UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2019September 30, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-38771
DIAMOND S SHIPPING INC.
(Exact name of registrant as specified in its charter)
Republic of the Marshall Islands | ||
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) | |
33 Benedict Place | ||
Greenwich, CT | 06830 | |
(Address of principal executive offices) | (Zip Code) |
(203) 413-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, | par value $0.001 per share | DSSI |
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. Yes x¨No xo
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨ No¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer | Accelerated filer | |||
Non-accelerated filer | x | Smaller reporting company | ||
Emerging growth company | x |
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.¨o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Nox
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 39,890,696date. The number of shares outstanding of the issuer’s common stock as of November 12, 2020: 40,440,593 shares of common stock, are issued and outstanding as of May 9, 2019.par value $0.001 per share.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
INDEX
PART II. | OTHER INFORMATION | PAGE | ||
Item 1 | Legal Proceedings | |||
Item 1A | Risk Factors | |||
Item 6 | Exhibits |
Special Notice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are often identified by future or conditional words such as “will,” “plans,” “expects,” “intends,” “believes,” “seeks,” “estimates,” or “anticipates,” or by variations of such words or by similar expressions. There can be no assurance that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements.
The following important factors, and those important factors described elsewhere in this report, could affect (and in some cases have affected) our actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements:
· | the cyclicality of the tanker industry; |
· | changes in economic and competitive conditions affecting our business, including market fluctuations in charter rates; |
· | the length and severity of the ongoing novel coronavirus (“COVID-19”) pandemic, including its impact on the demand for seaborne transportation of petroleum products; |
· | risks related to an oversupply of tanker vessels; |
· | changes in fuel prices; |
· | decreases in the market values of tanker vessels; |
· | risks related to the management of our growth strategy, counterparty risks and customer relations with key customers; |
· | our ability to meet obligations under time charter agreements; |
· | dependence on third-party managers and a limited number of customers; |
· | our liquidity, level of indebtedness, operating expenses, capital expenditures and financing; |
· | our interest rate swap agreements and credit facilities; |
· | risk of loss, including potential liability from future litigation and potential costs due to environmental damage, vessel collisions and business interruption; risks related to war, terrorism and piracy; |
· | risks related to the acquisition, modification and operation of vessels; |
· | future supply of, and demand for, refined products and crude oil, including relating to seasonality; |
· | risks related to our insurance, including adequacy of coverage and increased premium payments; |
· | risks related to tax rules applicable to us; |
· | our ability to clear the oil majors’ risk assessment processes; |
· | future refined product and crude oil prices and production; |
· | the carrying values of our vessels and the potential for any asset impairments; |
· | our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term time charter; |
· | our continued ability to enter into long-term, fixed-rate time charters with our charterers and to re-charter our vessels as their existing charters expire at attractive rates; |
· | failure to realize the anticipated benefits of the Merger (as defined herein), including as a result of integrating the businesses; |
· | failure to maintain effective internal control over financial reporting; |
· | our ability to implement our business strategy and manage planned growth; |
· | changes in laws, treaties or regulations applicable to the Company, including regulations relating to environmental compliance; and |
· | other risks and uncertainties disclosed in the Company’s reports filed from time to time with the Securities and Exchange Commission (“SEC”) under the Exchange Act. |
Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk. When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and in our other SEC filings. These forward-looking statements speak only as of the date on which such statements were made, and we undertake no obligation to update these statements, except as required by the federal securities laws. These forward-looking statements are not guarantees of our future performance, and actual results and future developments may vary materially from those projected in the forward-looking statements.
Except to the extent required by applicable law or regulation, we undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements (Unaudited)
5
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
as of March 31, 2019September 30, 2020 and December 31, 20182019
(In thousands,Thousands, except for share and per share data)
(Unaudited)
March 31, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 76,106 | $ | 83,054 | $ | 114,335 | $ | 83,609 | ||||||||
Due from charterers – Net of provision for doubtful accounts of $935 and $1,962, respectively | 46,965 | 42,637 | ||||||||||||||
Due from charterers – Net of provision for doubtful accounts of $2,037 and $1,415, respectively | 56,948 | 80,691 | ||||||||||||||
Inventories | 32,762 | 20,880 | 20,518 | 32,071 | ||||||||||||
Prepaid expenses and other current assets | 11,678 | 3,731 | 14,611 | 13,179 | ||||||||||||
Total current assets | 167,511 | 150,302 | 206,412 | 209,550 | ||||||||||||
Noncurrent assets: | ||||||||||||||||
Vessels – Net of accumulated depreciation of $498,926 and $479,532 and, respectively | 1,975,675 | 1,454,286 | ||||||||||||||
Other property – Net of accumulated depreciation of $522 and $458, respectively | 715 | 756 | ||||||||||||||
Deferred drydocking costs – Net of accumulated amortization of $15,718 and $14,573, respectively | 35,364 | 33,287 | ||||||||||||||
Deferred financing costs – Net | — | 169 | ||||||||||||||
Vessels – Net of accumulated depreciation of $631,438 and $553,483, respectively | 1,799,835 | 1,865,738 | ||||||||||||||
Other property – Net of accumulated depreciation of $813 and $584, respectively | 433 | 642 | ||||||||||||||
Deferred drydocking costs – Net of accumulated amortization of $24,406 and $17,975, respectively | 34,016 | 37,256 | ||||||||||||||
Restricted cash | 5,229 | 5,104 | 6,014 | 5,610 | ||||||||||||
Time charter contracts acquired – Net of accumulated amortization of $1,075 and $1,733, respectively | 7,317 | 93 | ||||||||||||||
Advances to Norient pool | 8,001 | — | ||||||||||||||
Time charter contracts acquired – Net of accumulated amortization of $4,290 and $2,296, respectively | 2,809 | 5,004 | ||||||||||||||
Other noncurrent assets | 5,431 | 5,858 | 2,593 | 4,582 | ||||||||||||
Total noncurrent assets | 2,029,731 | 1,499,553 | 1,853,701 | 1,918,832 | ||||||||||||
Total | $ | 2,197,242 | $ | 1,649,855 | $ | 2,060,113 | $ | 2,128,382 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Liabilities and Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | 112,242 | $ | 97,315 | $ | 134,389 | $ | 134,389 | ||||||||
Accounts payable and accrued expenses | 39,257 | 25,316 | 35,336 | 44,062 | ||||||||||||
Deferred charter hire revenue | 3,755 | 3,622 | 3,245 | 1,934 | ||||||||||||
Derivative liabilities | 784 | 630 | ||||||||||||||
Derivative liability | 557 | — | ||||||||||||||
Total current liabilities | 156,038 | 126,884 | 173,527 | 180,385 | ||||||||||||
Long-term debt – Net of deferred financing costs of $13,311 and $7,147, respectively | 828,064 | 542,226 | ||||||||||||||
Derivative liabilities | 1,146 | 900 | ||||||||||||||
Long-term debt – Net of deferred financing costs of $13,426 and $15,866, respectively | 600,703 | 744,055 | ||||||||||||||
Derivative liability | 620 | — | ||||||||||||||
Total liabilities | 985,248 | 670,009 | 774,850 | 924,440 | ||||||||||||
Commitments and contingencies (Note 15) | ||||||||||||||||
Commitments and contingencies (Note 16) | ||||||||||||||||
Shareholders’ Equity: | ||||||||||||||||
Partners’ contributions | — | 994,771 | ||||||||||||||
Common stock, par value $0.001; 100,000,000 shares authorized; issued and outstanding 39,890,696 shares at March 31, 2019 | 40 | — | ||||||||||||||
Equity: | ||||||||||||||||
Common stock, par value $0.001; 100,000,000 shares authorized; issued and outstanding 39,924,892 and 39,890,699 shares at September 30, 2020 and December 31, 2019, respectively | 40 | 40 | ||||||||||||||
Treasury stock – at cost; 137,289 shares at September 30, 2020 | (1,418 | ) | — | |||||||||||||
Additional paid-in capital | 1,234,137 | 2,558 | 1,240,521 | 1,237,658 | ||||||||||||
Accumulated other comprehensive income | 3,291 | 4,387 | ||||||||||||||
Accumulated deficit | (60,287 | ) | (56,477 | ) | ||||||||||||
Total Diamond S Shipping Inc. shareholders’ equity | 1,177,181 | 945,239 | ||||||||||||||
Accumulated other comprehensive loss | (1,177 | ) | — | |||||||||||||
Retained earnings (accumulated deficit) | 12,525 | (68,567 | ) | |||||||||||||
Total Diamond S Shipping Inc. equity | 1,250,491 | 1,169,131 | ||||||||||||||
Noncontrolling interests | 34,813 | 34,607 | 34,772 | 34,811 | ||||||||||||
Total equity | 1,211,994 | 979,846 | 1,285,263 | 1,203,942 | ||||||||||||
Total | $ | 2,197,242 | $ | 1,649,855 | $ | 2,060,113 | $ | 2,128,382 |
See notes to condensed consolidated financial statements.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended March 31,September 30, 2020 and 2019 and 2018
(In thousands,Thousands, except for share and per share data)
(Unaudited)
For the Three Months Ended March 31, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Spot revenue | $ | 98,449 | $ | 85,934 | ||||||||||||||||||||
Voyage revenue | $ | 69,098 | $ | 120,954 | $ | 419,169 | $ | 348,747 | ||||||||||||||||
Time charter revenue | 4,207 | 4,364 | 20,408 | 20,572 | 63,296 | 44,730 | ||||||||||||||||||
Pool revenue | — | 2,846 | 23,091 | — | 23,410 | — | ||||||||||||||||||
Voyage revenue | 102,656 | 93,144 | ||||||||||||||||||||||
Total revenue | 112,597 | 141,526 | 505,875 | 393,477 | ||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Voyage expenses | 41,578 | 44,735 | 32,896 | 59,968 | 156,926 | 167,441 | ||||||||||||||||||
Vessel expenses | 24,801 | 28,030 | 44,758 | 41,799 | 128,032 | 108,976 | ||||||||||||||||||
Depreciation and amortization expense | 21,956 | 22,054 | 29,067 | 28,763 | 86,598 | 79,962 | ||||||||||||||||||
Loss on sale of vessels | — | 18,344 | — | 18,344 | ||||||||||||||||||||
General and administrative expenses | 6,288 | 4,157 | 7,685 | 7,566 | 23,294 | 21,174 | ||||||||||||||||||
Total operating expenses | 94,623 | 98,976 | 114,406 | 156,440 | 394,850 | 395,897 | ||||||||||||||||||
Operating income (loss) | 8,033 | (5,832 | ) | |||||||||||||||||||||
Operating (loss) income | (1,809 | ) | (14,914 | ) | 111,025 | (2,420 | ) | |||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||
Interest expense | (9,370 | ) | (8,582 | ) | (7,019 | ) | (13,021 | ) | (28,106 | ) | (35,813 | ) | ||||||||||||
Other income | 517 | 351 | 3 | 492 | 339 | 1,393 | ||||||||||||||||||
Total other expense – Net | (8,853 | ) | (8,231 | ) | (7,016 | ) | (12,529 | ) | (27,767 | ) | (34,420 | ) | ||||||||||||
Net loss | (820 | ) | (14,063 | ) | ||||||||||||||||||||
Net (loss) income | (8,825 | ) | (27,443 | ) | 83,258 | (36,840 | ) | |||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interest | 206 | (336 | ) | 839 | (1,548 | ) | 2,166 | (1,416 | ) | |||||||||||||||
Net loss attributable to Diamond S Shipping Inc. | $ | (1,026 | ) | $ | (13,727 | ) | ||||||||||||||||||
Net (loss) income attributable to Diamond S Shipping Inc. | $ | (9,664 | ) | $ | (25,895 | ) | $ | 81,092 | $ | (35,424 | ) | |||||||||||||
Net loss per share – basic and diluted | $ | (0.04 | ) | $ | (0.51 | ) | ||||||||||||||||||
Net (loss) earnings per share – basic | $ | (0.24 | ) | $ | (0.65 | ) | $ | 2.03 | $ | (0.99 | ) | |||||||||||||
Net (loss) earnings per share – diluted | $ | (0.24 | ) | $ | (0.65 | ) | $ | 2.02 | $ | (0.99 | ) | |||||||||||||
Weighted average common shares outstanding – basic and diluted | 27,731,252 | 27,165,696 | ||||||||||||||||||||||
Weighted average common shares outstanding – basic | 39,918,427 | 39,890,698 | 39,879,976 | 35,835,477 | ||||||||||||||||||||
Weighted average common shares outstanding – diluted | 39,918,427 | 39,890,698 | 40,106,157 | 35,835,477 |
See notes to condensed consolidated financial statements.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss(Loss) Income
for the Three and Nine Months Ended March 31,September 30, 2020 and 2019 and 2018
(In Thousands)
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net loss | $ | (820 | ) | $ | (14,063 | ) | ||
Unrealized (loss) gain on cash flow hedges | (1,096 | ) | 1,356 | |||||
Other comprehensive (loss) income | (1,096 | ) | 1,356 | |||||
Comprehensive loss | (1,916 | ) | (12,707 | ) | ||||
Less: comprehensive income (loss) attributable to noncontrolling interest | 206 | (336 | ) | |||||
Comprehensive loss attributable to Diamond S Shipping Inc. | $ | (2,122 | ) | $ | (13,043 | ) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net (loss) income | $ | (8,825 | ) | $ | (27,443 | ) | $ | 83,258 | $ | (36,840 | ) | |||||
Unrealized loss on cash flow hedges | (281 | ) | (518 | ) | (1,177 | ) | (3,496 | ) | ||||||||
Other comprehensive loss | (281 | ) | (518 | ) | (1,177 | ) | (3,496 | ) | ||||||||
Comprehensive (loss) income | (9,106 | ) | (27,961 | ) | 82,081 | (40,336 | ) | |||||||||
Less: comprehensive income (loss) attributable to noncontrolling interest | 839 | (1,548 | ) | 2,166 | (1,416 | ) | ||||||||||
Comprehensive (loss) income attributable to Diamond S Shipping Inc. | $ | (9,945 | ) | $ | (26,413 | ) | $ | 79,915 | $ | (38,920 | ) |
See notes to condensed consolidated financial statements.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Shareholders’ Equity
for the Three and Nine Months Ended March 31,September 30, 2020 and 2019 and 2018
(In Thousands)
(Unaudited)
Partners’ Contributions | Common Stock | Additional Paid- in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Noncontrolling Interests | Total | ||||||||||||||||||||||
Balance – January 1, 2019 | $ | 994,771 | $ | — | $ | 2,558 | $ | 4,387 | $ | (56,477 | ) | $ | 34,607 | $ | 979,846 | |||||||||||||
Cumulative effect of accounting change (Note 12) | — | — | — | — | (2,784 | ) | — | (2,784 | ) | |||||||||||||||||||
Merger transaction (Note 3) | (994,771 | ) | 40 | 1,231,579 | — | — | — | 236,848 | ||||||||||||||||||||
Unrealized loss on cash flow hedges | — | — | — | (1,096 | ) | — | — | (1,096 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (1,026 | ) | 206 | (820 | ) | |||||||||||||||||||
Balance – March 31, 2019 | $ | — | $ | 40 | $ | 1,234,137 | $ | 3,291 | $ | (60,287 | ) | $ | 34,813 | $ | 1,211,994 |
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | (Accumulated Deficit) Retained Earnings | Noncontrolling Interests | Total | ||||||||||||||||||||||
Balance – January 1, 2020 | $ | 40 | $ | — | $ | 1,237,658 | $ | — | $ | (68,567 | ) | $ | 34,811 | $ | 1,203,942 | |||||||||||||
Stock-based compensation | — | — | 1,334 | — | — | — | 1,334 | |||||||||||||||||||||
NT Suez Holdco LLC distribution | — | — | — | — | — | (1,568 | ) | (1,568 | ) | |||||||||||||||||||
Shares repurchased | — | (1,418 | ) | — | — | — | — | (1,418 | ) | |||||||||||||||||||
Net income | — | — | — | — | 45,044 | 537 | 45,581 | |||||||||||||||||||||
Balance – March 31, 2020 | 40 | (1,418 | ) | 1,238,992 | — | (23,523 | ) | 33,780 | 1,247,871 | |||||||||||||||||||
Stock-based compensation | — | — | 1,109 | — | — | — | 1,109 | |||||||||||||||||||||
NT Suez Holdco LLC distribution | — | — | — | — | — | (343 | ) | (343 | ) | |||||||||||||||||||
Unrealized loss on cash flow hedges | — | — | — | (896 | ) | — | — | (896 | ) | |||||||||||||||||||
Equity awards net settled to cover employee withholding taxes | — | — | (693 | ) | — | — | (693 | ) | ||||||||||||||||||||
Net income | — | — | — | — | 45,712 | 790 | 46,502 | |||||||||||||||||||||
Balance – June 30, 2020 | 40 | (1,418 | ) | 1,239,408 | (896 | ) | 22,189 | 34,227 | 1,293,550 | |||||||||||||||||||
Stock-based compensation | — | — | 1,164 | — | — | — | 1,164 | |||||||||||||||||||||
NT Suez Holdco LLC distribution | — | — | — | — | — | (294 | ) | (294 | ) | |||||||||||||||||||
Unrealized loss on cash flow hedges | — | — | — | (281 | ) | — | — | (281 | ) | |||||||||||||||||||
Equity awards net settled to cover employee withholding taxes | — | — | (51 | ) | — | — | (51 | ) | ||||||||||||||||||||
Net (loss) income | — | — | — | — | (9,664 | ) | 839 | (8,825 | ) | |||||||||||||||||||
Balance – September 30, 2020 | $ | 40 | $ | (1,418 | ) | $ | 1,240,521 | $ | (1,177 | ) | $ | 12,525 | $ | 34,772 | $ | 1,285,263 |
Partners’ Contributions | Common Stock | Additional Paid- in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Noncontrolling Interests | Total | ||||||||||||||||||||||
Balance – January 1, 2018 | $ | 994,771 | $ | — | $ | 2,558 | $ | 4,773 | $ | 29,629 | $ | 35,029 | $ | 1,066,760 | ||||||||||||||
Unrealized gain on cash flow hedges | — | — | — | 1,356 | — | — | 1,356 | |||||||||||||||||||||
Net loss | — | — | — | — | (13,727 | ) | (336 | ) | (14,063 | ) | ||||||||||||||||||
Balance – March 31, 2018 | $ | 994,771 | $ | — | $ | 2,558 | $ | 6,129 | $ | 15,902 | $ | 34,693 | $ | 1,054,053 |
Partners’ Contributions | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Noncontrolling Interests | Total | ||||||||||||||||||||||
Balance – January 1, 2019 | $ | 994,771 | $ | — | $ | 2,558 | $ | 4,387 | $ | (56,477 | ) | $ | 34,607 | $ | 979,846 | |||||||||||||
Cumulative effect of accounting change | — | — | — | — | (2,784 | ) | — | (2,784 | ) | |||||||||||||||||||
Merger transaction (Note 3) | (994,771 | ) | 40 | 1,231,579 | — | — | — | 236,848 | ||||||||||||||||||||
Unrealized loss on cash flow hedges | — | — | — | (1,096 | ) | — | — | (1,096 | ) | |||||||||||||||||||
Net loss (income) | — | — | — | — | (1,026 | ) | 206 | (820 | ) | |||||||||||||||||||
Balance – March 31, 2019 | — | 40 | 1,234,137 | 3,291 | (60,287 | ) | 34,813 | 1,211,994 | ||||||||||||||||||||
Unrealized loss on cash flow hedges | — | — | — | (1,882 | ) | — | — | (1,882 | ) | |||||||||||||||||||
Capital contributions for NT Suez Holdco LLC | — | — | �� | — | — | — | 980 | 980 | ||||||||||||||||||||
Stock-based compensation | — | — | 861 | — | — | — | 861 | |||||||||||||||||||||
Net loss | — | — | — | — | (8,503 | ) | (74 | ) | (8,577 | ) | ||||||||||||||||||
Balance – June 30, 2019 | — | 40 | 1,234,998 | 1,409 | (68,790 | ) | 35,719 | 1,203,376 | ||||||||||||||||||||
Unrealized loss on cash flow hedges | — | — | — | (518 | ) | — | — | (518 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 1,301 | — | — | — | 1,301 | |||||||||||||||||||||
Net loss | — | — | — | — | (25,895 | ) | (1,548 | ) | (27,443 | ) | ||||||||||||||||||
Balance – September 30, 2019 | $ | — | $ | 40 | $ | 1,236,299 | $ | 891 | $ | (94,685 | ) | $ | 34,171 | $ | 1,176,716 |
See notes to condensed consolidated financial statements.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
for the ThreeNine Months Ended March 31,September 30, 2020 and 2019 and 2018
(In Thousands)
(Unaudited)
For the Three Months Ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows from Operating Activities: | ||||||||||||||||
Net loss | $ | (820 | ) | $ | (14,063 | ) | ||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Net income (loss) | $ | 83,258 | $ | (36,840 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization expense | 21,956 | 22,054 | 86,598 | 79,962 | ||||||||||||
Loss on sale of vessels | — | 18,344 | ||||||||||||||
Amortization of deferred financing costs | 846 | 723 | 2,663 | 3,106 | ||||||||||||
Amortization of time charter hire contracts acquired | 76 | 59 | 2,194 | 1,632 | ||||||||||||
Amortization of the realized gain from recouponing swaps | (696 | ) | — | — | (2,045 | ) | ||||||||||
Stock-based compensation expense | 3,607 | 2,162 | ||||||||||||||
Changes in assets and liabilities | (11,244 | ) | (2,590 | ) | 20,692 | (11,723 | ) | |||||||||
Cash paid for drydocking | (4,232 | ) | (4,223 | ) | ||||||||||||
Payments for drydocking | (5,120 | ) | (12,685 | ) | ||||||||||||
Net cash provided by operating activities | 5,886 | 1,960 | 193,892 | 41,913 | ||||||||||||
Cash flows from Investing Activities: | ||||||||||||||||
Acquisition costs, net of cash acquired of $16,568 | (292,683 | ) | — | — | (292,683 | ) | ||||||||||
Transaction costs | (17,785 | ) | — | — | (18,930 | ) | ||||||||||
Proceeds from sale of vessels | — | 31,800 | ||||||||||||||
Payments for vessel additions and other property | (2,649 | ) | (797 | ) | (11,958 | ) | (11,238 | ) | ||||||||
Net cash used in investing activities | (313,117 | ) | (797 | ) | (11,958 | ) | (291,051 | ) | ||||||||
Cash flows from Financing Activities: | ||||||||||||||||
Borrowings on long-term debt | 300,000 | — | — | 300,000 | ||||||||||||
Principal payments on long-term debt | (17,748 | ) | (18,593 | ) | (100,792 | ) | (86,604 | ) | ||||||||
Borrowings on revolving credit facilities | 51,000 | 6,000 | — | 61,000 | ||||||||||||
Repayments on revolving credit facilities | (26,323 | ) | — | (45,000 | ) | (26,323 | ) | |||||||||
NT Suez Holdco LLC distribution | (2,205 | ) | — | |||||||||||||
Shares repurchased | (1,418 | ) | — | |||||||||||||
Cash paid to net settle employee withholding taxes on equity awards | (745 | ) | — | |||||||||||||
Proceeds from partners’ contributions in subsidiaries | — | 980 | ||||||||||||||
Payments for deferred financing costs | (6,521 | ) | (271 | ) | (644 | ) | (6,970 | ) | ||||||||
Net cash provided by (used in) financing activities | 300,408 | (12,864 | ) | |||||||||||||
Net decrease in cash, cash equivalents and restricted cash | (6,823 | ) | (11,701 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (150,804 | ) | 242,083 | |||||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 31,130 | (7,055 | ) | |||||||||||||
Cash, cash equivalents and restricted cash – Beginning of period | 88,158 | 96,041 | 89,219 | 88,158 | ||||||||||||
Cash, cash equivalents and restricted cash – End of period | $ | 81,335 | $ | 84,340 | $ | 120,349 | $ | 81,103 | ||||||||
Supplemental disclosures: | ||||||||||||||||
Cash paid for interest | $ | 9,109 | $ | 7,861 | $ | 26,480 | $ | 35,206 | ||||||||
Common stock issued to CPLP (Refer to Note 3 — Merger Transaction) | $ | — | $ | 236,848 | ||||||||||||
Unpaid transaction costs in Accounts payable and accrued expenses at the end of the period | $ | 1,299 | $ | — | $ | — | $ | 154 | ||||||||
Unpaid vessel additions in Accounts payable and accrued expenses at the end of the period | $ | 2,514 | $ | — | $ | 1,326 | $ | 4,604 |
See notes to condensed consolidated financial statements.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
(In thousands,Thousands, except for share and per share data)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. | BUSINESS AND BASIS OF PRESENTATION |
Business— Diamond S Shipping Inc. (“DSSI”) was formed on November 14, 2018 under the laws of the Republic of the Marshall Islands for the purpose of receiving, via contribution from Capital Product Partners L.P. (“CPLP”), CPLP’s crude and product tanker business and combining that business with the business and operations of DSS Holdings L.P. (“DHLP”DSS LP”) pursuant to the Transaction Agreement, dated as of November 27, 2018 (as amended, the “Transaction Agreement”), by and among CPLP, DHLP,DSS LP, DSSI and the other parties named therein. DHLPDSS LP was a Cayman IslandIslands limited partnership formed on October 1, 2007.
On March 27, 2019, DSSI and DHLPDSS LP and all of its directly-owned subsidiaries (the “DHLP“DSS LP Subsidiaries”) completed a merger pursuant to the Transaction Agreement. Pursuant to the terms of the Transaction Agreement, on March 27, 2019, the DHLP subsidiariesDSS LP Subsidiaries merged with and into DSSI, with DSSI being the surviving corporation in the merger (the “Merger”). DSSI and the DHLPDSS LP Subsidiaries are hereinafter referred to collectively as the “Company.”
The Merger was accounted for as a reverse acquisition in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations” as the DHLP subsidiariesDSS LP Subsidiaries are the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of the DHLP subsidiariesDSS LP Subsidiaries for periods prior to the Merger are considered to be the predecessor financial statements of the Company. Refer to Note 3 — Merger Transaction for further information.
The Company is a seaborne transporter of crude oil and refined petroleum products, operating in the international shipping industry. ThroughAs of September 30, 2020, through its wholly-owned subsidiaries, the Company owns and operates 6664 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 5250 medium range (“MR”) product carriers. The Company also controls and operates two Suezmax vessels through a joint venture (see(Refer to Note 4)5 — Joint Venture Investments).
2. | Summary of SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation— The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) which includes the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and operating results have been included in the statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the nine monthsyear ended December 31, 20182019 and notes thereto included in the Company’s registration statementannual report on Form 1010-K (the “2018“2019 Financial Statements”). The results of operations for the three and nine months ended March 31, 2019September 30, 2020 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2019.2020.
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends to take advantage of the benefits of this extended transition period for as long as it is available. The Company’s condensed consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Section 107 of the JOBS Act provides that the decision not to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Cash and Cash Equivalents, and Restricted Cash — The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the condensed consolidated statements of cash flows:
March 31, 2019 | December 31, 2018 | March 31, 2018 | December 31, 2017 | September 30, | December 31, 2019 | September 30, | December 31, 2018 | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 76,106 | $ | 83,054 | $ | 79,340 | $ | 91,041 | $ | 114,335 | $ | 83,609 | $ | 75,559 | $ | 83,054 | ||||||||||||||||
Restricted cash | 5,229 | 5,104 | 5,000 | 5,000 | 6,014 | 5,610 | 5,544 | 5,104 | ||||||||||||||||||||||||
Total Cash and cash equivalents, and Restricted cash shown in the condensed consolidated statements of cash flows | $ | 81,335 | $ | 88,158 | $ | 84,340 | $ | 96,041 | $ | 120,349 | $ | 89,219 | $ | 81,103 | $ | 88,158 |
Amounts included in restricted cash represent those required to be set aside by the $66M$66 Million Facility, as defined in Note 79 below. The restriction will lapse when the related long-term debt is retired.
Revenue and Voyage Expense Recognition — Total revenue includes revenue earned on fixed rate time charters, spot market voyage charters, spot market-related time charters and pools. Pursuant to the new revenue recognition guidance, as disclosed in Note 12 — Voyage Revenue, which was adopted as of January 1, 2019, revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port.
In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by the Company when engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters. Refer to Note 12 — Voyage Revenue for further discussion of the accounting for fuel expenses for spot market voyage charters as a result of the new revenue recognition guidance adopted as of January 1, 2019. There are certain other non-specified voyage expenses, such as commissions, which are typically borne by the Company.
Recent Accounting Pronouncements
New accounting standards adopted — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. For the Company, this standard is effective for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASU, and shall be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption (the “modified retrospective transition method”). The Company early adopted ASU 2014-09 during the first quarter of 2019 using the modified retrospective transition method applied to those spot market voyage charter contracts which were not completed as of January 1, 2019. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to its Accumulated deficit as of January 1, 2019. Prior periods were not retrospectively adjusted. The adoption of ASU 2014-09 does not have an impact on the timing of recognition of revenue generated from time charter agreements. Refer to Note 12 for further discussion of the financial impact on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to provide guidance to entities when evaluating whether a transaction should be accounted for as an acquisition or disposal of a business. An entity first determines whether substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets. If this threshold is met, the assets acquired would not represent a business, and no further assessment is required. If the initial screen is not met, ASU 2017-01 requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to produce output and removes the evaluation of whether a market participant could replace the missing elements. For nonpublic entities, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASUs, and shall be applied prospectively. The Company early adopted ASU 2017-01, and concluded that the Merger should be accounted for as an asset acquisition. Refer to Note 3 — Merger Transaction for further discussion.
New accounting standard to be implemented — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For nonpublic entities, ASU 2016-02 is effective for annual periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of this pronouncement on the condensed consolidated financial statements.
As discussed in Note 1, the Company completed a Merger on March 27, 2019. Directly prior to the Merger, the following took place:
Immediately following the Distribution, the Merger took place, which is detailed as follows:
Pursuant to the Transaction agreement, the CPLP unitholders received 12,725,000 common shares in DSSI, and the DHLP limited partners received common shares of DSSI that were determined by the factor to which DHLP’s net asset value is to the net asset value of DSSI immediately after the Distribution, multiplied by the number of shares distributed to CPLP unitholders after the March 27, 2019 effective date. This equated to the DHLP limited partners receiving 27,165,696 common shares.
The Merger completed on March 27, 2019, and the Company’s common shares commenced trading on the New York Stock Exchange on March 28, 2019.
The Merger was accounted for as a reverse acquisition using in accordance with ASC 805, “Business Combinations.” Based on the structure of the Merger and other activities contemplated by the Transaction Agreement, relative outstanding share ownership, the composition of the Company's board of directors and the designation of certain senior management positions of the Company, the DHLP subsidiaries are the accounting acquirer for financial reporting purposes.
Further, in accordance with ASU 2017-01, the Merger was determined to be an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets.
The consideration transferred, assets acquired, and liabilities assumed are recognized as follows:
Consideration paid and transferred | ||||
Cash paid — net of cash received of $16,568 | $ | 292,683 | ||
Common stock issued to CPLP | 236,848 | |||
Transaction costs | 20,738 | |||
Total consideration paid and transferred | $ | 550,269 |
Net assets acquired | ||||
Due from charterers | $ | 4,514 | ||
Inventories | 6,969 | |||
Prepaid expenses and other current assets | 1,152 | |||
Vessels | 537,988 | |||
Time charter contracts acquired — assets | 7,300 | |||
Other noncurrent assets | 2,191 | |||
Accounts payable and accrued expenses | (7,478 | ) | ||
Deferred charter hire revenue | (2,367 | ) | ||
Net assets acquired | $ | 550,269 |
Further, as the Merger was determined to be an asset acquisition, the Company recorded the acquired assets and liabilities at the cost of the acquisition, including transaction costs, on the basis of relative fair value. The carrying value of the vessels were recorded in accordance with the principles set forth under ASC Topic 820, “Fair Value Measurement” based upon current market values obtained from at least two independent ship brokers. The time charter contract assets acquired represent an estimate of the fair value of the time charters acquired as of the date of the Merger, and considers the differential between the stated time charter rate and the contracts’ fair value at the time of the Merger.
In connection with the Merger, the incentive units granted under the DHLP unit incentive plan expired with no value.
NT Suez Holdco LLC — In September 2014, the Company formed a joint venture, NT Suez Holdco LLC (“NT Suez”), to purchase two Suezmax newbuildings. The two vessels were delivered in October and November 2016.
NT Suez is owned 51% by the Company and 49% by WLR/TRF Shipping S.a.r.l (“WLR/TRF”). WLR/TRF is indirectly owned by funds managed or jointly managed by WL Ross & Co, LLC (“WLR”), including WLR Recovery Fund V DSS AIV, L.P. and WLR V Parallel ESC, L.P., which are also shareholders of the Company. WLR is a fund manager that manages the Company’s largest shareholders.
As of March 31, 2019 and December 31, 2018, the investments NT Suez received from the Company and WLR/TRF aggregated $72,104, which was used for shipyard installment payments and working capital.
Management has determined that NT Suez qualifies as a variable interest entity, and, when aggregating the variable interests held by the related parties (i.e. the Company and WLR/TRF), the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts NT Suez’s economic performance. Accordingly, the Company consolidates NT Suez.
Diamond Anglo Ship Management Pte. Ltd. — In January 2018, the Company and Anglo Eastern Investment Holdings Ltd. (“AE Holdings”), a third party, formed a joint venture, Diamond Anglo Ship Management Pte. Ltd. (“DASM”). DASM is owned 51% by the Company and 49% by AE Holdings as of March 31, 2019 and December 31, 2018, and was formed to provide ship management services to the Company’s vessels.
As of March 31, 2019 and December 31, 2018, the investments DASM received from the Company and AE Holdings totaled $51 and $49, respectively, which were used for general and administrative expenses.
Management has determined that DASM qualifies as a variable interest entity, and, when aggregating the variable interests held by the Company and AE Holdings, the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts DASM’s economic performance. Accordingly, the Company consolidates DASM.
Prepaid expenses and other current assets consist of the following as of March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | |||||||
Advances to Capital Ship Management Corp. (“CSM”) | $ | 5,000 | $ | — | ||||
Advances to technical managers | 241 | 578 | ||||||
Insurance claims receivable | 662 | 697 | ||||||
Prepaid insurance | 916 | 580 | ||||||
Advances to agents | 633 | 549 | ||||||
Deferred voyage costs | 1,684 | — | ||||||
Other | 2,542 | 1,327 | ||||||
Total prepaid expenses and other current assets | $ | 11,678 | $ | 3,731 |
Accounts payable and accrued expenses consist of the following as of March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | |||||||
Trade accounts payable and accrued expenses | $ | 21,300 | $ | 11,071 | ||||
Accrued vessel and voyage expenses | 16,342 | 13,845 | ||||||
Accrued interest | 392 | 400 | ||||||
Other current liabilities (Refer to Note 13 — Related Party Transactions) | 1,223 | — | ||||||
Total accounts payable and accrued expenses | $ | 39,257 | $ | 25,316 |
Long-term debt at March 31, 2019 and December 31, 2018 was comprised of the following:
March 31, 2019 | December 31, 2018 | |||||||
$360 Facility | $ | 345,000 | $ | — | ||||
$460 Facility | 304,000 | 315,368 | ||||||
$235 Facility | 188,692 | 186,923 | ||||||
$75 Facility | 60,625 | 61,875 | ||||||
$66 Facility | 55,102 | 56,199 | ||||||
$30 LOC | — | 20,323 | ||||||
$20 LOC | — | 6,000 | ||||||
Total | 953,617 | 646,688 | ||||||
Less: Unamortized deferred financing costs | (13,311 | ) | (7,147 | ) | ||||
Less: Current portion | (112,242 | ) | (97,315 | ) | ||||
Long-term debt, net of deferred financing costs | $ | 828,064 | $ | 542,226 |
$360 Facility — On March 27, 2019, in connection with the Merger, the Company entered into a $360,000 five-year Credit Agreement (as amended, the “$360 Facility”), for the purposes of financing the Merger and refinancing the $30 LOC (defined below). The $360 Facility consists of a term loan of $300,000 and a revolving loan of $60,000, and is collateralized by the 25 vessels acquired in the Merger and the three vessels that collateralized the $30 LOC, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $360 Facility are 1.06%. As of March 31, 2019, $45,000 of the revolving loan was drawn, while $15,000 was available and undrawn.
The $360 Facility contains certain restrictions on the payments of dividends. The $360 Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal year that is equal to 50% of the adjusted consolidated net income of the Company.
$460 Facility — On June 6, 2016, the Company entered into a $460,000 five-year senior secured term loan facility, as amended (the “$460 Facility”), for the purposes of refinancing a previous facility. The $460 Facility is a term loan of $459,375,000, collateralized by 28 vessels, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. Interest is paid monthly, and the $460 Facility bears interest at the Eurodollar Rate for a one-month interest period, plus a 2.80% interest rate margin.
The $460 Facility contains certain restrictions on the payments of dividends. In connection with the Merger, the $460 Facility was amended whereby the Company is able to pay dividends in a manner that is consistent with the stipulations stated in the $360 Facility.
$235 Facility — On August 19, 2016, the Company entered into a $235,000 five-year senior secured financing facility, as amended (the “$235 Facility”), for the purposes of refinancing a previous facility. The $235 Facility consists of a term loan of $220,000 and a revolving loan of $15,000, and is collateralized by eight vessels, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $235 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.75% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $235 Facility are 1.10%. As of March 31, 2019, $11,000 of the revolving loan was drawn, while $1,115 was available and undrawn.
The $235 Facility contains certain restrictions on the payments of dividends. In connection with the Merger, the $235 Facility was amended whereby the Company is able to pay dividends in a manner that is consistent with the stipulations stated in the $360 Facility.
$75 Facility — On March 17, 2016, the Company entered into a seven-year senior secured term loan, as amended (the “$75 Facility”), consisting of a delayed draw term loan of up to $75,000. The $75 Facility financed and is collateralized by the two 2016-built Suezmax vessels, is payable on a quarterly basis, and bears interest on LIBOR plus a margin of 2.20%.
The $75 Facility contains certain restrictions on the payments of dividends. In connection with the Merger, the $75 Facility was amended whereby the Company is able to pay dividends in a manner that is consistent with the stipulations stated in the $360 Facility.
$66 Facility — On August 9, 2016, the Company entered into a $66,000 five-year senior secured term loan facility (the “$66 Facility”) for the purpose of financing two vessels controlled through the joint venture (see Note 3). The $66 Facility, which is collateralized by the two vessels controlled through NT Suez, is a nonrecourse term loan with reductions that are based on a 15 year amortization schedule, and are payable on a quarterly basis. Interest is paid quarterly, and the $66 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 3.25% interest rate margin.
The $66 Facility contains certain restrictions on the payments of dividends. The $66 Facility LOC permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and does not exceed an amount equal to 75% of the consolidated net income, as determined in accordance with GAAP, of the borrower, which is the consolidated accounts of NT Suez.
$20 Line of Credit — On September 29, 2016, the Company extended its $20,000 revolving line of credit (the “$20 LOC”), initially entered into on October 1, 2013. The $20 LOC was paid off and cancelled in connection with the Merger.
$30 Line of Credit — On October 20, 2016, the Company entered into a $30,000 three-year revolving line of credit, as amended (the “$30 LOC”), for the purposes of refinancing a previous line of credit. The $30 LOC was paid off and cancelled in connection with the Merger.
Interest Rates — The following table sets forth the effective interest rate associated with the interest costs for the Company’s debt facilities, including the rate differential between the fixed pay rate and the variable receive rate on the interest rate swap agreements that were in effect (see Note 8), combined, as well as the cost associated with commitment fees. Additionally, the table includes the range of interest rates on the debt, excluding the impact of swaps and commitment fees:
For the Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Effective interest rate | 4.84% | 4.36% | ||||||
Range of interest rates (excluding impact of swaps and unused commitment fees) | 4.80% to 6.06% | 3.35% to 5.56% |
Restrictive Covenants — The Company’s credit facilities credit contain restrictive covenants and other non-financial restrictions. The $360 Facility, $235 Facility, $460 Facility and $75 Facility include, among other things, the Company’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, leverage ratio requirements, minimum working capital requirements, and other customary restrictions. The $66 Facility includes restrictions and financial covenants including, among other things, the Company’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, and other customary restrictions. The Company was in compliance with its financial covenants as of March 31, 2019.
Maturities — The aggregate maturities of debt during the remaining nine months of the year ending December 31, 2019, and annually for the years ending December 31 are as follows:
2019 (for the remaining nine months of the year) | $ | 80,744 | ||
2020 | 125,992 | |||
2021 | 492,506 | |||
2022 | 60,000 | |||
2023 | 96,875 | |||
Thereafter | 97,500 | |||
Total | $ | 953,617 |
All derivatives are recognized on the Company’s condensed consolidated balance sheets at their fair values. For accounting hedges, on the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge) or (2) a hedge of a forecasted transaction (“cash flow” hedge).
The Company has entered into interest rate swap transactions, with multiple counterparties, which have been designated as cash flow hedges. The Company uses interest rate swaps for the management of interest rate risk exposure, as the interest rate swaps effectively convert a portion of the Company’s debt from a floating to a fixed rate. The interest rate swaps are agreements between the Company and counterparties to pay, in the future, a fixed-rate payment in exchange for the counterparties paying the Company a variable payment. The amount of the net payment obligation is based on the notional amount of the swap contract and the prevailing market interest rates. The Company may terminate the swap contracts prior to their expiration dates, at which point a realized gain or loss would be recognized. The value of the Company’s commitment would increase or decrease based primarily on the extent to which interest rates move against the rate fixed for each swap.
In September 2018, the Company re-couponed its swaps, receiving cash of $6,813, with the corresponding gain recognized ratably over the original term of the hedged instruments. The interest rate swaps designated as a cash flow hedge that were in place as of March 31, 2019 and December 31, 2018 are as follows:
Interest Rate Swap Detail | March 31, 2019 | December 31, 2018 | ||||||||||||||
Trade Date | Fixed Rate | Start Date of Swap | End Date of Swap | Notional Amount Outstanding | Notional Amount Outstanding | |||||||||||
25-Sep-18 | 2.906 | % | 31-Aug-18 | 04-Jun-21 | $ | 54,028 | $ | 56,030 | ||||||||
25-Sep-18 | 2.906 | % | 31-Aug-18 | 04-Jun-21 | 54,028 | 56,030 | ||||||||||
25-Sep-18 | 2.906 | % | 31-Aug-18 | 04-Jun-21 | 54,028 | 56,030 | ||||||||||
$ | 162,084 | $ | 168,090 |
The Company pays fixed-rate interest amounts and receives floating rate interest amounts based on one-month LIBOR settings.
The derivative asset and liability balances at March 31, 2019 and December 31, 2018 are as follows:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||
Balance Sheet Location | March 31, 2019 | December 31, 2018 | Balance Sheet Location | March 31, 2019 | December 31, 2018 | |||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||
Interest rate contracts | Derivative asset (Current assets) | $ | — | $ | — | Derivative liability (Current liabilities) | $ | 784 | $ | 630 | ||||||||||
Interest rate contracts | Derivative asset (Noncurrent assets) | — | — | Derivative liability (Noncurrent liabilities) | 1,146 | 900 | ||||||||||||||
Total derivatives designated as hedging instruments | — | — | 1,930 | 1,530 | ||||||||||||||||
Total Derivatives | $ | — | $ | — | $ | 1,930 | $ | 1,530 |
The components of Accumulated other comprehensive income included in the condensed consolidated balance sheets consist of net unrealized (loss) gain on cash flow hedges as of March 31, 2019 and December 31, 2018.
The following table presents the gross amounts of these liabilities with any offsets to arrive at the net amounts recognized in the condensed consolidated balance sheets at March 31, 2019 and December 31, 2018:
Gross Amounts Offset in the | Net Amounts of Liabilities Presented in the | Gross Amounts not Offset in the Condensed Consolidated Balance Sheets | ||||||||||||||||||||||
Gross Amounts of Recognized Liabilities | Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
March 31, 2019 Derivatives | $ | 1,930 | $ | — | $ | 1,930 | $ | — | $ | — | $ | 1,930 | ||||||||||||
December 31, 2018 Derivatives | 1,530 | — | 1,530 | — | — | 1,530 |
The components of Accumulated other comprehensive income included in the condensed consolidated balance sheets consist of net unrealized gain on cash flow hedges as of March 31, 2019 and December 31, 2018.
The changes in Accumulated other comprehensive income by component for the three months ended March 31, 2019 and 2018 are as follows:
2019 | 2018 | |||||||
Accumulated other comprehensive income – January 1, | $ | 4,387 | $ | 4,773 | ||||
Other comprehensive (loss) income before reclassifications | (1,621 | ) | 1,117 | |||||
Amounts reclassified from Accumulated other comprehensive income | 525 | 239 | ||||||
Other comprehensive (loss) income for the period | (1,096 | ) | 1,356 | |||||
Accumulated other comprehensive income – March 31, | $ | 3,291 | $ | 6,129 |
The realized gain for the three months ended March 31, 2019 reclassified from Accumulated other comprehensive income consists of a realized loss of ($171) related to interest rate swap contracts and $696 related to the amortization of the gain on re-couponed swaps, as discussed in Note 8. The realized gain for the three months ended March 31, 2018 reclassified from Accumulated other comprehensive income consists of a realized gain of $239 related to interest rate swap contracts. The realized (loss) gain reclassified from Accumulated other comprehensive income are presented in Interest expense in the condensed consolidated statements of operations.
The fair values and carrying amounts of the Company’s financial instruments at March 31, 2019 and December 31, 2018 that are required to be disclosed at fair value, but not recorded at fair value, are as follows:
March 31, 2019 | December 31, 2018 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Cash and cash equivalents | $ | 76,106 | $ | 76,106 | $ | 83,054 | $ | 83,054 | ||||||||
Restricted cash | 5,229 | 5,229 | 5,104 | 5,104 | ||||||||||||
Variable rate debt | 953,617 | 953,617 | 646,688 | 646,688 |
The following methods and assumptions are used in estimating the fair value of disclosures for financial instruments:
Cash and cash equivalents, and Restricted cash: The carrying amounts reported in the consolidated balance sheets for Cash and cash equivalents, and Restricted cash approximate fair value. Cash and cash equivalents, and Restricted cash are considered Level 1 items as they represent liquid assets with short-term maturities.
Variable Rate Debt: The fair value of variable rate debt is based on management’s estimate of rates the Company could obtain for similar debt of the same remaining maturities. Additionally, the Company considers its creditworthiness in determining the fair value of variable rate debt under the credit facilities. The carrying amounts in the above table, which exclude the impact of deferred financing costs, approximate the fair market value for the variable rate debt. Variable rate debt is considered to be a Level 2 item as the Company considers the estimate of rates it could obtain for similar debt.
The fair value of an asset or liability is based on assumptions that market participants would use in pricing the asset or liability. The hierarchies of inputs used when determining fair value are described below:
Level 1:Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2:Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and the placement of financial instruments within the fair value hierarchy.
The table below provides the financial instruments carried at fair value based on the levels of hierarchy as of the valuation date listed:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
March 31, 2019 | ||||||||||||||||
Derivative liabilities | $ | — | $ | 1,930 | $ | — | $ | 1,930 | ||||||||
December 31, 2018 | ||||||||||||||||
Derivative liabilities | — | 1,530 | — | 1,530 |
Derivative Liabilities: The fair value of the derivative liabilities, which relate to the interest rate swaps used for hedging purposes, is the estimated amount the Company would pay for the liability to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Interest rate swaps are considered to be a Level 2 item as the Company, using the income approach to value the derivatives, uses observable Level 2 market inputs at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets in active markets (specifically, futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset (specifically, LIBOR, cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Refer to Note 8 — Interest Rate Swaps for further information regarding the Company’s interest rate swap agreements.
The Company does not currently have any Level 3 financial assets and there have been no transfers in and/or out of Level 3 during the three months ended March 31, 2019 and 2018.
The future minimum revenues, before inclusion of profit-sharing revenue, if any, expected to be received on irrevocable time charters for which revenues can be reasonably estimated and the related revenue days that the vessels are available for employment, and not including charterers’ renewal options for the remaining nine months of the year ending December 31, 2019, and annually for the years ending December 31 are as follows:
2019 (for the remaining nine months of the year) | $ | 55,671 | ||
2020 | 40,835 | |||
2021 | 2,354 | |||
Total future committed revenue | $ | 98,860 |
Total voyage revenue includes revenue earned on fixed rate time charters, spot market voyage charters, spot market-related time charters and vessel pools. For the three months ended March 31, 2019 and 2018, the Company earned $102,656 and $93,144 of voyage revenue, respectively.
On January 1, 2019 the Company adopted the revenue recognition guidance under ASU 2014-09 (refer to Note 2 — Summary of Significant Accounting Policies) using the modified retrospective method applied to contracts that were not completed as of January 1, 2019. The financial results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and will be continued to be reported under previous guidance.
As a result of the adoption of the new revenue recognition guidance on January 1, 2019, the Company recorded a net increase to the opening accumulated deficit of $2,784 for the cumulative impact of adopting the new guidance. The impact related primarily to the change in accounting for spot market voyage charters. Prior to the adoption of the new guidance, revenue for spot market voyage charters was recognized ratably over the total transit time of the voyage, which previously commenced the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. As a result of the adoption of the new guidance, revenue for spot market voyage charters is now being recognized ratably over the total transit time of the voyage which now begins when the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Additionally, the Company has identified that the contract fulfillment costs of spot market voyage charters consist primarily of the fuel consumption that is incurred by the Company from the end of the previous vessel employment until the arrival at the loading port. The fuel consumption during this period is deferred and recorded as deferred voyage costs included in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheetcondensed consolidated balance sheet and is amortized ratably over the total transit time of the voyage from arrival at the loading port until the vessel departs from the discharge port and recognized as part of Voyage expenses. Refer also to Note 57 — Prepaid expenses and other current assets.
In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by the Company when engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters. There are certain other non-specified voyage expenses, such as commissions, which are typically borne by the Company.
The following table illustratesCompany recognizes revenue from pool arrangements based on its portion of the net distributions reported by the pool, which represents the net voyage revenue of the pool after voyage expenses and certain pool manager fees.
Recent Accounting Pronouncements
New accounting standards to be implemented — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about the Company’s leasing activities. The Company is currently analyzing its contracts and will then calculate the right-of-use assets and lease liabilities as of January 1, 2021 based on the present value of the Company’s remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the potential impact of the adoption of the new revenue recognition guidancethis pronouncement on the condensed consolidated balance sheet:financial statements.
As of March 31, 2019 | ||||||||||||
Balance | ||||||||||||
without Adoption | ||||||||||||
of New Revenue | Effect of | |||||||||||
As Reported | Standard | Change | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Due from charterers | $ | 46,965 | $ | 53,037 | $ | 6,072 | ||||||
Prepaid expenses and other current assets | 11,678 | 9,691 | (1,987 | ) | ||||||||
Equity: | ||||||||||||
Accumulated deficit | $ | (60,287 | ) | $ | (56,202 | ) | $ | (4,085 | ) |
3. | Merger Transaction |
As discussed in Note 1, the Company completed a Merger on March 27, 2019. Directly prior to the Merger, the following took place:
· | DSSI formed four wholly-owned subsidiaries organized under the laws of the Republic of the Marshall Islands, referred to as “Products Merger Entity,” “Crude Merger Entity,” “Management Merger Entity” and “Surviving Merger Entity.” |
· | CPLP separated its product and crude tanker businesses into separate lines of subsidiaries and contributed them to DSSI (the “Separation”). |
· | DSSI issued 12,724,500 additional common shares in connection with the contribution by CPLP. |
· | In the Separation, CPLP contributed to DSSI (1) CPLP’s crude and product tanker vessels, (2) an amount in cash equal to $10 million and (3) associated inventories. |
· | On March 27, 2019, CPLP distributed on a pro rata basis all 12,725,000 then-outstanding common shares of DSSI to its unitholders of record as of March 19, 2019 (the “Distribution”). |
Immediately following the Distribution, the Merger took place, which is detailed as follows:
· | The Pre-Mergers took place: |
o | DSS Crude Transport Inc., a wholly-owned subsidiary of DSS LP, merged with Crude Merger Entity, with DSS Crude Transport Inc. surviving the merger, |
o | DSS Products Transport Inc., a wholly-owned subsidiary of DSS LP, merged with Products Merger Entity, with DSS Products Transport Inc. surviving the merger, and |
o | Diamond S Technical Management LLC, a wholly-owned subsidiary of DSS LP, merged with Management Merger Entity, with Diamond S Technical Management LLC surviving the merger. |
· | Following the Pre-Mergers and pursuant to the same plan, each of DSS Crude Transport Inc., DSS Products Transport Inc. and Diamond S Technical Management LLC merged with the Surviving Merger Entity, with the Surviving Merger Entity surviving. The Surviving Merger Entity subsequently merged with DSSI, with DSSI surviving. |
Pursuant to the Transaction agreement, the CPLP unitholders received 12,725,000 common shares in DSSI, and the DSS LP limited partners received common shares of DSSI that were determined by the factor to which DSS LP’s net asset value is to the net asset value of DSSI immediately after the Distribution, multiplied by the number of shares distributed to CPLP unitholders after the March 27, 2019 effective date. This equated to the DSS LP limited partners receiving 27,165,696 common shares.
The Merger completed on March 27, 2019, and the Company’s common shares commenced trading on the New York Stock Exchange on March 28, 2019.
The Merger was accounted for as a reverse acquisition in accordance with ASC 805, “Business Combinations.” Based on the structure of the Merger and other activities contemplated by the Transaction Agreement, relative outstanding share ownership, the composition of the Company's board of directors and the designation of certain senior management positions of the Company, the DSS LP Subsidiaries are the accounting acquirer for financial reporting purposes.
Further, in accordance with ASU 2017-01, the Merger was determined to be an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets.
The consideration transferred, assets acquired, and liabilities assumed are recognized as follows:
Consideration paid and transferred | ||||
Cash paid — net of cash received of $16,568 | $ | 292,683 | ||
Common stock issued to CPLP | 236,848 | |||
Transaction costs | 20,738 | |||
Total consideration paid and transferred | $ | 550,269 | ||
Net assets acquired | ||||
Due from charterers | $ | 4,514 | ||
Inventories | 6,969 | |||
Prepaid expenses and other current assets | 1,152 | |||
Vessels | 537,988 | |||
Time charter contracts acquired — assets | 7,300 | |||
Other noncurrent assets | 2,191 | |||
Accounts payable and accrued expenses | (7,478 | ) | ||
Deferred charter hire revenue | (2,367 | ) | ||
Net assets acquired | $ | 550,269 |
Further, as the Merger was determined to be an asset acquisition, the Company recorded the acquired assets and liabilities at the cost of the acquisition, including transaction costs, on the basis of relative fair value. The carrying value of the vessels were recorded in accordance with the principles set forth under ASC Topic 820, “Fair Value Measurement” based upon current market values obtained from at least two independent ship brokers. The time charter contract assets acquired represent an estimate of the fair value of the time charters acquired as of the date of the Merger, and considers the differential between the stated time charter rate and the contracts’ fair value at the time of the Merger.
In connection with the Merger, the incentive units granted under the DSS LP unit incentive plan expired with no value. Further, while the Company is now a public company, management believe that, pursuant to Section 883 of the U.S. Internal Revenue Code of 1986, the income related to vessel operations will continue to be exempt from U.S. federal income tax, although no assurance can be given that the Company will continue to satisfy this statutory exemption from U.S. federal income taxation.
4. | Net (Loss) earnings Per Share |
The computation of basic net (loss) earnings per share is based on the weighted-average number of common shares outstanding during the reporting period. The computation of diluted net earnings (loss) per share assumes the vesting of nonvested stock awards (refer to Note 15 — Stock-Based Compensation), for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. Of the 591,773 and 615,525 nonvested shares and RSUs outstanding as of September 30, 2020 and 2019, 238,421 and 615,525, respectively, were excluded from the computation of diluted net earnings per share because these were anti-dilutive (refer to Note 15 — Stock-Based Compensation).
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Common shares outstanding, basic: | ||||||||||||||||
Weighted-average common shares outstanding, basic | 39,918,427 | 39,890,698 | 39,879,976 | 35,835,477 | ||||||||||||
Common shares outstanding, diluted: | ||||||||||||||||
Weighted-average common shares outstanding, basic | 39,918,427 | 39,890,698 | 39,879,976 | 35,835,477 | ||||||||||||
Dilutive effect of restricted stock awards | — | — | 226,181 | — | ||||||||||||
Weighted-average common shares outstanding, diluted | 39,918,427 | 39,890,698 | 40,106,157 | 35,835,477 |
5. | JOINT VENTURE INVESTMENTS |
NT Suez Holdco LLC — In September 2014, the Company formed a joint venture, NT Suez Holdco LLC (“NT Suez”), to purchase two Suezmax newbuildings. The two vessels were delivered in October and November 2016.
NT Suez is owned 51% by the Company and 49% by WLR/TRF Shipping S.a.r.l (“WLR/TRF”). WLR/TRF is indirectly owned by funds managed or jointly managed by WL Ross & Co, LLC (“WLR”), including WLR Recovery Fund V DSS AIV, L.P. and WLR V Parallel ESC, L.P., which are also shareholders of the Company. WLR is a fund manager that manages the Company’s largest shareholders.
As of September 30, 2020 and December 31, 2019, the investments NT Suez received from the Company and WLR/TRF aggregated $74,104, which was used for shipyard installment payments and working capital. In February 2020, NT Suez distributed $1,632 and $1,568 to the Company and WLR/TRF, respectively. In June 2020, NT Suez distributed $357 and $343 to the Company and WLR/TRF, respectively.
Management has determined that NT Suez qualifies as a variable interest entity, and, when aggregating the variable interests held by the related parties (i.e. the Company and WLR/TRF), the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impact NT Suez’s economic performance. Accordingly, the Company consolidates NT Suez.
Diamond Anglo Ship Management Pte. Ltd. — In January 2018, the Company and Anglo Eastern Investment Holdings Ltd. (“AE Holdings”), a third party, formed a joint venture, Diamond Anglo Ship Management Pte. Ltd. (“DASM”). DASM is owned 51% by the Company and 49% by AE Holdings as of September 30, 2020 and December 31, 2019, and was formed to provide ship management services to the Company’s vessels.
As of September 30, 2020 and December 31, 2019, the investments DASM received from the Company and AE Holdings totaled $51 and $49, respectively, which were used for general and administrative expenses.
Management has determined that DASM qualifies as a variable interest entity, and, when aggregating the variable interests held by the Company and AE Holdings, the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts DASM’s economic performance. Accordingly, the Company consolidates DASM.
6. | Vessel Dispositions |
In August 2019, the Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. The Company reached an agreement to sell the Atlantic Aquarius and Atlantic Leo for $32 million in aggregate gross proceeds. In September 2019, the Company delivered the vessels to the buyer and repaid debt on the $460 Million Facility, as defined in Note 9 below, of $20.4 million. The loss on sale of the vessels was $18.3 million, which was recorded to the condensed consolidated statement of operations for the three and nine months ended September 30, 2019.
7. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following as of September 30, 2020 and December 31, 2019:
September 30, | December 31, 2019 | |||||||
Advances to Capital Ship Management Corp. (“CSM”) (Refer to Note 14 — Related Party Transactions) | $ | 6,288 | $ | 5,757 | ||||
Advances to technical managers | 23 | 26 | ||||||
Insurance claims receivable | 1,066 | 511 | ||||||
Prepaid insurance | 1,527 | 1,093 | ||||||
Advances to agents | 2,199 | 1,421 | ||||||
Deferred voyage costs | 2,003 | 3,132 | ||||||
Other | 1,505 | 1,239 | ||||||
Total prepaid expenses and other current assets | $ | 14,611 | $ | 13,179 |
8. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consist of the following as of September 30, 2020 and December 31, 2019:
September 30, | December 31, 2019 | |||||||
Trade accounts payable and accrued expenses | $ | 8,306 | $ | 9,716 | ||||
Accrued vessel and voyage expenses | 23,903 | 32,201 | ||||||
Accrued interest | 35 | 1,090 | ||||||
Accrued vessel and voyage expenses and Other current liabilities (Refer to Note 14 — Related Party Transactions) | 3,092 | 1,055 | ||||||
Total accounts payable and accrued expenses | $ | 35,336 | $ | 44,062 |
9. | LONG-TERM DEBT |
Long-term debt at September 30, 2020 and December 31, 2019 was comprised of the following:
September 30, 2020 | December 31, 2019 | |||||||
$360 Million Facility | $ | 241,250 | $ | 327,500 | ||||
$525 Million Facility | 458,750 | 515,000 | ||||||
$66 Million Facility | 48,518 | 51,810 | ||||||
Total | 748,518 | 894,310 | ||||||
Less: Unamortized deferred financing costs | (13,426 | ) | (15,866 | ) | ||||
Less: Current portion | (134,389 | ) | (134,389 | ) | ||||
Long-term debt, net of deferred financing costs | $ | 600,703 | $ | 744,055 |
$360 Million Facility — On March 27, 2019, in connection with the Merger, the Company entered into a $360,000 five-year Credit Agreement, as amended (the “$360 Million Facility”), for the purposes of financing the Merger and refinancing the $30 Million Line of Credit (defined below). The $360 Million Facility consists of a term loan of $300,000 and a revolving loan of $60,000, and is collateralized by the 25 vessels acquired in the Merger and the three vessels that collateralized the $30 Million Line of Credit, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $360 Million Facility are 1.06%. As of September 30, 2020, $10,000 of the revolving loan was drawn, while $50,000 was available and undrawn.
The $360 Million Facility contains certain restrictions on the payments of dividends. The $360 Million Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal quarter an amount that is equal to 50% of the adjusted consolidated net income of the Company in such fiscal quarter.
$525 Million Facility — On December 23, 2019, the Company entered into a $525,000 five-year Credit Agreement (the “$525 Million Facility”), for the purposes of refinancing the $460 Million Facility, the $235 Million Facility and the $75 Million Facility (defined below). The $525 Million Facility consists of a term loan of $375,000 and a revolving loan of $150,000, and is collateralized by the 36 vessels that collateralized the $460 Million Facility, the $235 Million Facility and the $75 Million Facility, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $525 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.50% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $525 Million Facility are 0.875%. As of September 30, 2020, $140,000 of the revolving loan was drawn, while $10,000 was available and undrawn.
The $525 Million Facility contains certain restrictions on the payments of dividends. The $525 Million Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal quarter an amount that is equal to 50% of the adjusted consolidated net income of the Company in the preceding fiscal quarter.
Prior to the December 2019 refinancing, the Company financed 26 MR vessels, which were acquired in September 2011, with a $460,000 five-year senior secured term loan facility, as amended (the “$460 Million Facility”). Interest was paid monthly, and the $460 Million Facility bore interest at the Eurodollar Rate for a one-month interest period, plus a 2.80% interest rate margin.
Also, prior to the December 2019 refinancing, the Company financed eight 2012-built Suezmaxes with a $235,000 five-year senior secured financing facility, as amended (the “$235 Million Facility”), which consisted of a term loan of $220 million and a revolving loan of $15,000. Interest on the term loan component was paid quarterly and the $235 Million Facility bore interest at the Eurodollar Rate for a three-month interest period, plus a 2.75% interest rate margin. Commitment fees on undrawn amounts related to the revolving loan component of the $235 Million Facility were 1.10%.
Lastly, prior to the December 2019 refinancing, the Company financed two 2016-built Suezmaxes vessels with a $75,000 seven-year senior secured term loan facility, as amended (the “$75 Million Facility”). Interest was paid quarterly, and the $75 Million Facility bore interest at the Eurodollar Rate for a three-month interest period, plus a 2.20% interest rate margin.
$66 Million Facility — On August 9, 2016, the Company entered into a $66,000 five-year senior secured term loan facility (the “$66 Million Facility”) for the purpose of financing two vessels controlled through the joint venture NT Suez (refer to Note 5 — Joint Venture Investments). The $66 Million Facility, which is collateralized by the two vessels controlled through NT Suez, is a nonrecourse term loan with reductions that are based on a 15-year amortization schedule, and are payable on a quarterly basis. Interest is paid quarterly, and the $66 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 3.25% interest rate margin.
The $66 Million Facility contains certain restrictions on the payments of dividends by the NT Suez joint venture. The $66 Million Facility permits the NT Suez joint venture to pay dividends so long as the payment of dividends does not cause an event of default, and does not exceed an amount equal to 75% of the consolidated net income, as determined in accordance with GAAP, of the borrower, which is the consolidated accounts of NT Suez.
Interest Rates – The following table illustratessets forth the effective interest rate associated with the interest costs for the Company’s debt facilities, including the rate differential between the fixed pay rate and the variable receive rate on the interest rate swap agreements that were in effect (refer to Note 10 — Interest Rate Swaps), combined, as well as the cost associated with the commitment fees. Additionally, the table includes the range of interest rates on the debt, excluding the impact of swaps and commitment fees:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Effective interest rate | 3.05 | % | 4.87 | % | 3.95 | % | 4.94 | % | ||||||||
Range of interest rates (excluding impact of swaps and unused commitment fees) | 2.81% to 4.04 | % | 4.53% to 5.58 | % | 2.81% to 5.32 | % | 4.53% to 6.06 | % |
Restrictive Covenants — The Company’s credit facilities credit contain restrictive covenants and other non-financial restrictions. The $360 Million Facility and $525 Million Facility include, among other things, restrictions on the adoptionCompany’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, leverage ratio requirements, minimum working capital requirements, and other customary restrictions. The $66 Million Facility includes restrictions and financial covenants including, among other things, the Company’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, and other customary restrictions. The Company was in compliance with its financial covenants as of September 30, 2020.
Maturities – The aggregate maturities of debt during the remaining three months of the new revenue recognition guidance onyear ending December 31, 2020, and annually for the Condensed Consolidated Statement of Operations:years ending December 31 are as follows:
For the Three Months Ended March 31, 2019 | ||||||||||||
Balance | ||||||||||||
without Adoption | ||||||||||||
of New Revenue | Effect of | |||||||||||
As Reported | Standard | Change | ||||||||||
Revenue | $ | 102,656 | $ | 104,253 | $ | (1,597 | ) | |||||
Voyage expenses | 41,578 | 41,874 | 296 | |||||||||
Net (loss) income | (820 | ) | 481 | 1,301 |
2020 (for the remaining three months of the year) | $ | 33,597 | |||
2021 | 177,421 | ||||
2022 | 130,000 | ||||
2023 | 130,000 | ||||
2024 | 277,500 | ||||
Total | $ | 748,518 |
10. | INTEREST RATE SWAPS |
The adoptionCompany uses interest rate swaps for the management of interest rate risk exposure, as the interest rate swaps effectively convert a portion of the new revenue recognition guidance does not have an impactCompany’s debt from a floating to a fixed rate. The interest rate swaps are agreements between the Company and counterparties to pay, in the future, a fixed-rate payment in exchange for the counterparties paying the Company a variable payment. The amount of the net payment obligation is based on the operating, investingnotional amount of the swap contract and the prevailing market interest rates. The Company may terminate the swap contracts prior to their expiration dates, at which point a realized gain or financing activitiesloss would be recognized. The value of the Company’s commitment would increase or decrease based primarily on the extent to which interest rates move against the rate fixed for each swap. All derivatives are recognized on the Company’s Consolidated Balance Sheets at their fair values. For accounting hedges, on the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge) or (2) a hedge of a forecasted transaction (“cash flow” hedge).
The Company previously entered into interest rate swap transactions, with multiple counterparties, which were designated as cash flow hedges. In September 2018, the Company re-couponed its swaps, receiving cash of $6,813, with the corresponding gain recognized ratably over the original term of the hedged instruments. The re-couponed swaps were terminated in December 2019 when the related $460 Million Facility was extinguished. Upon the swaps’ termination, the Company made a payment of $2,486 and recognized the remaining gain that resulted from the re-couponing in September 2018, which are recognized in Interest expense in the condensed consolidated statements of operations.
On April 29, 2020, the Company entered into interest rate swap transactions, with multiple counterparties, which were designated as cash flows.flow hedges. In accordance with these transactions, the Company will pay an average fixed-rate interest amount of 0.54% and will receive floating rate interest amounts based on three-month LIBOR settings. These interest rate swaps are designated as cash flow hedges with a start date of June 30, 2020 and an end date of December 23, 2024, with an aggregate notional amount outstanding of $197,129 at September 30, 2020.
The derivative asset and liability balances at September 30, 2020 and December 31, 2019 are as follows:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||
Balance | Fair Value | Balance | Fair Value | |||||||||||||||||
Sheet Location | September 30, 2020 | December 31, 2019 | Sheet Location | September 30, 2020 | December 31, 2019 | |||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||
Interest rate contracts | Derivative asset (Current assets) | $ | — | $ | — | Derivative liability (Current liabilities) | $ | 557 | $ | — | ||||||||||
Interest rate contracts | Derivative asset (Noncurrent assets) | — | — | Derivative liability (Noncurrent liabilities) | 620 | — | ||||||||||||||
Total derivatives designated as hedging instruments | — | — | 1,177 | — | ||||||||||||||||
Total Derivatives | $ | — | $ | — | $ | 1,177 | $ | — |
The components of Accumulated other comprehensive loss included in the Condensed Consolidated Balance Sheets consist of net unrealized loss on cash flow hedges as of September 30, 2020 and December 31, 2019.
The following table presents the gross amounts of these liabilities with any offsets to arrive at the net amounts recognized in the Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019:
Gross | Gross Amounts Offset in the Condensed | Net Amounts of Liabilities Presented in the Condensed | Gross Amounts not Offset in the Condensed Consolidated Balance Sheets | |||||||||||||||||||||
Amounts of Recognized Liabilities | Consolidated Balance Sheets | Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
September 30, 2020 Derivatives | $ | 1,177 | $ | — | $ | 1,177 | $ | — | $ | — | $ | 1,177 | ||||||||||||
December 31, 2019 Derivatives | — | — | — | — | — | — |
11. | ACCUMULATED OTHER COMPREHENSIVE (Loss) Income |
The components of Accumulated other comprehensive (loss) income included in the Condensed Consolidated Balance Sheets consist of net unrealized loss on cash flow hedges as of September 30, 2020 and December 31, 2019.
The changes in Accumulated other comprehensive (loss) income by component are as follows:
For the Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Accumulated other comprehensive income – January 1, | $ | — | $ | 4,387 | ||||
Other comprehensive loss before reclassifications | (1,053 | ) | (4,931 | ) | ||||
Amounts reclassified from Accumulated other comprehensive (loss) income | (124 | ) | 1,435 | |||||
Other comprehensive loss for the period | (1,177 | ) | �� | (3,496 | ) | |||
Accumulated other comprehensive (loss) income – September 30, | $ | (1,177 | ) | $ | 891 |
The realized loss for the nine months ended September 30, 2020 reclassified from Accumulated other comprehensive loss consists of a realized loss of $124 related to interest rate swap contracts. The realized gain for the nine months ended September 30, 2019 reclassified from Accumulated other comprehensive income consists of a realized loss of ($610) related to interest rate swap contracts and $2,045 related to the amortization of the gain on re-couponed swaps, as discussed in Note 10. The realized gain reclassified from Accumulated other comprehensive loss are presented in Interest expense in the Condensed Consolidated Statements of Operations.
12. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The fair values and carrying amounts of the Company’s financial instruments at September 30, 2020 and December 31, 2019 that are required to be disclosed at fair value, but not recorded at fair value, are as follows:
September 30, 2020 | December 31, 2019 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Cash and cash equivalents | $ | 114,335 | $ | 114,335 | $ | 83,609 | $ | 83,609 | ||||||||
Restricted cash | 6,014 | 6,014 | 5,610 | 5,610 | ||||||||||||
Variable rate debt | 748,518 | 748,518 | 894,310 | 894,310 |
The following table illustratesmethods and assumptions are used in estimating the cumulative effectfair value of disclosures for financial instruments:
Cash and cash equivalents, and Restricted cash: The carrying amounts reported in the adoption of the new revenue recognition guidance on the opening condensed consolidated balance sheet:sheets for Cash and cash equivalents, and Restricted cash approximate fair value. Cash and cash equivalents, and Restricted cash are considered Level 1 items as they represent liquid assets with short-term maturities.
New | ||||||||||||
Balance at | Revenue | Balance at | ||||||||||
December 31, | Standard | January 1, | ||||||||||
2018 | Adjustment | 2019 | ||||||||||
Assets | ||||||||||||
Current assets: | ||||||||||||
Due from charterers | $ | 42,637 | $ | (4,475 | ) | $ | 38,162 | |||||
Prepaid expenses and other current assets | 3,731 | 1,691 | 5,422 | |||||||||
Equity: | ||||||||||||
Accumulated deficit | $ | (56,477 | ) | $ | (2,784 | ) | $ | (59,261 | ) |
Variable Rate Debt: The fair value of variable rate debt is based on management’s estimate of rates the Company could obtain for similar debt of the same remaining maturities. Additionally, the Company considers its creditworthiness in determining the fair value of variable rate debt under the credit facilities. The carrying amounts in the above table, which exclude the impact of deferred financing costs, approximate the fair market value for the variable rate debt. Variable rate debt is considered to be a Level 2 item as the Company considers the estimate of rates it could obtain for similar debt.
The fair value of an asset or liability is based on assumptions that market participants would use in pricing the asset or liability. The hierarchies of inputs used when determining fair value are described below:
Level 1: Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2: Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and the placement of financial instruments within the fair value hierarchy.
The table below provides the financial instruments carried at fair value based on the levels of hierarchy as of the valuation date listed:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
September 30, 2020 | ||||||||||||||||
Derivative liabilities | $ | — | $ | 1,177 | $ | — | $ | 1,177 |
Derivative Liabilities: The fair value of the derivative liabilities, which relate to the interest rate swaps used for hedging purposes, is the estimated amount the Company would pay for the liability to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Interest rate swaps are considered to be a Level 2 item as the Company, using the income approach to value the derivatives, uses observable Level 2 market inputs at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets in active markets (specifically, futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset (specifically, LIBOR, cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Refer to Note 10 — Interest Rate Swaps for further information regarding the Company’s interest rate swap agreements.
The Company does not currently have any Level 3 financial assets or liabilities and there have been no transfers in and/or out of Level 3 during the nine months ended September 30, 2020 and 2019.
13. | REVENUE FROM TIME CHARTERS |
The future minimum revenues, before inclusion of profit-sharing revenue, if any, expected to be received on irrevocable time charters for which revenues can be reasonably estimated and the related revenue days that the vessels are available for employment, and not including charterers’ renewal options for the remaining three months of the year ending December 31, 2020, and annually for the years ending December 31 are as follows:
2020 (for the remaining three months of the year) | $ | 15,885 | |||
2021 | 40,558 | ||||
2022 | 13,511 | ||||
Total future committed revenue | $ | 69,954 |
14. | Related Party Transactions |
During the three and nine months ended March 31,September 30, 2020 and 2019, and 2018, the Company had the following related party transactions.
Capital Ship Management Corp. (“CSM”) — Pursuant to the Transaction Agreement, for a period of five years, CSM will provide commercial and technical management services for the 25 vessels acquired in the Merger. For the three and nine months ended March 31,September 30, 2020 and 2019, the following transactions were recorded for these services:
· |
· | For the three and nine months ended September 30, 2020, $499 and $1,866, respectively, and for the three and nine months ended September 30, 2019, $548 and $1,130, respectively, was incurred for commercial management services, which is included in Voyage expenses in the condensed consolidated |
· |
Capital Product Partners, L.P. (“CPLP”)Working capital is advanced to CSM to procure both voyage and vessel costs. At September 30, 2020, the net funds advanced totaled $3,196, of which $6,288 is included in Prepaid Expense and Other Current Assets in the condensed consolidated balance sheet (refer to Note 7 — PursuantPrepaid Expenses and Other Current Assets), and the $3,092 liability is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet (refer to the Transaction Agreement, the Company is to reimburse CPLP for certain transaction expenses. During the three months ended MarchNote 8 — Accounts Payable and Accrued Expenses). At December 31, 2019, the Company determined the reimbursement to CPLP totals $11,080,net funds advanced totaled $4,748, of which was included in transaction costs and capitalized as part of the Merger. As of March 31, 2019, $489 of the $11,080 is unpaid, and$5,757 is included in other current liabilitiesPrepaid Expense and Other Current Assets in the condensed consolidated balance sheet and the $1,009 liability is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet.
At December 31, 2019, amounts received for activity that occurred prior to the Merger that are due to CSM total $46 and are included in Accounts payable and accrued expenses in the condensed consolidated balance sheet. Refer to Note 6 — Accounts Payable and Accrued Expenses.
Pursuant toThese amounts were settled during the Transaction Agreement, there is a Lockbox mechanism whereby on March 27, 2019, the Company was paid for estimated prorated charter hire, net of prorated costs incurred between the Lockbox date and March 27, 2019. As the voyages that occurred during that period are completed, the cash is settled between the Company and CPLP. Based on the finalization of certain voyages, and taking into amounts previously paid to the Company by CPLP, the Company owes CPLP $734 as of March 31, 2019, which is included in other current liabilities in Accounts payable and accrued expenses in the condensed consolidated balance sheet. Refer to Note 6 — Accounts Payable and Accrued Expenses.nine months ended September 30, 2020.
Stock-Based Compensation |
2019 Equity Incentive Plan— On March 16, 2019, CPLP, as the sole shareholder of DSSI at the time, approvedUnder the 2019 Equity Incentive Plan which was amended on March 27, (“2019 for awards with respect to an aggregate of 3,989,000 shares of common stock (the “2019 Plan”). Under the 2019 Plan,, the Company’s Board of Directors, the compensation committee,Compensation Committee, or their designees may grant a variety of stock-based incentive awards representing an aggregate of 3,989,000 shares of common stock to the Company’s officers, directors, employees, and consultants. Such awards include stock options, stock appreciation rights, restricted (nonvested) stock, restricted stock units, and unrestricted stock. On April 11, 2019, in accordance with the Non-Employee Director Compensation Policy, grants of 31,602
Restricted Stock Units — The Company has issued restricted stock units and 15,802 shares of restricted stock were made(“RSUs”) under the 2019 Plan to the non-managementcertain members of the Board of Directors, an executive and certain employees of the Company, which represent the right to receive a share of common stock, or in the sole discretion of the Company’s Compensation Committee, the value of a share of common stock on the date that the RSU vests. Such shares of common stock will only be issued to certain directors, an executive and employees when their RSUs vest under the terms of their grant agreements and 2019 Plan described above.
The RSUs that have been issued to certain members of the Board of Directors vest one year from the date of grant. The RSUs that have been issued to other individuals vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes the Company’s unvested RSUs for the nine months ended September 30, 2020:
Weighted | ||||||||
Number of | Average Grant | |||||||
RSUs | Date Price | |||||||
Outstanding at January 1, 2020 | 74,716 | $ | 14.03 | |||||
Granted | 47,156 | 12.08 | ||||||
Vested | (46,525 | ) | 13.58 | |||||
Forfeited | (1,887 | ) | 13.70 | |||||
Outstanding at September 30, 2020 | 73,460 | $ | 13.07 |
The following table summarizes certain information of the RSUs unvested and vested as of September 30, 2020:
Unvested RSUs | Vested RSUs | |||||||||||||||||
September 30, 2020 | September 30, 2020 | |||||||||||||||||
Weighted | ||||||||||||||||||
Weighted | Average | Weighted | ||||||||||||||||
Average | Remaining | Average | ||||||||||||||||
Number of | Grant Date | Contractual | Number of | Grant Date | ||||||||||||||
RSUs | Price | Life | RSUs | Price | ||||||||||||||
73,460 | $ | 13.07 | 1.6 | 46,525 | $ | 13.58 |
The Company is amortizing these grants over the applicable graded vesting periods. Forfeitures are taken into account when they occur. As of September 30, 2020, unrecognized compensation cost of $591 related to RSUs will be recognized over a weighted-average period of 1.6 years. For the three and nine months ended September 30, 2020, the Company recognized $186 and $556, respectively, of nonvested stock amortization expense for the RSUs, which is included in General and administrative expenses.
Restricted Stock — Under the 2019 Plan, grants of restricted common stock were issued to certain members of the Board of Directors, executives and employees. The restricted common stock issued to certain members of the Board of Directors vest one year from the date of grant. The restricted common stock issued to certain executives and employees ordinarily vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes the Company’s nonvested stock awards for the nine months ended September 30, 2020 which were issued under the 2019 Plan:
Weighted | ||||||||
Number of | Average Grant | |||||||
Shares | Date Price | |||||||
Outstanding at January 1, 2020 | 562,790 | $ | 13.44 | |||||
Granted | 175,151 | 12.41 | ||||||
Vested | (198,116 | ) | 13.51 | |||||
Forfeited | (21,512 | ) | 13.70 | |||||
Outstanding at September 30, 2020 | 518,313 | $ | 13.05 |
For the nine months ended September 30, 2020, 198,116 shares vested under the 2019 Plan. This approved grant has a value of $623, and the units and stock vest on the first anniversary of the grant date, provided the director continually serves as a director forThere were no shares that year. On May 10, 2019, 391,331 shares of restricted stock, vesting ratably over a period of three years, were issued to certain officers and employees of the Companyvested under the 2019 Plan. Plan during the year ended December 31, 2019. For the three and nine months ended September 30, 2020, the Company recognized $838 and $2,818, respectively, in nonvested stock amortization expense for the 2019 Plan restricted stock, which is included in General and administrative expenses.
The estimated valueCompany is amortizing these grants over the applicable graded vesting periods. Forfeitures are taken into account when they occur. As of this issuanceSeptember 30, 2020, unrecognized compensation cost of $3,525 related to nonvested stock will be recognized over a weighted-average period of 2.0 years.
Performance Awards — The Company granted performance awards that contain service, performance-based and/or market-based vesting criteria. Vesting occurs if the recipient remains employed and depends on the degree to which performance goals are achieved during the three-year performance period (as defined in the award agreements). The table below summarizes the Company’s nonvested performance awards for the nine months ended September 30, 2020 which were issued under the 2019 Plan:
Weighted | ||||||||
Number of | Average Grant | |||||||
Shares | Date Price | |||||||
Outstanding at January 1, 2020 | — | $ | — | |||||
Granted | 133,305 | 12.60 | ||||||
Vested | — | — | ||||||
Forfeited | — | — | ||||||
Outstanding at September 30, 2020 | 133,305 | $ | 12.60 |
For the three and nine months ended September 30, 2020, the Company recognized $140 and $233, respectively, in nonvested stock amortization expense for the 2019 Plan performance awards, which is $5,361.included in General and administrative expenses. As of September 30, 2020, unrecognized compensation cost of $1,446 related to nonvested stock will be recognized over a weighted-average period of 2.6 years.
The future compensation to be recognized for the aforementioned RSUs, restricted stock and performance awards as of September 30, 2020 is as follows:
2020 (for the remaining three months of the year) | $ | 1,128 | |||
2021 | 2,939 | ||||
2022 | 1,240 | ||||
2023 | 255 | ||||
Total | $ | 5,562 |
COMMITMENTS AND CONTINGENCIES |
Commitments— In connection withAugust and September 2020, the Merger, seven of the acquired vessels are attachedCompany entered into contracts to install ballast water treatment and scrubber contracts.systems on seven vessels with installation scheduled to occur in 2021. These contracts have a total estimated cost of $7,262,$6,575, of which $5,071$6,097 remains unpaid at March 31, 2019, and will be paid during the remaining nine monthsas of the year ending December 31, 2019. These contracts are in addition to the ballast water treatment and scrubber contracts disclosed in the 2018 Financial Statements.September 30, 2020, with payments due as follows as:
2020 (for the remaining three months of the year) | $ | 990 | |||
2021 | 5,107 | ||||
Total | $ | 6,097 |
In May 2019, the Company entered into an amendment to extend the term of the operating lease for its office space in Greenwich, Connecticut on Benedict Place, which now expires on July 31, 2026. Under this amended agreement, the future minimum payments for the next five years and thereafter are as follows:
2019 (for the remaining nine months of the year) | $ | 757 | ||
2020 | 952 | |||
2021 | 874 | |||
2022 | 1,035 | |||
2023 | 1,194 | |||
Thereafter | 3,147 | |||
Total future minimum operating lease payments | $ | 7,959 |
Contingencies — From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of its business. Such claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that isit believes will have, individually or in the aggregate, a material effect on the Company, its financial condition, results of operations or cash flows.
SEGMENT REPORTING |
The Company is engaged primarily in the ocean transportation of crude oil and petroleum products in the international market through the ownership and operation of a diversified fleet of vessels. The international shipping industry has many distinct market segments based, in large part, on the size and design configuration of vessels required. Rates in each market segment are determined by a variety of factors affecting the supply and demand for vessels to move cargoes in the trades for which they are suited. Tankers are not bound to specific ports or schedules and therefore can respond to market opportunities by moving between trades and geographical areas. The Company’s vessels regularly navigate in international waters, over hundreds of trade routes, to hundreds of ports and, as a result, the disclosure of geographic information is impracticable. The Company charters its vessels primarily on voyage charters and on time charters.
The Company has two reportable segments, Crude Tankers and Product Carriers. Segment results are evaluated based on income (loss) from operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements.
Results for the Company’s revenue and loss from operations by segment for the three and nine months ended March 31,September 30, 2020 and 2019 and 2018 are as follows:
Crude Tankers | Product Carriers | Total | Crude Tankers | Product Carriers | Total | |||||||||||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||||||
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
Total revenue | $ | 42,293 | $ | 70,304 | $ | 112,597 | ||||||||||||||||||
Voyage expenses | (12,891 | ) | (20,005 | ) | (32,896 | ) | ||||||||||||||||||
Vessel expenses | (11,606 | ) | (33,152 | ) | (44,758 | ) | ||||||||||||||||||
Depreciation and amortization | (10,121 | ) | (18,946 | ) | (29,067 | ) | ||||||||||||||||||
General, administrative and management fees(1) | (1,873 | ) | (5,812 | ) | (7,685 | ) | ||||||||||||||||||
Income (loss) from operations | $ | 5,802 | $ | (7,611 | ) | $ | (1,809 | ) | ||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||
Voyage revenue | $ | 35,409 | $ | 67,247 | $ | 102,656 | $ | 46,222 | $ | 95,304 | $ | 141,526 | ||||||||||||
Voyage expenses | (14,370 | ) | (27,208 | ) | (41,578 | ) | (22,919 | ) | (37,049 | ) | (59,968 | ) | ||||||||||||
Vessel expenses | (6,760 | ) | (18,041 | ) | (24,801 | ) | (10,554 | ) | (31,245 | ) | (41,799 | ) | ||||||||||||
Depreciation and amortization | (8,037 | ) | (13,919 | ) | (21,956 | ) | (9,898 | ) | (18,865 | ) | (28,763 | ) | ||||||||||||
General, administrative and management fees(1) | (1,761 | ) | (4,527 | ) | (6,288 | ) | ||||||||||||||||||
Income from operations | $ | 4,481 | $ | 3,552 | $ | 8,033 | ||||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||
Voyage revenue | $ | 29,358 | $ | 63,786 | $ | 93,144 | ||||||||||||||||||
Voyage expenses | (16,702 | ) | (28,033 | ) | (44,735 | ) | ||||||||||||||||||
Vessel expenses | (8,329 | ) | (19,701 | ) | (28,030 | ) | ||||||||||||||||||
Depreciation and amortization | (7,938 | ) | (14,116 | ) | (22,054 | ) | ||||||||||||||||||
General, administrative and management fees(1) | (1,149 | ) | (3,008 | ) | (4,157 | ) | ||||||||||||||||||
Loss from operations | $ | (4,760 | ) | $ | (1,072 | ) | $ | (5,832 | ) | |||||||||||||||
Loss on sale of vessels | — | (18,344 | ) | (18,344 | ) | |||||||||||||||||||
General and administrative expenses | (1,781 | ) | (5,785 | ) | (7,566 | ) | ||||||||||||||||||
Income (loss) from operations | $ | 1,070 | $ | (15,984 | ) | $ | (14,914 | ) |
Crude Tankers | Product Carriers | Total | ||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||
Total revenue | $ | 202,795 | $ | 303,080 | $ | 505,875 | ||||||
Voyage expenses | (55,900 | ) | (101,026 | ) | (156,926 | ) | ||||||
Vessel expenses | (35,490 | ) | (92,542 | ) | (128,032 | ) | ||||||
Depreciation and amortization | (30,041 | ) | (56,557 | ) | (86,598 | ) | ||||||
General, administrative and management fees(1) | (5,679 | ) | (17,615 | ) | (23,294 | ) | ||||||
Income from operations | $ | 75,685 | $ | 35,340 | $ | 111,025 | ||||||
Nine Months Ended September 30, 2019 | ||||||||||||
Voyage revenue | $ | 133,105 | $ | 260,372 | $ | 393,477 | ||||||
Voyage expenses | (64,383 | ) | (103,058 | ) | (167,441 | ) | ||||||
Vessel expenses | (27,729 | ) | (81,247 | ) | (108,976 | ) | ||||||
Depreciation and amortization | (27,806 | ) | (52,156 | ) | (79,962 | ) | ||||||
Loss on sale of vessels | — | (18,344 | ) | (18,344 | ) | |||||||
General and administrative expenses | (4,982 | ) | (16,192 | ) | (21,174 | ) | ||||||
Income (loss) from operations | $ | 8,205 | $ | (10,625 | ) | $ | (2,420 | ) |
(1) | Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on a formula). |
The reconciliations of total assets of the segments to amounts included in the condensed consolidated balance sheets are as follows:
March 31, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
Crude Tankers | $ | 911,257 | $ | 758,372 | $ | 868,142 | $ | 896,897 | ||||||||
Product Carriers | 1,278,540 | 885,220 | 1,187,453 | 1,225,235 | ||||||||||||
Corporate unrestricted cash and cash equivalents | 1,816 | 2,508 | 2,789 | 2,609 | ||||||||||||
Other unallocated amounts | 5,629 | 3,755 | 1,729 | 3,641 | ||||||||||||
Consolidated total assets | $ | 2,197,242 | $ | 1,649,855 | $ | 2,060,113 | $ | 2,128,382 |
SUBSEQUENT EVENTS |
The Company has evaluated all subsequent events to ensure that these condensed consolidated financial statements include appropriate recognition and disclosure of recognized events as of March 31, 2019. ExceptSeptember 30, 2020.
In October 2020, the Board of Directors approved selling the Atlantic Mirage, a 2009-built MR vessel. The Company reached an agreement to sell the Atlantic Mirage for $16.4 million in aggregate gross proceeds. Delivery of the Atlantic Mirage is expected to take place in the latter half of the fourth quarter of 2020, and the Company expects to record a loss of approximately $9.7 million on the sale of this vessel.
Other than as disclosed in this note and elsewhere in thethese condensed consolidated financial statements, there were no additional subsequent events that the Company believes require recognition or disclosure.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of Diamond S Shipping Inc. (“we,” “us,” “our” or the “Company”). This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Information Statement (the “Information Statement”) included as an exhibit to our registration statementAnnual Report on Form 10 originally10-K (the “2019 Annual Report”) for the year ended December 31, 2019, filed with the SEC on December 21, 2018March 27, 2020, and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under “Cautionary Note on Forward-Looking Statements”.
Business Overview
The Diamond S Shipping Inc. standalone corporate entity (“DSSI”) was formed on November 14, 2018 under the laws of the Republic of the Marshall Islands for the purpose of receiving, via contribution from Capital Product Partners L.P. (“CPLP”),CPLP, CPLP’s crude and product tanker business and combining that business with the business and operations of DSS Holdings L.P. (“DHLP”) pursuant to the Transaction Agreement, dated as of November 27, 2018 (as amended, the “Transaction Agreement”), by and among CPLP, DHLP, DSSI and the other parties named therein. DHLP was a Cayman Island limited partnership formed on October 1, 2007.
On March 27, 2019, DSSI, and DHLP and all of its directly-owned subsidiaries (the “DHLP Subsidiaries”) completed a mergerLP pursuant to the Transaction Agreement. Pursuant to the termsFor a description of the Transaction Agreement on March 27, 2019, the DHLP subsidiaries merged with and into DSSI, with DSSI being the surviving corporation in the merger (the “Merger”). DSSIrelated Merger, please see Note 1 — Business and the DHLP Subsidiaries, which are the consolidated accountsBasis of Diamond S Shipping Inc., are hereinafter referred to collectively as “we,” “us,” “our” or the “Company.”
The Merger was accounted for as a reverse acquisition in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations” as the DHLP subsidiaries are the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of the DHLP subsidiaries for periods prior to the Merger are considered to be the predecessor financial statements of the Company. Refer toPresentation and Note 3 — Merger Transaction to ourin the unaudited condensed consolidated financial statements.statements included elsewhere in this Quarterly Report on Form 10-Q.
The Company is aWe provide seaborne transportertransportation of crude oil, and refined petroleum, and other products operating in the international shipping industry. Through its wholly-ownedAs of September 30, 2020, through our wholly owned subsidiaries, the Company ownswe owned and operates 66operated 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 52 medium range (“MR”)50 MR product carriers. The CompanyAs of the same date, we also controlscontrolled and operatesoperated two Suezmax vessels through a joint venture.
Factors to Consider When Evaluating the Company’s Results
The COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a pandemic. In response to the ongoing outbreak, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have, and will likely continue to, negatively affect the global economy. In addition, the COVID-19 pandemic has resulted in increased vessel expenses, primarily due to crewing related matters and logistical challenges for delivery of services and materials to vessels. The extent to which COVID-19 will materially impact the Company’s results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the outbreak, it may have a material adverse effect on the Company’s future results of operation and financial condition.
Strategic Product Tanker Partnership
On June 15, 2020, the Company entered into an agreement with Dampskibsselskabet Norden A/S (“Norden”). During the term of this agreement, the Company and Norden have agreed to use commercially reasonable efforts to identify new projects in the product tanker industry that they may jointly pursue and develop. Pursuant to this agreement, Company has agreed to initially contribute 28 of its MR vessels to the Norient Product Pool (the “Pool”). This agreement will terminate upon the occurrence of certain events, including when the Company no longer has vessels operating in the Pool. As of September 30, 2020, 28 of the Company’s vessels are operating in the Pool.
The Merger
The Merger, as described above,in Note 3 — Merger Transaction in the unaudited condensed consolidated financial statements included herein, closed on March 27, 2019. Our condensed consolidated financial statements include operating results for the 25 vessels acquired vessels for four187 days and 274 days during the threenine months ended March 31,September 30, 2019 and 2020, respectively, in addition to the 4341 vessels historically owned by the Companyus for the full period.period and the two vessels sold in September 2019.
Credit Facility
25
In connection with the Merger, the Company entered into a $360 million five-year Credit Agreement (the “$360 Facility”), for the purposes of financing the Merger and refinancing a $30 million Line of Credit. The $360 Facility consists of a term loan of $300 million and a revolving loan of $60 million, and is collateralized by the 25 vessels acquired in the Merger and three vessels that collateralized the $30 million Line of Credit, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin.
DispositionsNew Credit Facilities and Refinancings
For a description of the Alpine MinuteCompany’s credit agreements and Alpine Magicrefinancings, please see Note 9 — Long-Term Debt in the unaudited condensed consolidated financial statements included herein.
Vessel Dispositions
In November 2018, the DHLP boardAugust 2019, our Board of directorsDirectors approved selling the Alpine MinuteAtlantic Aquarius and Alpine Magic,Atlantic Leo, both 2009-built MR vessels. The CompanyWe reached an agreement to sell the Alpine MinuteAtlantic Aquarius and Atlantic Leo, each for $17.8 million less a 1% broker commission payable to a third party, and the Company reached a separate agreement to sell the Alpine Magic for $17.0$16.0 million less a 1% broker commission payable to a third party. In December 2018, the CompanySeptember 2019, we completed the sale of the Alpine MinuteAtlantic Aquarius and Alpine MagicAtlantic Leo.
Share Repurchase Program
On March 4, 2020, our Board of Directors approved a share repurchase program, providing authorization to repurchase up to $50 million of our common shares, effective for a period of one year. We may repurchase these shares in the open market or in privately negotiated transactions, at times and prices that we consider to be appropriate. As of September 30, 2020, we repurchased 137,289 shares for a total of $1.4 million under the share repurchase program, with all repurchases having been effected in the three months ended March 31, 2020.
Other Trends and Factors Affecting the Company’s Future Results of Operations
The principal factors that have affected the Company’sour results of operations, and may in the future affect results of operations, are the economic, regulatory, financial, credit, political and governmental conditions prevailing in the tanker market and shipping industry generally and in the countries and markets in which the Company’sour vessels are chartered.
The world economy has experienced significant economic and political upheavals in recent history. In addition, credit supply has been constrained and financial markets have been particularly turbulent. Protectionist trends, global growth and demand for the seaborne transportation of goods, including oil and oil products and overcapacity and deliveries of newly-built vessels have affected, and may further affect, the tanker market and shipping industry in general and the business, financial condition, results of operations and cash flows of the Company.
Some of the key factors that have affected the Company’sour business, financial condition, results of operations and cash flows, and may in the future affect Diamond S’our business, financial condition, results of operations and cash flows, include the following:
· | levels of oil product demand and inventories; |
· | supply and demand for crude oil and oil products; |
· | charter hire levels (under time and bareboat charters) and the ability to re-charter vessels at competitive rates as their current charters expire; |
· | developments in vessel values, which may affect compliance with covenants under credit facilities and/or debt refinancing; |
· | compliance with covenants in credit facilities, including covenants relating to the maintenance of vessel value ratios; |
· | the level of debt and the related interest expense and amortization of principal; |
· | access to debt and equity and the cost of capital required to acquire additional vessels; |
· | supply and order-book of tanker vessels; |
· | the ability to increase the size of the fleet and make additional acquisitions that are accretive to earnings; |
· | the ability of the commercial and chartering operations to successfully employ vessels at economically attractive rates, particularly as charters expire and the fleet expands; |
· | the continuing demand for crude oil and oil products from China, India, Brazil and Russia and other emerging markets; |
· | the ability to comply with new maritime regulations, the more restrictive regulations for the transport of certain products and cargoes and the increased costs associated therewith; |
· | changes in fuel prices, including as a result of the imposition of sulfur oxide emissions limits in 2020 under new regulations adopted by the IMO (for those vessels that are not retrofitted with scrubbers); |
· | the effective and efficient technical management of the vessels; |
· | the costs associated with upcoming drydocking of vessels; |
· | the ability to obtain and maintain major international oil company approvals and to satisfy technical, health, safety and compliance standards; |
· | the strength of and growth in the number of the customer relationships, especially with major international oil companies and major commodity traders; |
· | the prevailing spot market rates and the number of vessels operating in the spot market; |
· | changes in laws, treaties or regulations applicable to the Company, including regulations relating to environmental compliance; and |
· | the ability to acquire and sell vessels at satisfactory prices. |
Operating Data
The following table representstables represent the operating data for the three and nine months ended March 31,September 30, 2020 and 2019 and 2018 on a consolidated basis.
For the Three Months Ended March 31, | For the Three Months Ended September 30, | |||||||||||||||||||||||||||||||
2019 | 2018 | Change | % Change | 2020 | 2019 | Change | % Change | |||||||||||||||||||||||||
(In Thousands, Except Per Share and Share Data) | (In Thousands, Except Per Share and Share Data) | |||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Spot revenue | $ | 98,449 | $ | 85,934 | $ | 12,515 | 14.6 | % | ||||||||||||||||||||||||
Voyage revenue | $ | 69,098 | $ | 120,954 | $ | (51,856 | ) | (42.9 | )% | |||||||||||||||||||||||
Time charter revenue | 4,207 | 4,364 | (157 | ) | 3.6 | % | 20,408 | 20,572 | (164 | ) | (0.8 | )% | ||||||||||||||||||||
Pool revenue | — | 2,846 | (2,846 | ) | (100.0 | )% | 23,091 | — | 23,091 | — | ||||||||||||||||||||||
Voyage revenue | 102,656 | 93,144 | 9,512 | 10.2 | % | |||||||||||||||||||||||||||
Total revenue | 112,597 | 141,526 | (28,929 | ) | (20.4 | )% | ||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Voyage expenses | 41,578 | 44,735 | (3,157 | ) | (7.1 | )% | 32,896 | 59,968 | (27,072 | ) | (45.1 | )% | ||||||||||||||||||||
Vessel expenses | 24,801 | 28,030 | (3,229 | ) | (11.5 | )% | 44,758 | 41,799 | 2,959 | 7.1 | % | |||||||||||||||||||||
Depreciation and amortization expense | 21,956 | 22,054 | (98 | ) | (0.4 | )% | 29,067 | 28,763 | 304 | 1.1 | % | |||||||||||||||||||||
Loss on sale of vessels | — | 18,344 | (18,344 | ) | (100.0 | )% | ||||||||||||||||||||||||||
General and administrative expenses | 6,288 | 4,157 | 2,131 | 51.3 | % | 7,685 | 7,566 | 119 | 1.6 | % | ||||||||||||||||||||||
Total operating expenses | 94,623 | 98,976 | (4,353 | ) | (4.4 | )% | 114,406 | 156,440 | (42,034 | ) | (26.9 | )% | ||||||||||||||||||||
Operating income (loss) | 8,033 | (5,832 | ) | 13,865 | 237.7 | % | ||||||||||||||||||||||||||
Operating income | (1,809 | ) | (14,914 | ) | 13,105 | (87.9 | )% | |||||||||||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||||||||||
Total other expense — Net | (8,853 | ) | (8,231 | ) | (622 | ) | 7.6 | % | (7,016 | ) | (12,529 | ) | 5,513 | (44.0 | )% | |||||||||||||||||
Net loss | (820 | ) | (14,063 | ) | 13,243 | (94.2 | )% | (8,825 | ) | (27,443 | ) | 18,618 | (67.8 | )% | ||||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interest | 206 | (336 | ) | 542 | 161.3 | % | 839 | (1,548 | ) | 2,387 | (154.2 | )% | ||||||||||||||||||||
Net loss attributable to Diamond S Shipping Inc. | $ | (1,026 | ) | $ | (13,727 | ) | $ | 12,701 | (92.5 | )% | $ | (9,664 | ) | $ | (25,895 | ) | $ | 16,231 | (62.7 | )% | ||||||||||||
Net loss per share – basic and diluted | $ | (0.04 | ) | $ | (0.51 | ) | $ | 0.47 | (92.5 | )% | ||||||||||||||||||||||
Weighted average common shares outstanding – basic and diluted | 27,731,252 | 27,165,696 | 565,556 | 2.1 | % | |||||||||||||||||||||||||||
Net loss per share – basic | $ | (0.24 | ) | $ | (0.65 | ) | $ | 0.41 | (63.1 | )% | ||||||||||||||||||||||
Net loss per share – diluted | $ | (0.24 | ) | $ | (0.65 | ) | $ | 0.41 | (63.1 | )% | ||||||||||||||||||||||
Weighted average common shares outstanding – basic | 39,918,427 | 39,890,698 | 27,729 | 0.1 | % | |||||||||||||||||||||||||||
Weighted average common shares outstanding – diluted | 39,918,427 | 39,890,698 | 27,729 | 0.1 | % |
27
For the Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | Change | % Change | |||||||||||||
(In Thousands, Except Per Share and Share Data) | ||||||||||||||||
Revenue: | ||||||||||||||||
Voyage revenue | $ | 419,169 | $ | 348,747 | $ | 70,422 | 20.2 | % | ||||||||
Time charter revenue | 63,296 | 44,730 | 18,566 | 41.5 | % | |||||||||||
Pool revenue | 23,410 | — | 23,410 | — | ||||||||||||
Total revenue | 505,875 | 393,477 | 112,398 | 28.6 | % | |||||||||||
Operating expenses: | ||||||||||||||||
Voyage expenses | 156,926 | 167,441 | (10,515 | ) | (6.3 | )% | ||||||||||
Vessel expenses | 128,032 | 108,976 | 19,056 | 17.5 | % | |||||||||||
Depreciation and amortization expense | 86,598 | 79,962 | 6,636 | 8.3 | % | |||||||||||
Loss on sale of vessels | — | 18,344 | (18,344 | ) | (100.0 | )% | ||||||||||
General and administrative expenses | 23,294 | 21,174 | 2,120 | 10.0 | % | |||||||||||
Total operating expenses | 394,850 | 395,897 | (1,047 | ) | (0.3 | )% | ||||||||||
Operating income | 111,025 | (2,420 | ) | 113,445 | (4,687.8 | )% | ||||||||||
Other (expense) income: | ||||||||||||||||
Total other expense — Net | (27,767 | ) | (34,420 | ) | 6,653 | (19.3 | )% | |||||||||
Net income (loss) | 83,258 | (36,840 | ) | 120,098 | (326.0 | )% | ||||||||||
Less: Net income attributable to noncontrolling interest | 2,166 | (1,416 | ) | 3,582 | (253.0 | )% | ||||||||||
Net income (loss) attributable to Diamond S Shipping Inc. | $ | 81,092 | $ | (35,424 | ) | $ | 116,516 | (328.9 | )% | |||||||
Net earnings (loss) per share – basic | $ | 2.03 | $ | (0.99 | ) | $ | 3.02 | (305.1 | )% | |||||||
Net earnings (loss) per share – diluted | $ | 2.02 | $ | (0.99 | ) | $ | 3.01 | (304.0 | )% | |||||||
Weighted average common shares outstanding – basic | 39,879,976 | 35,835,477 | 4,044,499 | 11.3 | % | |||||||||||
Weighted average common shares outstanding – diluted | 40,106,157 | 35,835,477 | 4,270,680 | 11.9 | % |
Results of Operations
Three months ended March 31, 2019September 30, 2020 compared to the three months ended March 31, 2018September 30, 2019
VoyageTotal revenue
VoyageTotal revenue increaseddecreased by $9.5$28.9 million to $102.7$112.6 million during the three months ended March 31, 2019September 30, 2020 as compared to $93.1$141.5 million for the three months ended March 31, 2018.September 30, 2019. The $9.5$28.9 million increasedecrease was principally drivendue to weaker market conditions in the product tanker segment. The global consumption of petroleum products has experienced considerable demand destruction as a result of the global pandemic. In addition, the unwinding of the floating storage cycle effectively increased the supply of available ships. These negative trends were partially offset by a 7.4% increase in revenue days due to (1) fewer drydock days across the fleet: 156 during the three months ended March 31, 2018 vs. 90 days during the three months ended March 31, 2019 and (2) an additional 100 revenue days in March 2019 duesolid start to the Merger. Further, freight ratesquarter in the crude oil transportation market improved driven by an increase in long haul voyages primarilycarrier segment as a result of a carryover of strong rates from U.S. crude oil exports and steady demand growth in global crude oil consumption.the first half of 2020.
Voyage Expenses
Voyage expenses primarily consist of bunkers, port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements on the Company’s behalf. Voyage expenses incurred during time charters and while vessels are operating in pools are paid for by the charterer orand pool, manager,respectively, except for commissions to the initial brokers, which were paid for by the Company. Voyage expenses incurred during voyage charters were paid for by the Company.
Voyage expenses decreased by $3.2$27.1 million to $41.6$32.9 million during the three months ended March 31, 2019September 30, 2020 as compared to $44.7$60.0 million for the three months ended March 31, 2018.September 30, 2019. The $3.1$27.1 million decrease in voyage expenses was driven by an increasea reduction in short-term time charter activitybunker and port costs incurred as a result of entering 28 vessels in the Suezmax fleetPool as of September 30, 2020, with 23 of the vessels having entered the Pool during the three months ended March 31, 2019, as the bunker and port costs were born by the charterer.September 30, 2020.
Vessel Expenses
Vessel expenses include crew wages and associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses.
Vessel expenses decreasedincreased by $3.2$3.0 million to $24.8$44.8 million during the three months ended March 31, 2019September 30, 2020 as compared to $28.0$41.8 million for the three months ended March 31,September 30, 2019. The $3.2$3.0 million decreaseincrease in vessel expenses was driven a decrease in operating daysis primarily due to additional expenses incurred for crew bonuses, increased costs of crew reliefs, testing, quarantine and logistics for delivery of services and materials to the vessels as a result of the sale of the Alpine Minute and Alpine Magic.global pandemic.
Loss on Sale of Vessels
The $18.3 million loss on sale of vessels during the three months ended September 30, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo in September 2019.
Vessel Depreciation and Amortization Expense
We depreciate the cost of our vessels on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 25 years, and we estimate the residual value by taking the estimated scrap value of $300 per lightweight ton times the weight of the ship in lightweight tons. We continue to monitor changes in the oil and petroleum product supply chain that might have an impact on the useful operating life of our assets.
Depreciation and amortization expense decreasedincreased by $0.1$0.3 million to $22.0$29.1 million during the nine months ended September 30, 2020 as compared to $28.8 million during the three months ended March 31, 2019 as compared to $22.1 million during the three months ended March 31, 2018. The relatively slight decrease in depreciation and amortization expenseSeptember 30, 2019. This increase is due to vessel additions primarily related the added depreciation expense for the 25 vessels acquired in the Merger for four days in the three months ended March 31, 2019,scrubber and ballast water treatment projects, offset by the decrease in the depreciation and amortization expense related to the sale of the Alpine MinuteAtlantic Aquarius and Alpine MagicAtlantic Leo in December 2018.September 2019.
General and Administrative Expenses
For the three months ended March 31,September 30, 2020 and 2019, and 2018, general and administrative expenses were $6.3$7.7 million and $4.2$7.6 million, respectively. The $2.1 million increase was primarily due to incurring costsgeneral and administrative expenses remained relatively flat as the Company has had similar onshore infrastructure in place during the three months ended March 31, 2019 related to legal and audit fees in connection with filing a Form 10 and Form S-1.both quarters.
Total Other Expense, net
Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $8.9$7.0 million for the three months ended March 31, 2019September 30, 2020 compared to $8.2$12.5 million for the three months ended March 31, 2018.September 30, 2019. The increasedecrease of $0.6$5.5 million was primarily driven by an increasea $160 million decrease in the average debt balance in the two comparative periods, coupled with a decrease in the effective interest rates.rate.
Net Income (Loss) Attributable to Noncontrolling Interest
The net income (loss) attributable to noncontrolling interest was net income of $0.2$0.8 million for the three months ended March 31, 2019September 30, 2020 compared to a net loss of $0.3$1.5 million for the three months ended March 31, 2018.September 30, 2019. The net income (loss) attributable to noncontrolling interest primarily represents a 49% interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The decreaseincrease in the net lossincome of $0.5$2.3 million was mainly attributable to higherfixing these two Suezmax vessels on three-year time charter rates achievedcontracts, which began in the latter half of 2019, coupled with these two vessels having 132 off-hire days during the three months ended September 30, 2019 for the installation of their scrubbers.
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
Total revenue
Total revenue increased by $112.4 million to $505.9 million during the nine months ended September 30, 2020 as compared to $393.5 million for the nine months ended September 30, 2019. The $112.4 million increase was principally driven by a 13.4% increase in total revenue days due to an additional 2,092 revenue days during the nine months ended September 30, 2020, primarily due to the Merger coupled with stronger prevailing market conditions in both the crude tanker and product carrier segments during that period, when compared with the market conditions during the nine months ended September 30, 2019.
Voyage Expenses
Voyage expenses decreased by $10.5 million to $156.9 million during the nine months ended September 30, 2020 as compared to $167.4 million for the nine months ended September 30, 2019. The $10.5 million decrease in voyage expenses was predominantly driven by a reduction in bunker and port costs incurred as a result of better fuel efficiencies from long haul voyages.operating 28 vessels in the Pool as of September 30, 2020, with 23 of the vessels entered into the Pool during the three months ended September 30, 2020.
Vessel Expenses
Vessel expenses increased by $19.0 million to $128.0 million during the nine months ended September 30, 2020 as compared to $108.0 million for the nine months ended September 30, 2019. The $19.0 million increase in vessel expenses was driven by a 10.4% increase in vessel operating days, which consists of an increase in 2,175 vessel operating days due to the Merger and a decrease in 513 days as a result of the sale of the Atlantic Aquarius and Atlantic Leo, and additional expenses incurred for crew bonuses, increased costs of crew reliefs, testing, quarantine and logistics for delivery of services and materials to the vessels as a result of the global pandemic.
Vessel Depreciation and Amortization Expense
Depreciation and amortization expense increased by $6.6 million to $86.6 million during the nine months ended September 30, 2020 as compared to $80.0 million during the nine months ended September 30, 2019. The increase in depreciation and amortization expense is due to the added depreciation expense for the 25 vessels acquired in the Merger for 2,175 vessel operating days in the nine months ended September 30, 2020 coupled with vessel additions primarily related to the scrubber and ballast water treatment projects, and offset by the decrease in the depreciation and amortization expense related to the sale of the Atlantic Aquarius and Atlantic Leo in September 2019.
Loss on Sale of Vessels
The $18.3 million loss on sale of vessels during the nine months ended September 30, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo in September 2019.
General and Administrative Expenses
For the nine months ended September 30, 2020 and 2019, general and administrative expenses were $23.3 million and $21.2 million, respectively. The $2.1 million increase was primarily due to costs incurred in the first quarter of 2020 when compared to the first quarter of 2019 that were attributable to stock-based compensation costs, legal fees in connection with the annual filings and an increase in headcount to maintain the infrastructure of a public company and to manage a larger fleet employed in the spot market.
Total Other Expense, net
Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $27.8 million for the nine months ended September 30, 2020 compared to $34.4 million for the nine months ended September 30, 2019. The decrease of $6.6 million was primarily driven by a $28 million decrease in the average debt balance in the two comparative periods, coupled with a decrease in the effective interest rate.
30
Net Income Attributable to Noncontrolling Interest
The net income attributable to noncontrolling interest was net income of $2.2 million for the nine months ended September 30, 2020 compared to a net loss of $1.4 million for the nine months ended September 30, 2019. The net income attributable to noncontrolling interest primarily represents a 49% interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net income of $3.6 million was mainly attributable to fixing these two Suezmax vessels on three-year time charter contracts, which began in the latter half of 2019, coupled with these two vessels having 132 off-hire days during the three months ended September 30, 2019 for the installation of their scrubbers.
Liquidity and Capital Resources
As of March 31, 2019September 30, 2020 and December 31, 2018,2019, total cash, cash equivalents and restricted cash were $81.3$120.3 million and $88.2$89.2 million, including restricted cash of $5.2$6.0 million and $5.1$5.6 million, respectively. As of March 31, 2019September 30, 2020 and December 31, 2018,2019, the Company had $16.1$60.0 million and $19.3$15.0 million available and undrawn under its credit facilities, respectively.
Generally, the primary sources of funds have been cash from operations and undrawn amounts under credit facilities.
Effective upon completionOn December 27, 2019, we refinanced (i) the $460 Million Facility, (ii) the $235 Million Facility, and (iii) the $75 Million Facility with the proceeds of the Merger, the Company has indebtedness outstanding under a new term loan and revolving credit facility, arranged in connection with the Merger, and indebtedness under previously existing credit facilities of the Company. Refer to Note 7 — Long-Term Debt of our condensed consolidated financial statements.$525 Million Facility.
At March 31, 2019, we wereSeptember 30, 2020, the Company was in compliance with all financial covenants under each of the Company’sits credit facilities.
Passage of environmental legislation or other regulatory initiatives have in the past had, and may in the future may have, a significant impact on the operations of the Company.our operations. Regulatory measures can increase therequired costs related to operating and maintaining the Company’sour vessels and may require us to retrofit our vessels with new equipment.equipment to comply with new or existing regulations.
Among other capital expenditures, in consideration ofconnection with the IMOInternational Maritime Organization’s new limits for sulfur oxide emissions effective January 1, 2020, Regulations, the Companywe contracted for the purchase and installation of scrubbers on five of itsour Suezmax vessels. TheseAs of September 30, 2020, four of these scrubbers are expectedhave been installed, with one remaining to be installed prior to January 1, 2020 or shortly thereafter and are expected to translate intoinstalled. The total aggregate capital expenditures for these five scrubbers is approximately $16.8 million, of at least $9.6 million. The Companywhich $14.9 million has been paid as of September 30, 2020. We may, in the future, determine to purchase additional scrubbers for installation on other vessels ownedthat we own or operated by the Company.
operate. In addition, with respect to vessels that we haveare not contracted for the installation ofretrofitted with scrubbers, we do expect to incur certain capital expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel, and estimate that the costs of such capitalwhich expenditures willare not expected to be significant.significant or which have not yet been determined.
Furthermore, the Company hasWe entered into contracts in place to install ballast water treatment systems on 22 of our vessels for 15 vessels whose compliance date requires such installation in 2019 and 2020. Totala total estimated cost is $13.4 million.of $23.5 million, of which 12 systems have been installed and $14.0 million has been paid as of September 30, 2020. Seven of these contracts were signed during the third quarter of 2020.
We believe that we have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months. However, should market conditions deteriorate beyond third-party forecasts, we would consider a number of liquidity enhancing measures, which could include refinancing a portion of our senior debt, exploring unsecured debt instruments, asset sales and sale-leaseback transactions on certain of our assets.
Cash Flows
The following table summarizes the Company’s cash and cash equivalents provided by or used in operating, financing and investing activities for the periods presented below (presented in millions):
For the Three Months Ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Net Cash Provided by Operating Activities | $ | 5.9 | $ | 2.0 | $ | 193.9 | $ | 41.9 | ||||||||
Net Cash Used in Investing Activities | (313.1 | ) | (0.8 | ) | (12.0 | ) | (291.1 | ) | ||||||||
Net Cash Provided by (Used in) Financing Activities | 300.4 | (12.9 | ) | |||||||||||||
Net Cash (Used in) Provided by Financing Activities | (150.8 | ) | 242.1 |
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the threenine months ended March 31,September 30, 2020 and 2019 and 2018 was $5.9$193.9 million and $2.0$41.9 million, respectively. The increase of $3.9$152.0 million was mainly attributable to among other factors,more revenue days and higher charter rates affectingthat increased our revenues offsetand overall net income by $120.1 million for the negative effect of the changes in the Company’s operating assets and liabilities amounting to cash of $11.2 million. The changes in operating assets and liabilities were driven mainly by increases in trade accounts receivable, offset by and pool working capital returned to the Company during the threenine months ended March 31, 2018, as a result of the change from pool employment to voyage charters,September 30, 2020, when compared to the threenine months ended March 31, 2019.September 30, 2019, and an increase of $40.0 million in cash provided by the changes in assets and liabilities for the comparative periods.
Net Cash Used in Investing Activities
Net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements, and the Merger. Net cash used by investing activities during the threenine months ended March 31,September 30, 2020 and 2019 and 2018 was $313.1$12.0 million and $0.8$291.1 million, respectively. The increase in$12.0 million net cash used inby investing activities during the nine months ended September 30, 2020 was primarily drivenfor additions to vessels and other property, while the $291.1 million net cash used by investing activities during the nine months ended September 30, 2019 included the consideration paid in connection with the Merger, with $292.7 million paid to CPLP to acquire the vessels, and $17.8$18.9 million paid in transaction costs, duringand $11.2 million paid for additions to vessels and other property, offset by cash proceeds of $31.8 million provided by the three months ended March 31,sale of the Atlantic Aquarius and Atlantic Leo in September 2019.
Net Cash (Used in) Provided by (Used in) Financing Activities
Net cash (used in) provided by (used in) financing activities during the threenine months ended March 31,September 30, 2020 and 2019 and 2018 was $300.4($150.8) million and ($12.9)$242.1 million, respectively. The increasechange in cash (used in) provided by financing activities was primarily driven bydue to the following occurringfinancing activities that we engaged in during the threetwo comparable periods. During the nine months ended March 31, 2019:September 30, 2020, the main outflows of cash for financing activities consisted of debt payments of $145.8 million, a $2.2 million distribution to the noncontrolling interest in the NT Suez Holdco LLC entity, and paying $1.4 million to repurchase shares under the share repurchase program. During the nine months ended September 30, 2019 we had borrowings under the $360 Million Facility, consisting of $300 million inof the term loan drawn and $45$55 million of the revolver drawn, which were offset by $26.4 million repaid on lines of credit that were cancelled in connection with the Merger, $86.6 million in term loan repayments and $6.5$7.1 million in deferred financing costs paid in connection with the $360 Million Facility.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations and Contingencies
The following table summarizes the Company’s long-term contractual obligations as of March 31, 2019September 30, 2020 (in thousands of U.S. dollars).
Payment due by period | Payment due by period | |||||||||||||||||||||||||||||||||||||||
Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | |||||||||||||||||||||||||||||||
Long-term Debt Obligations | $ | 953,617 | $ | 80,744 | $ | 618,498 | $ | 156,875 | $ | 97,500 | $ | 748,518 | $ | 33,597 | $ | 307,421 | $ | 407,500 | $ | — | ||||||||||||||||||||
Interest Obligations(1) | 107,522 | 34,978 | 64,663 | 7,505 | 376 | 53,059 | 5,290 | 32,136 | 15,633 | — | ||||||||||||||||||||||||||||||
Capital Commitments | 13,775 | 11,103 | 2,672 | — | — | |||||||||||||||||||||||||||||||||||
Office Lease | 7,959 | 757 | 1,826 | 2,229 | 3,147 | |||||||||||||||||||||||||||||||||||
Capital Obligations (scrubbers and ballast water treatment systems) | 13,559 | 1,740 | 11,819 | — | — | |||||||||||||||||||||||||||||||||||
Lease Obligations | 6,387 | 137 | 1,909 | 2,401 | 1,940 | |||||||||||||||||||||||||||||||||||
Total: | $ | 1,082,873 | $ | 127,582 | $ | 687,659 | $ | 166,609 | $ | 101,023 | $ | 821,523 | $ | 40,764 | $ | 353,285 | $ | 425,534 | $ | 1,940 |
(1) Interest has been estimated based on the LIBOR forward rates and the prescribed margin for each of our facilities. Refer to Note 9 — Long-Term Debt of our unaudited condensed consolidated financial statements contained herein.
Critical Accounting Policies
The Company’s condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company has described below what its management believes are its most critical accounting policies. For a description of all of the Company’s significant accounting policies, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — B. Liquidity and Capital Resources — Critical Accounting Policies and Note 2 (Significant— Summary of Significant Accounting Policies) to the audited consolidated financial statements of DSS Holdings L.P., which are includedPolicies, each contained in the Company’s registration statement on Form 10,our 2019 Annual Report, and in Note 2 — Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements included herein, for further information.
Revenue Recognition
During the three and nine months ended March 31,September 30, 2020 and 2019, and 2018, revenues arewere generated from fixed rate time charters, pool arrangementsspot market voyage charters, spot market-related time charters and voyage charters.pools.
The Company recognizesWe recognize revenues over the term of the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection of the related revenue is reasonably assured. The Company doesWe do not recognize revenue during days the vessel is off-hire. Where the time charter contains a profit or loss sharing arrangement, the profit or loss is recognized based on amounts earned or incurred as of the reporting date.
Revenues from pool arrangements are recognized based on its portion of the net distributions reported by the relevant pool, which represents the net voyage revenue of the pool after voyage expenses and pool manager fees.
For the three and nine months ended March 31, 2018, under a voyage charter agreement, the revenues are recognized on a pro rata basis based on the relative transit time in each period. The period over which voyage revenues are recognized commences at the time the vessel departs from its last discharge portSeptember 30, 2020 and ends at the time the discharge of cargo at the next discharge port is completed. The Company does not begin recognizing revenue until a charter has been agreed to by the customer and the Company, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. The Company does not recognize revenue when a vessel is off-hire. Estimated losses on voyages are provided for in full at the time such losses become evident.
For the three months ended March 31, 2019, pursuant to the new revenue recognition guidance, which was early adopted as of January 1, 2019, and is disclosed in Note 12 — Voyage Revenue of our condensed consolidated financial statements, revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Previously, revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by us when the Company whenvessels are engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters.
Vessel Lives and Impairment
The carrying value of each of the Company’s vessels represents its original cost (contract price plus initial expenditures) at the time of delivery or purchase less accumulated depreciation or impairment charges. The carrying values of vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. In recent years changing market conditions resulted in a decrease in charter rates and values of assets. We consider these market developments as indicators of potential impairment of the carrying amount of its assets.
In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels’ future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels’ operating expenses, vessels’ capital expenditures and drydocking requirements, vessels’ residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where the vessels are not fixed on time charters, we utilize an estimated daily time charter equivalent for its vessels’ unfixed days based on the most recent ten year historical one-year time charter average.
Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions are highly subjective and likely to change, possibly materially, in the future. There can be no assurance as to how long charter rates and vessel values will remain at their current low levels or whether they will improve by a significant degree. If charter rates were to remain at depressed levels, future assessments of vessel impairment would be adversely affected.
In recent years, the market values of vessels have experienced particular volatility, with substantial declines in many of the charter-free market value, or basic market value, of various vessel classes. As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their carrying values under our impairment accounting policy. This is due to management’s projection that future undiscounted cash flows expected to be earned by such vessels over their operating lives will exceed such vessels’ carrying amounts.
Deferred Drydocking Costs and Amortization
We use the deferral method of accounting for drydocking costs. Under the deferral method, drydocking costs are deferred and amortized on a straight-line basis over the useful life of the drydock, which is estimated to be approximately 30 to 60 months. Management uses judgment when estimating the period between drydocks performed, which can result in adjustments to the estimated amortization of drydock expense if drydocks occur earlier or later than originally estimated. We update our estimate of a vessel’s next scheduled drydock as necessary. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off as a component of the gain or loss upon disposal of vessels. We defer the costs associated with drydocking as they occur and amortize these costs on a straight-line basis over the period between drydocking. Deferred drydocking costs include actual costs incurred at the drydock yard, cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise, and the cost of hiring a third party to oversee the drydocking. Expenditures for normal maintenance and repairs, whether incurred as part of the drydock or not, are expensed as incurred. If the vessel is drydocked earlier than originally anticipated, any remaining deferred drydock costs that have not been amortized are expensed at the beginning of the next drydock.
Recent Accounting Pronouncements
New Accounting Standards Adopted
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. For the Company, this standard is effective for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASU, and shall be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption (the “modified retrospective transition method”). The Company early adopted ASU 2014-09 during the first quarter of 2019 using the modified retrospective transition method applied to those spot market voyage charter contracts which were not completed as of January 1, 2019. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to its Accumulated deficit as of January 1, 2019. Prior periods were not retrospectively adjusted. The adoption of ASU 2014-09 does not have an impact on the timing of recognition of revenue generated from time charter agreements. Refer to Note 12 — Voyage Revenue of our condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to provide guidance to entities when evaluating whether a transaction should be accounted for as an acquisition or disposal of a business. An entity first determines whether substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets. If this threshold is met, the assets acquired would not represent a business, and no further assessment is required. If the initial screen is not met, ASU 2017-01 requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to produce output and removes the evaluation of whether a market participant could replace the missing elements. For nonpublic entities, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASUs, and shall be applied prospectively. The Company early adopted ASU 2017-01, and concluded that the Merger should be accounting as an asset acquisition. Refer to Note 3 — Merger Transaction of our condensed consolidated financial statements.
New Accounting Standards to be Implemented
In February 2016, the FASB issued ASU No. 2016-02, “Leases“Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For nonpublic entities,the Company, ASU 2016-02 is effective for annual periods beginning after December 15, 2019,2020, and interim reporting periods within annual reporting periods beginning after December 15, 2020,2021, with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about our leasing activities. We are currently analyzing our contracts and will then calculate the right-of-use assets and lease liabilities as of January 1, 2021 based on the present value of our remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the potential impact of this pronouncement.pronouncement on the condensed consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is exposed to the impact of interest rate changes primarily through floating-rate borrowings that require it to make interest payments based on the Eurodollar Rate. Significant increases in interest rates could adversely affect operating margins, results of operations and our ability to service debt. The Company uses, interest rate swaps to reduce its exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with floating-rate debt.
The Company is exposed to the risk of credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Company only entered into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s Financial Services LLC or A3 or better by Moody’s Investors Service, Inc. at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.
From time to time, the Company enters into interest rate swap agreements to modify its exposure to interest rate movements and to manage its interest expense. As of September 30, 2020, 26.3% of the debt was fixed due to the interest rate swap agreements, and 73.7% was variable. Based on the Company’s September 30, 2020 outstanding variable rate debt balance, a one percentage point increase in annual Eurodollar Rates would increase its annual interest expense by approximately $5.2 million.
Inflation
Inflation has only a moderate effect on the Company’s expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase the Company’s operating, voyage, general and administrative and financing costs.
Foreign Exchange Risk
The shipping industry’s functional currency is the U.S. dollar. All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurred certain operating expenses, such as vessel and general and administrative expenses, in currencies other than the U.S. dollar, and the foreign exchange risk associated with these operating expenses has historically been immaterial. If foreign exchange risk becomes material in the future, the Company may seek to reduce its exposure to fluctuations in foreign exchange rates through the use of short-term currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable. For contracts which qualify as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes in foreign exchange spot rates with the change in fair value of the effective portions being recorded in accumulated other comprehensive loss.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Companyinformation called for by Item 3 is exposed toset forth in Item 2 under the impact of interest rate changes primarily through floating-rate borrowings that require it to make interest payments based on the Eurodollar Rate. Significant increases in interest rates could adversely affect operating margins, results of operationscaption “Quantitative and our ability to service debt. The Company uses, interest rate swaps to reduce its exposure to market risk from changes in interest rates. The principal objective of these contractsQualitative Disclosures About Market Risk” and is to minimize the risks and costs associated with floating-rate debt.
The Company is exposed to the risk of credit loss in the event of non-performanceincorporated herein by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Company only entered into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s Financial Services LLC or A3 or better by Moody’s Investors Service, Inc. at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.reference.
From time to time, the Company has considered entering into interest rate swap agreements to modify its exposure to interest rate movements and to manage its interest expense. As of March 31, 2019, 17% of the debt was fixed and 83% was variable. Based on the Company’s March 31, 2019 outstanding variable rate debt balance, a one percentage point increase in annual Eurodollar Rates would increase its annual interest expense by approximately $7.9 million.
Inflation
Inflation has only a moderate effect on the Company’s expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase the Company’s operating, voyage, general and administrative and financing costs.
Foreign Exchange Risk
The shipping industry’s functional currency is the U.S. dollar. All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurred certain operating expenses, such as vessel and general and administrative expenses, in currencies other than the U.S. dollar, and the foreign exchange risk associated with these operating expenses has historically been immaterial. If foreign exchange risk becomes material in the future, the Company may seek to reduce its exposure to fluctuations in foreign exchange rates through the use of short-term currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable. For contracts which qualify as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes in foreign exchange spot rates with the change in fair value of the effective portions being recorded in accumulated other comprehensive loss.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2019.September 30, 2020. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.September 30, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the threenine months ended March 31, 2019,September 30, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk“Item 1A. Risk Factors” in the Company’s Information Statement,2019 Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Information Statement2019 Annual Report are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSThe ongoing COVID-19 pandemic and governmental responses thereto could adversely affect the Company’s business.
In connection withAs previously disclosed by the completionCompany, the ongoing outbreak of the transactions (the “Transactions”novel coronavirus (“COVID-19”) contemplatedhas caused severe global disruptions and has and may continue to negatively affect economic conditions regionally as well as globally and otherwise impact the Company’s operations and the operations of the Company’s customers and suppliers. Governments in affected countries have imposed travel bans, quarantines and other emergency public health measures in an effort to contain the outbreak. These measures have resulted in a significant reduction in global economic activity and extreme volatility in the global financial markets which has reduced the global demand for oil and refined petroleum products. Additionally, as a result of restrictive measures, the Company’s vessels may not be able to call on ports, or may be restricted from disembarking from ports, located in regions affected by the Transaction Agreement, datedoutbreak. The Company may also experience operational disruptions and delays, unavailability of normal port infrastructure and services including limited access to equipment, critical goods and personnel, disruptions to crew change, quarantine of ships and/or crew, counterparty solidity, closure of ports and custom offices, as of November 27, 2018, among DSS Holdings L.P. (“DSS LP”) and Capital Product Partners L.P., on March 27, 2019, we issued 27,165,695 common shares to DSS LP. These shares were issued in reliance upon an exemption from registration pursuant to Section 4(a)(2) under the Securities Act. This issuance was not a “public offering” because only one person was involvedwell as disruptions in the transaction, we did not engagesupply chain and industrial production, which may lead to reduced cargo demand, amongst other potential consequences attendant to pandemic diseases.
To date, the COVID-19 pandemic has primarily affected the Company’s operations in general solicitation the following ways, which may result in loss of revenue days and/or advertising with regardincrease in vessel operating expenses:
· | the Company’s ability to arrange, in a timely manner, crew reliefs, Flag and Class Surveys, delivery of spares and stores, and requested inspections of vessels, has been made more difficult by the effects of COVID-19; |
· | it has become more difficult for the Company to obtain the services required by our vessels; |
· | the Company is now required to comply with the requirements of port states with respect to procedures for the prevention of community spread of COVID-19; and |
· | the Company has needed to implement precautions to prevent any exposure of our ships’ crews to COVID-19 when calling at ports and/or places affected by the virus. |
If the COVID-19 pandemic continues on a prolonged basis or becomes more severe, the rate environment in the crude and product markets may deteriorate and our operations and cash flows may be negatively impacted. A prolonged negative rate environment could result in the value of our vessels being impaired which could in turn impair our ability to borrow amounts under our revolving credit facilities or to access to credit and capital markets in the future on favorable terms or at all.
The extent to which COVID-19 will materially impact the Company’s results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the issuanceoutbreak, it may have a material adverse effect on the Company’s future results of operation and sale of common shares and we did not offer to the public in connection with the issuance to DSS LP.financial condition.
36
† | Certain schedules, exhibits and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to furnish a copy of any such omitted schedule or similar attachment to the SEC upon request. |
* | The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q are “furnished” to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIAMOND S SHIPPING INC. | |||
Date: | November 16, 2020 | By: | /s/Craig H. Stevenson, Jr. |
Craig H. Stevenson, Jr. | |||
Chief Executive Officer and President | |||
(Principal Executive Officer) | |||
Date: | November 16, 2020 | By: | /s/ Kevin M. Kilcullen |
Kevin M. Kilcullen | |||
Chief Financial Officer | |||
(Principal Financial Officer) |