describes two generally accepted methods of accounting for non-vested share awards with a graded vesting schedule
for financial reporting purposes: 1) the "accelerated method", which treats an award with multiple vesting dates
as multiple awards and results in a front-loading of the costs of the award and 2) the "straight-line method" which
treats such awards as a single award. Management has selected the straight-line method with respect to the non-vested share awards
because it considers each non-vested share award to be a single award and not multiple awards, regardless of the vesting schedule.
Additionally, the "front-loaded" recognition of compensation cost that results from the accelerated method implies that
the related employee services become less valuable as time passes, which management does not believe to be the case. The grant
date fair value is considered to be the average between the relevant highest and lowest price recorded on the grant date.
The details of the non-vested share awards
as of December 31, 2015, are outlined as follows:
A summary of the activity for non-vested
share awards for the year ended December 31, 2015 is as follows:
The remaining unrecognized compensation
cost amounting to $321,826 as of December 31, 2015, is expected to be recognized over the remaining weighted average period of
1.0 year, according to the contractual terms of those non-vested share awards.
Share based compensation amounted to $805,469,
$986,416 and $966,915 for the years ended December 31, 2013, 2014 and 2015, respectively and is included in general and administrative
expenses.
Gain from vessel early redelivery represents
income recognized in connection with the early termination of period time charters resulting from a request of the respective vessel
charterers for which the Company received cash compensation of $2,267,818 in 2013.
Other income for the year ended December
31, 2013, relates mainly to a cash compensation of $402,596 received from KLC representing the present value of the total outstanding
cash payments the Company was entitled to receive in connection with the settlement agreement dated September 15, 2011 and pursuant
to the amended KLC rehabilitation plan that was approved by the Seoul Central District Court in March 2013, and to claim recoveries
of $218,634 relating to a dispute regarding one of the Company’s vessels.
During 2014 and 2015, the Company recognized
a charge of $250,283 and $246,022, in relation to a special contribution. According to the Greek Law 4301/2014, the charge is a
voluntary contribution calculated based on the carrying capacity of the Company’s fleet, and is payable annually for four
fiscal years, until 2017. The special contribution is included in Other expenses in the accompanying consolidated statement of
comprehensive loss.
The Company and its subsidiaries are incorporated
either in the Marshall Islands or Liberia and under the laws of the Marshall Islands and Liberia, are not subject to income taxes.
The Company is also subject to United States
federal income taxation in respect of income that is derived from the international operation of ships and the performance of services
directly related thereto ("Shipping Income"), unless exempt from United States federal income taxation.
If the Company does not qualify for the
exemption from tax under Section 883, it will be subject to a 4% tax on its “U.S. source shipping income,” imposed
without the allowance for any deductions. For these purposes, "U.S. source shipping income" means 50% of the shipping
income that will be derived by the Company that is attributable to transportation that begins or ends, but that does not both begin
and end, in the United States. For 2013, 2014 and 2015, the Company qualified for the benefits of Section 883.
The following table sets forth the computation
of basic and diluted net loss per share for the years ended December 31, 2013, 2014 and 2015:
The Company excluded the dilutive effect
of 2,800 (2013 and 2014: 2,800) stock option awards, and 3,923 (2013: 8,922 and 2014: 9,172) non-vested share awards in calculating
dilutive LPS for its Class A common shares as their effect was anti-dilutive.
From time to time the Company expects to
be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty
claims. Such claims, even if lacking in merit, could result in the expenditure of significant financial and managerial resources.
The Company is not aware of any claim or contingent liability, which is reasonably possible and should be disclosed, other than
the case with Hull DY4050 and DY4052 described below, or probable and for which a provision should be established in the accompanying
financial statements.
In December 2013, the Company agreed to
acquire shipbuilding contracts for two Ultramax newbuilding drybulk carriers from Allseas (Hull numbers DY4050 and DY4052). The
Ultramax newbuildings were under construction at Yangzhou Dayang Shipbuilding Co. Ltd., or Dayang. The acquisition cost of these
two newbuildings was $28,250,000 per vessel, or $56,500,000 in the aggregate. In February 2014, the Company paid the first installment
of $5,592,661 per vessel. Upon commencement of the steel cutting of each vessel in the second quarter of 2014, the Company paid
the second installment of $3,884,530 per vessel. The balance of the contract price, or $18,772,809 per vessel, would be payable
upon the delivery of each vessel.
The Company did not take delivery of the
newbuilding with Hull number DY4050 that was scheduled to be delivered in the fourth quarter of 2015. On April 28, 2016, Dayang
served the Company fourteen days' notice of delivery for the newbuilding with Hull number DY4050 for delivery on May 12, 2016 and
as per the terms of the contract Dayang resent the fourteen days’ notice for vessel’s delivery on May 23, 2016. The
Company’s current financial position does not allow the Company to take delivery of the newbuilding vessel, which constitutes
an event of default, resulting in a claim of more than approximately $18,000,000 against the owning company of Hull number DY4050
in respect of the third (delivery) instalment, interest and costs.
Furthermore, in January 2016, the Company
sent to Dayang notices for the cancellation of the newbuilding with Hull number DY4052 that was scheduled to be delivered at the
end of December 2015. Dayang rejected such cancellation notices and arbitration proceedings have been commenced in London. If the
Company is not successful in the arbitration proceedings Dayang would potentially have a claim of more than approximately $18,000,000
against the owning company of Hull number DY4052 (excluding legal costs which are estimated to exceed $1,000,000). The Company
is considering ways to resolve the issues relating to these newbuilding disputes.
In relation to the rental agreement with
Granitis as discussed in Note 4, fixed future minimum non-cancelable rent commitments as of December 31, 2015, based on the Euro/U.S.
dollar exchange rate of €1.0000:$1.0887 as of December 31, 2015, amount to:
Charter hires are not generally received
when a vessel is off-hire, including time required for normal periodic maintenance of the vessel. In arriving at the minimum future
charter revenues, an estimated off-hire time of 18 days to perform any scheduled dry-docking on each vessel has been deducted,
and it has been assumed that no additional off-hire time is incurred, although there is no assurance that such estimate will be
reflective of the actual off-hire in the future.
Please refer to Notes 6 and 8 for the sale
of vessels and their loan settlement.
In January 2016, the Company entered into
a securities purchase agreement with an unrelated third party, under which it authorized and issued a convertible note in the original
principal amount of $500,000, which was convertible into common shares. The convertible note was entitled to interest, which was
paid in common shares. As of May 9, 2016, the original principal amount was converted into 1,333,027 common shares.
On April 28, 2016, the Company announced
that it will not proceed with the interest payment of approximately $390,000, which is originally due on May 15, 2016, due to lack
of liquidity.