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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________________ to __________________
Commission File Number 001-33831
EAGLE BULK SHIPPING INC.
(Exact name of Registrant as specified in its charter)
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Republic of the Marshall Islands | | 98-0453513 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
300 First Stamford Place, 5th floor
Stamford, Connecticut 06902
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (203) 276-8100
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | EGLE | The Nasdaq Stock Market LLC |
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 every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☒ | Non-Accelerated filer | ☐ |
Smaller reporting company | ☒ | | Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Number of shares of registrant’s common stock outstanding as of August 6, 2020: 77,052,592
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
TABLE OF CONTENTS
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PART I | FINANCIAL INFORMATION | |
ITEM 1. | FINANCIAL STATEMENTS (Unaudited) | |
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PART II | OTHER INFORMATION | |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the period ended June 30, 2020 (the "Quarterly Report on Form 10-Q") contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbor provided for under these sections. These statements may include words such as “believe,” “estimate,” “project,” “intend,” “expect,” “plan,” “anticipate,” and similar expressions in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements reflect management’s current expectations and observations with respect to future events and financial performance.
Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by those forward-looking statements. The principal factors that affect our financial position, results of operations and cash flows include, charter market rates, which have declined significantly from historic highs, periods of charter hire, vessel operating expenses and voyage costs, which are incurred primarily in U.S. dollars, depreciation expenses, which are a function of the cost of our vessels, significant vessel improvement costs and our vessels' estimated useful lives, and financing costs related to our indebtedness. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors which could include the following: (i) changes in demand in the drybulk market, including, without limitation, changes in production of, or demand for, commodities and bulk cargoes, generally or in particular regions; (ii) greater than anticipated levels of drybulk vessel newbuilding orders or lower than anticipated rates of drybulk vessel scrapping; (iii) changes in rules and regulations applicable to the drybulk industry, including, without limitation, legislation adopted by international bodies or organizations such as the International Maritime Organization and the European Union (the “EU”) or by individual countries; (iv) actions taken by regulatory authorities including without limitation the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”); (v) changes in trading patterns significantly impacting overall drybulk tonnage requirements; (vi) changes in the typical seasonal variations in drybulk charter rates; (vii) changes in the cost of other modes of bulk commodity transportation; (viii) changes in general domestic and international political conditions; (ix) changes in the condition of the Company's vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated dry docking costs); (x) significant deterioration in charter hire rates from current levels or the inability of the Company to achieve its cost-cutting measures; (xi) the duration and impact of the novel coronavirus ("COVID-19") pandemic; (xii) the relative cost and availability of low and high sulfur fuel oil; (xiii) our ability to realize the economic benefits or recover the cost of the scrubbers we have installed; (xiv) any legal proceedings which we may be involved from time to time; and other factors listed from time to time in our filings with the Securities and Exchange Commission (the “SEC”). This discussion also includes statistical data regarding world drybulk fleet and order book and fleet age. We generated some of this data internally, and some were obtained from independent industry publications and reports that we believe to be reliable sources. We have not independently verified this data nor sought the consent of any organizations to refer to their reports in this Quarterly Report on Form 10-Q. We disclaim any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
PART I: FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
EAGLE BULK SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019
(Unaudited)
(in U.S. dollars except share and per share data)
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
ASSETS: | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 98,532,141 | | | $ | 53,583,898 | |
Restricted cash - current | — | | | 5,471,470 | |
Accounts receivable, net of a reserve of $2,699,600 and $2,472,345, respectively | 18,967,935 | | | 19,982,871 | |
Prepaid expenses | 3,416,652 | | | 4,631,416 | |
Inventories | 10,104,762 | | | 15,824,278 | |
Derivative asset and other current assets | 9,378,476 | | | 1,039,430 | |
Total current assets | 140,399,966 | | | 100,533,363 | |
Noncurrent assets: | | | |
Vessels and vessel improvements, at cost, net of accumulated depreciation of $174,169,557 and $153,029,544, respectively | 853,916,919 | | | 835,959,084 | |
Operating lease right-of-use assets | 13,784,567 | | | 20,410,037 | |
Other fixed assets, net of accumulated depreciation of $996,418 and $832,541, respectively | 617,631 | | | 740,654 | |
Restricted cash - noncurrent | 74,917 | | | 74,917 | |
Deferred drydock costs, net | 20,406,118 | | | 17,495,270 | |
Deferred financing costs - Super Senior Facility | — | | | 166,111 | |
Advance for scrubbers, ballast water systems and other assets | 2,896,962 | | | 26,707,700 | |
Total noncurrent assets | 891,697,114 | | | 901,553,773 | |
Total assets | $ | 1,032,097,080 | | | $ | 1,002,087,136 | |
LIABILITIES & STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 15,310,881 | | | $ | 13,483,397 | |
Accrued interest | 5,014,786 | | | 5,321,089 | |
Other accrued liabilities | 7,693,031 | | | 28,996,836 | |
Fair value of derivative instruments - current | 3,179,011 | | | 756,229 | |
Current portion of operating lease liabilities | 12,511,790 | | | 13,255,978 | |
Unearned charter hire revenue | 4,880,019 | | | 4,692,259 | |
Current portion of long-term debt | 39,244,297 | | | 35,709,394 | |
Total current liabilities | 87,833,815 | | | 102,215,182 | |
Noncurrent liabilities: | | | |
Norwegian Bond Debt, net of debt discount and debt issuance costs | 172,574,882 | | | 175,867,310 | |
Super Senior Facility, net of debt issuance costs | 14,868,997 | | | — | |
New Ultraco Debt Facility, net of debt issuance costs | 147,157,424 | | | 141,396,770 | |
Revolver loan under New Ultraco Debt Facility | 55,000,000 | | | — | |
Convertible Bond Debt, net of debt discount and debt issuance costs | 94,685,801 | | | 92,803,144 | |
Fair value of derivative instruments - non current | 573,361 | | | — | |
Operating lease liabilities | 2,441,982 | | | 8,301,793 | |
Total noncurrent liabilities | 487,302,447 | | | 418,369,017 | |
Total liabilities | 575,136,262 | | | 520,584,199 | |
Commitments and contingencies | | | |
Stockholders' equity: | | | |
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued as of June 30, 2020 and December 31, 2019 | — | | | — | |
Common stock, $0.01 par value, 700,000,000 shares authorized, 71,957,885 and 71,502,206 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | 719,579 | | | 715,022 | |
Additional paid-in capital | 918,255,834 | | | 917,862,269 | |
Accumulated deficit | (461,093,440) | | | (437,074,354) | |
Accumulated other comprehensive loss | (921,155) | | | — | |
Total stockholders' equity | 456,960,818 | | | 481,502,937 | |
Total liabilities and stockholders' equity | $ | 1,032,097,080 | | | $ | 1,002,087,136 | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EAGLE BULK SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019
(Unaudited)
(in U.S. dollars except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Revenues, net | $ | 57,391,784 | | | $ | 69,391,315 | | | $ | 131,770,103 | | | $ | 146,780,912 | |
| | | | | | | |
Voyage expenses | 23,767,747 | | | 20,907,155 | | | 50,332,105 | | | 46,813,295 | |
Vessel expenses | 20,232,274 | | | 19,958,408 | | | 43,932,383 | | | 40,052,114 | |
Charter hire expenses | 4,719,367 | | | 11,179,480 | | | 10,760,306 | | | 22,671,386 | |
Depreciation and amortization | 12,503,191 | | | 9,761,322 | | | 24,969,674 | | | 19,168,430 | |
General and administrative expenses | 6,767,403 | | | 8,040,811 | | | 14,728,475 | | | 16,450,730 | |
Operating lease impairment | 352,368 | | | — | | | 352,368 | | | — | |
Gain on sale of vessels | — | | | (966,802) | | | — | | | (5,073,349) | |
Total operating expenses | 68,342,350 | | | 68,880,374 | | | 145,075,311 | | | 140,082,606 | |
Operating (loss)/income | (10,950,566) | | | 510,941 | | | (13,305,208) | | | 6,698,306 | |
Interest expense | 8,737,079 | | | 6,733,156 | | | 17,928,894 | | | 13,495,159 | |
Interest income | (56,132) | | | (393,164) | | | (212,989) | | | (827,482) | |
Loss on debt extinguishment | — | | | — | | | — | | | 2,268,452 | |
Realized and unrealized loss/(gain) on derivative instruments, net | 859,814 | | | 163,105 | | | (7,002,027) | | | (2,275,150) | |
Total other expense, net | 9,540,761 | | | 6,503,097 | | | 10,713,878 | | | 12,660,979 | |
Net loss | $ | (20,491,327) | | | $ | (5,992,156) | | | $ | (24,019,086) | | | $ | (5,962,673) | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 71,945,621 | | | 71,348,524 | | | 71,907,387 | | | 71,316,093 | |
Diluted | 71,945,621 | | | 71,348,524 | | | 71,907,387 | | | 71,316,093 | |
| | | | | | | |
Per share amounts: | | | | | | | |
Basic net loss | $ | (0.28) | | | $ | (0.08) | | | $ | (0.33) | | | $ | (0.08) | |
Diluted net loss | $ | (0.28) | | | $ | (0.08) | | | $ | (0.33) | | | $ | (0.08) | |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EAGLE BULK SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive loss
For the Three and Six Months Ended June 30, 2020 and 2019
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
| June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Net loss | $ | (20,491,327) | | | $ | (5,992,156) | | | $ | (24,019,086) | | | $ | (5,962,673) | |
| | | | | | | |
Other comprehensive loss | | | | | | | |
Net unrealized loss on cash flow hedges | (649,287) | | | — | | | (921,155) | | | — | |
| | | | | | | |
Comprehensive loss | $ | (21,140,614) | | | $ | (5,992,156) | | | $ | (24,940,241) | | | $ | (5,962,673) | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EAGLE BULK SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
For the Three and Six Months Ended June 30, 2020 and 2019
(Unaudited)
(in U.S. dollars except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Common Stock Amount | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated other comprehensive loss | | Total Stockholders’ Equity |
Balance at December 31, 2019 | 71,502,206 | | | $ | 715,022 | | | $ | 917,862,269 | | | $ | (437,074,354) | | | $ | — | | | $ | 481,502,937 | |
Net loss | | | — | | | — | | | (3,527,759) | | | — | | | (3,527,759) | |
Issuance of shares due to vesting of restricted shares | 437,679 | | | 4,377 | | | (4,377) | | | — | | | — | | | — | |
Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (271,868) | | | (271,868) | |
Cash used to settle net share equity awards | — | | | — | | | (1,161,301) | | | — | | | — | | | (1,161,301) | |
Stock-based compensation | — | | | — | | | 836,200 | | | — | | | — | | | 836,200 | |
Balance at March 31, 2020 | 71,939,885 | | | $ | 719,399 | | | $ | 917,532,791 | | | $ | (440,602,113) | | | $ | (271,868) | | | $ | 477,378,209 | |
Net loss | — | | | — | | | — | | | (20,491,327) | | | — | | | (20,491,327) | |
Issuance of shares due to vesting of restricted shares | 18,000 | | | 180 | | | (180) | | | — | | | — | | | — | |
Unrealized loss on cash flow hedges | — | | | — | | | — | | | — | | | (649,287) | | | (649,287) | |
Stock-based compensation | — | | | — | | | 723,223 | | | — | | | — | | | 723,223 | |
Balance at June 30, 2020 | 71,957,885 | | | $ | 719,579 | | | $ | 918,255,834 | | | $ | (461,093,440) | | | $ | (921,155) | | | $ | 456,960,818 | |
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| Common Stock | | Common Stock Amount | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
Balance at December 31, 2018 | 71,055,400 | | | $ | 710,555 | | | $ | 894,272,533 | | | $ | (415,377,239) | | | $ | 479,605,849 | |
Net income | — | | | — | | | — | | | 29,483 | | | 29,483 | |
Issuance of shares due to vesting of restricted shares | 293,011 | | | 2,929 | | | (2,929) | | | — | | | — | |
Cash used to settle net share equity awards | — | | | — | | | (877,161) | | | — | | | (877,161) | |
Stock-based compensation | — | | | — | | | 1,445,469 | | | — | | | 1,445,469 | |
Balance at March 31, 2019 | 71,348,411 | | | $ | 713,484 | | | $ | 894,837,912 | | | $ | (415,347,756) | | | $ | 480,203,640 | |
Net loss | — | | | — | | | — | | | (5,992,156) | | | (5,992,156) | |
Issuance of shares due to vesting of restricted shares | 113 | | | 1 | | | (1) | | | — | | | — | |
Cash used to settle net share equity awards | — | | | — | | | (536) | | | — | | | (536) | |
Stock-based compensation | — | | | — | | | 1,227,210 | | | — | | | 1,227,210 | |
Balance at June 30, 2019 | 71,348,524 | | | $ | 713,485 | | | $ | 896,064,585 | | | $ | (421,339,912) | | | $ | 475,438,158 | |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EAGLE BULK SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended | | |
| June 30, 2020 | | June 30, 2019 |
Cash flows from operating activities: | | | |
Net loss | $ | (24,019,086) | | | $ | (5,962,673) | |
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities: | | | |
Depreciation | 21,303,889 | | | 16,434,359 | |
Amortization of operating lease right-of-use assets | 6,273,102 | | | 6,242,947 | |
Amortization of deferred drydocking costs | 3,665,785 | | | 2,734,071 | |
Amortization of debt discount and debt issuance costs | 3,046,071 | | | 1,128,929 | |
Loss on debt extinguishment | — | | | 2,268,452 | |
Gain on sale of vessels | — | | | (5,073,349) | |
Operating lease impairment | 352,368 | | | — | |
Net unrealized loss/(gain) on fair value of derivatives | 814,014 | | | (1,951,420) | |
Stock-based compensation expense | 1,559,423 | | | 2,672,679 | |
Drydocking expenditures | (6,576,633) | | | (4,506,257) | |
Changes in operating assets and liabilities: | | | |
Accounts payable | (4,523,437) | | | (4,411,836) | |
Accounts receivable | (2,921,947) | | | 747,545 | |
Accrued interest | (306,303) | | | 1,023,820 | |
Inventories | 5,719,516 | | | 3,143,326 | |
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Operating lease liabilities short and long-term | (6,603,999) | | | (6,616,844) | |
Derivative asset, other current and non-current assets | (7,078,072) | | | 885,451 | |
Other accrued liabilities | (7,280,400) | | | 3,540,176 | |
Prepaid expenses | 1,214,764 | | | 657,760 | |
Unearned revenue | 187,760 | | | (4,496,185) | |
Net cash (used in)/provided by operating activities | (15,173,185) | | | 8,460,951 | |
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Cash flows from investing activities: | | | |
Purchase of vessel and vessel improvements | (510,029) | | | (18,477,740) | |
Purchase of scrubbers and ballast water systems | (22,371,606) | | | (23,893,065) | |
Proceeds from hull and machinery insurance claims | 3,658,924 | | | 1,301,546 | |
Proceeds from sale of vessels | — | | | 22,631,367 | |
Purchase of other fixed assets | (40,853) | | | (200,959) | |
Net cash used in investing activities | (19,263,564) | | | (18,638,851) | |
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Cash flows from financing activities: | | | |
Repayment of revolver loan under New First Lien Facility | — | | | (5,000,000) | |
Proceeds from the revolver loan under New First Lien Facility | — | | | 5,000,000 | |
Repayment of Original Ultraco Debt Facility | — | | | (82,600,000) | |
Proceeds from New Ultraco Debt Facility | 22,550,000 | | | 153,440,000 | |
Repayment of Norwegian Bond Debt | (4,000,000) | | | (4,000,000) | |
Repayment of term loan under New Ultraco Debt Facility | (13,112,245) | | | (5,048,671) | |
Proceeds from revolver facility under New Ultraco Debt Facility | 55,000,000 | | | — | |
Proceeds from Super Senior Facility | 15,000,000 | | | — | |
Repayment of New First Lien Facility - term loan | — | | | (60,000,000) | |
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Debt issuance costs paid to lenders on New Ultraco Debt Facility | (381,471) | | | (3,156,250) | |
Cash used to settle net share equity awards | (1,161,301) | | | (877,697) | |
Other financing costs | 18,539 | | | (280,237) | |
Net cash provided by/(used in) financing activities | 73,913,522 | | | (2,522,855) | |
Net increase/(decrease) in cash, cash equivalents and Restricted cash | 39,476,773 | | | (12,700,755) | |
Cash, cash equivalents and Restricted cash at beginning of period | 59,130,285 | | | 78,163,638 | |
Cash, cash equivalents and Restricted cash at end of period | $ | 98,607,058 | | | $ | 65,462,883 | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | |
Cash paid during the period for interest | $ | 15,202,876 | | | $ | 11,028,514 | |
Accruals for scrubbers and ballast water treatment systems included in Accounts payable and Other accrued liabilities | $ | 8,507,683 | | | $ | 8,976,160 | |
Accruals for debt issuance costs included in Other accrued liabilities | $ | 200,000 | | | $ | — | |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EAGLE BULK SHIPPING INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation and General Information
The accompanying condensed consolidated financial statements include the accounts of Eagle Bulk Shipping Inc. and its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our” or similar terms). The Company is engaged in the ocean transportation of drybulk cargoes worldwide through the ownership, charter and operation of drybulk vessels. The Company’s fleet is comprised of Supramax and Ultramax drybulk carriers and the Company operates its business in one business segment.
As of June 30, 2020, the Company owned and operated a modern fleet of 50 oceangoing vessels, including 30 Supramax and 20 Ultramax vessels with a combined carrying capacity of 2,946,188 deadweight tonnage ("dwt") and an average age of approximately 9.2 years. Additionally, the Company charters-in three Ultramax vessels on a long term basis with remaining lease term of approximately one year and also charters-in vessels on a short term basis for a period less than one year.
For the three and six months ended June 30, 2020 and 2019, the Company’s charterers did not individually account for more than 10% of the Company’s gross charter revenue during those periods.
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and the rules and regulations of the SEC that apply to interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes normally included in consolidated financial statements prepared in conformity with U.S. GAAP. They should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K, filed with the SEC on March 12, 2020.
The accompanying condensed consolidated financial statements are unaudited and include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its condensed consolidated financial position and results of operations for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year.
On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a pandemic. In response to the pandemic, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the pandemic, such as quarantines and travel restrictions. Such measures have caused and will likely continue to cause severe trade disruptions. The extent to which COVID-19 will impact the Company's results of operations and financial condition, including possible vessel impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact cannot be made at this time.
As of January 1, 2020, we adopted ASU No. 2016-13, "Financial Instruments—Credit Losses" ("ASU 2016-13"). ASU 2016-13 amended the current financial instrument impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The adoption of the accounting standard did not have any material impact on our condensed consolidated financial statements.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company are residual value of vessels, the useful lives of vessels, the value of stock-based compensation, estimated losses on our trade receivables, operating lease impairment, fair value of Convertible Bond Debt (as defined below) and its equity component, fair value of operating lease right-of-use assets and operating lease liabilities and the fair value of derivatives. Actual results could differ from those estimates.
Note 2. Recent Accounting Pronouncements
Leases
On January 1, 2019, the Company adopted Accounting Standards Update 2016-02, "Leases", ("ASC 842"). ASC 842 revises the accounting for leases. Under the new lease standard, lessees are required to recognize a operating lease right-of-use assets and a lease liabilities for substantially all leases. The new lease standard will continue to classify leases as either financing or operating, with classification affecting the pattern of expense recognition. The accounting applied by a lessor under the new guidance will be substantially equivalent to current lease accounting guidance.
The following are the type of contracts that fall under ASC 842:
Time charter out contracts
In a time charter contract, the vessel is hired by the charterer for a specified period of time in exchange for consideration which is based on a daily hire rate. The charterer has the full discretion over the ports visited, shipping routes and vessel speed. The contract/charter party generally provides typical warranties regarding the speed and performance of the vessel. The charter party generally has some owner protective restrictions such that the vessel is sent only to safe ports by the charterer, subject always to compliance with applicable sanction laws, and carry only lawful or non-hazardous cargo. In a time charter contract, the Company is responsible for all the costs incurred for running the vessel such as crew costs, vessel insurance, repairs and maintenance and lubes. The charterer bears the voyage related costs such as bunker expenses, port charges and canal tolls during the hire period. The performance obligations in a time charter contract are satisfied over the term of the contract beginning when the vessel is delivered to the charterer until it is redelivered back to the Company. The charterer generally pays the charter hire in advance of the upcoming contract period. The Company determined that all time charter contracts are considered operating leases and therefore fall under the scope of ASC 842 because: (i) the vessel is an identifiable asset; (ii) the Company does not have substantive substitution rights; and (iii) the charterer has the right to control the use of the vessel during the term of the contract and derives the economic benefits from such use.
The transition guidance associated with ASC 842 allows for certain practical expedients to the lessors. The Company elected not to separate the lease and non-lease components included in the time charter revenue because the pattern of revenue recognition for the lease and non-lease components (included in the daily hire rate) is the same. The daily hire rate represents the hire rate for a bare boat charter as well as the compensation for expenses incurred running the vessel such as crewing expense, repairs, insurance, maintenance and lubes. Both the lease and non-lease components are earned by passage of time.
The adoption of ASC 842 did not materially impact our accounting for time charter out contracts. The revenue generated from time charter out contracts is recognized on a straight-line basis over the term of the respective time charter agreements, which are recorded as part of revenues, net in our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019.
Time charter-in contracts
The Company charters in vessels to supplement our own fleet and employs them both on time charters and voyage charters. The time charter-in contracts range in lease terms from 30 days to 2 years. The Company elected the practical expedient of ASC 842 that allows for time charter-in contracts with an initial lease term of less than 12 months to be excluded from the operating lease right-of-use assets and lease liabilities recognized on our Condensed Consolidated Balance Sheet as of January 1, 2019. The Company recognized the operating lease right-of-use assets and the corresponding lease liabilities on the Condensed Consolidated Balance sheet for time charter-in contracts greater than 12 months on the date of adoption of ASC 842. The Company will continue to recognize the lease payments for all operating leases as charter hire expenses on the condensed consolidated statements of operations on a straight-line basis over the lease term.
Under ASC 842, leases are classified as either finance or operating arrangements, with such classification affecting the pattern and classification of expense recognition in an entity's income statement. For operating leases, ASC 842 requires recognition in an entity’s income statement of a single lease expense, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Right-of-use assets represent a right to use an underlying asset for the lease term and the related lease liability represents an obligation to make lease payments pursuant to the contractual terms of the lease agreement.
At lease commencement, a lessee must develop a discount rate to calculate the present value of the lease payments so that it can determine lease classification and measure the lease liability. When determining the discount rate to be used at lease
commencement, a lessee must use the rate implicit in the lease unless that rate cannot be readily determined. When the rate implicit in the lease cannot be readily determined, the lessee should use its incremental borrowing rate. The incremental borrowing rate is the rate that reflects the interest a lessee would have to pay to borrow funds on a collateralized basis over a similar term and in a similar economic environment. The Company determined that the time charter-in contracts do not contain an implicit borrowing rate. Therefore, the Company arrived at the incremental borrowing rate by determining the Company's implied credit rating and the yield curve for debt as of January 1, 2019. The Company then interpolated the yield curve to determine the incremental borrowing rate for each lease based on the remaining lease term on the specific lease. Based on the above methodology, the Company's incremental borrowing rates ranged from 5.05% to 6.08% for the five lease contracts for which the Company recorded operating lease right-of-use assets and corresponding lease liabilities.
The Company has time charter-in contracts for three Ultramax vessels which are greater than 12 months as of the date of adoption of ASC 842. A brief description of each of these contracts is below:
(i) The Company entered into an agreement effective April 28, 2017, to charter-in a 61,400 dwt, 2013 built Japanese vessel for approximately four years with options for two additional years. The hire rate for the first four years is $12,800 per day and the hire rate for the first optional year is $13,800 per day and $14,300 per day for the second optional year. The Company determined that it will not exercise the existing options under this contract and therefore the options are not included in the calculation of the operating lease right-of-use asset. In addition, the Company’s fair value below contract value of time charters acquired of $1.8 million as of December 31, 2018, which related to the unamortized value of a prior charter with the same counterparty that had been recorded at the time of the Company’s emergence from bankruptcy, was offset against the corresponding right of use asset on this lease as of January 1, 2019.
(ii) On May 4, 2018, the Company entered into an agreement to charter-in a 61,425 dwt 2013 built Ultramax vessel for three years with an option for an additional two years. The hire rate for the first three years is $12,700 per day and $13,750 per day for the first year option and $14,750 per day for the second year option. The Company took delivery of the vessel in the third quarter of 2018. The Company determined that it will not exercise the existing options under this contract and therefore the options are not included in the calculation of the operating lease right-of-use asset.
(iii) On December 9, 2018, the Company entered into an agreement to charter-in a 62,487 dwt 2016 built Ultramax vessel for two years. The hire rate for the vessel until March 2020 is $14,250 per day and $15,250 per day thereafter. The Company took delivery of the vessel in the fourth quarter of 2018. The Company elected not to exercise the existing options under this contract and therefore the options are not included in the calculation of the operating lease right-of-use asset. On December 25, 2019, the Company renegotiated the lease terms for another year at a hire rate of $11,600 per day. The Company accounted for this as a lease modification on December 25, 2019 and increased its lease liability and right-of-use asset on its consolidated balance sheet as of December 31, 2019 by $4.5 million.
Office leases
On October 15, 2015, the Company entered into a commercial lease agreement as a sublessee for office space in Stamford, Connecticut. The lease is effective from January 2016 through June 2023, with an average annual rent of $0.4 million. The lease is secured by a cash collateral of $74,917 which is recorded as restricted cash - noncurrent in the accompanying condensed consolidated balance sheets. In November 2018, the Company entered into a lease office agreement in Singapore, which expires in October 2021, with an average annual rent of $0.3 million. The Company determined the two office leases to be operating leases and recorded the lease expense as part of General and administrative expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019.
Lease Disclosures Under ASC 842
The objective of the disclosure requirements under ASC 842 is to enable users of an entity’s financial statements to assess the amount, timing, and uncertainty of cash flows arising from lease arrangements. In addition to the supplemental qualitative leasing disclosures included above, below are quantitative disclosures that are intended to meet the stated objective of ASC 842.
Operating lease right-of-use assets and lease liabilities as of June 30, 2020 and December 31, 2019 are as follows:
| | | | | | | | | | | | | | |
Description | Location in Balance Sheet | June 30, 2020 (1) | | December 31, 2019 (1) |
Assets: | | | | |
Chartered-in contracts greater than 12 months (2) | Operating lease right-of-use assets | $ | 12,125,541 | | | $ | 18,442,965 | |
Office leases | Operating lease right-of-use assets | 1,659,026 | | | 1,967,072 | |
| | $ | 13,784,567 | | | $ | 20,410,037 | |
Liabilities: | | | | |
Chartered-in contracts greater than 12 months | Current portion of operating lease liabilities | $ | 11,853,335 | | | $ | 12,622,524 | |
Office leases | Current portion of operating lease liabilities | 658,455 | | | 633,454 | |
Lease liabilities - current portion | | $ | 12,511,790 | | | $ | 13,255,978 | |
| | | | |
Chartered-in contracts greater than 12 months | Operating lease liabilities | $ | 1,441,411 | | | $ | 6,974,943 | |
Office leases | Operating lease liabilities | 1,000,571 | | | 1,326,850 | |
Lease liabilities - noncurrent portion | | $ | 2,441,982 | | | $ | 8,301,793 | |
(1) The Operating lease right-of-use assets and Operating lease liabilities represent the present value of lease payments for the remaining term of the lease. The discount rate used ranged from 5.05% to 6.08%. The weighted average discount rate used to calculate the lease liability was 5.50%.
(2) As of June 30, 2020, the Company determined that there were impairment indicators present for one of our chartered-in vessel contracts and, as a result, we recorded an operating lease impairment of $0.4 million. The operating lease impairment was included as a component of Operating (loss)/income in our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020.
The table below presents the components of the Company’s lease expenses and sub-lease income on a gross basis earned from chartered-in contracts greater than 12 months for the three and six months ended June 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | Six Months Ended | | |
Description | Location in Statement of Operations | | June 30, 2020 | | June 30, 2019 | | June 30, 2020 | | June 30, 2019 |
Lease expense for chartered-in contracts less than 12 months | Charter hire expenses | | $ | 1,644,173 | | | $ | 7,684,182 | | | $ | 4,389,586 | | | $ | 16,044,965 | |
Lease expense for chartered-in contracts greater than 12 months | Charter hire expenses | | 3,075,194 | | | 3,495,298 | | | 6,370,720 | | | 6,626,421 | |
| | | $ | 4,719,367 | | | $ | 11,179,480 | | | $ | 10,760,306 | | | $ | 22,671,386 | |
Lease expense for office leases | General and administrative expenses | | 181,412 | | | 177,356 | | | 362,824 | | | 355,356 | |
Sub lease income from chartered-in contracts greater than 12 months * | Revenues, net | | $ | 1,292,814 | | | $ | 2,759,065 | | | $ | 5,290,038 | | | $ | 5,841,817 | |
* The sub-lease income represents only time charter revenue earned on the chartered-in contracts greater than 12 months. There is additional revenue earned from voyage charters on the same chartered-in contracts which is recorded in Revenues, net in our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019.
The cash paid for operating leases with terms greater than 12 months is $3.4 million and $7.1 million for the three and six months ended June 30, 2020, respectively.
The cash paid for operating leases with terms greater than 12 months is $3.7 million and $