EX-99.3 4 d223041dex993.htm EX-99.3 EX-99.3
Table of Contents

Exhibit 99.3

 

LOGO

StealthGas Inc.
ANNUAL
REPORT
2015


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LOGO

COMPANY
Profile
STEALTHGAS INC. is an international provider of seaborne transportation services primarily to the liquefied petroleum gas sector [LPG]. Our vessels carry various petroleum and petrochemical gas products in liquefied form such propane, butane, butadiene, isopropane, propylene and vinyIchloride monomer, which are all byproducts of natural gas and crude oil. Furthermore, the company owns three M.R. Product Carriers and therefore has a presence in the transportation of products such as aviation fuel, vegetable oil and gasoline, as well as crude oil through its ownership of one Aframax tanker.
The Company owns and operates the world’s largest independently owned small LPG carrier fleet in the 3,000 to 8,000 cubic meter range.
As of April 2016, the Company operated 51 LPG carriers following the delivery of ten eco LPG newbuilding vessels in 2015 and one in February 2016. In addition to these, the Company expects the delivery of 5 eco LPG newbuilding carriers from April 2016 to December 2017.
The Company also owns three Medium Range Product carriers and one Aframax tanker employed on bareboat charters.
HIGHLIGHTS Operational
Successful delivery of ten new eco LPG new buildings.
Year on year increase of vessel calendar days by 15% at 18,541 days.
Annual operational utilization of 92.5%.
66% of our vessels on period charters thus securing steady cash flow.
Continuous reduction of daily opex costs and breakeven levels - an outcome of successful management and operations.
HIGHLIGHTS Financial
Voyage revenues amounted to $ 141 million marking a 6.6% increase compared to voyage revenues in 2014.
Company asset base expanded
to $ 1.03 billion from $ 945 million in 2014.
Moderate gearing since debt
to assets stands at 41% while net debt to assets is as low as 31%.
Cash on hand of $100 million with strong operating cashflow of about $48 million.
Stock repurchase of 3.6 million shares for a total of approximately $20 million, from the beginning of the program in December 2014.


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LOGO

Michael JOLLIFFE
Dear Shareholders,
It gives me great pleasure once again to write to you as Chairman of StealthGas Inc.
2015 was a challenging year for the global economy and the broader shipping industry. Lower levels of global economic growth, coupled with instability in the oil markets and the slowing down of strong economies such as China’s, greatly affected commodity demand and seaborne trade.
Looking at some of the major shipping segments in isolation, it is undoubtedly the dry bulk market that experienced the most exacting year, mostly led by the decline in Chinese coal imports, and the oversupply of dry vessels. These conditions significantly lowered freight rates below opex levels, resulting in financial losses for many companies. Weak performance also prevailed in the container segment, attributed to a lower demand for containerized goods, particularly in the EU. On the other hand, low oil prices benefited crude oil tanker and oil product tanker markets which enjoyed strong freight rates. As a result of the collapse in crude oil prices and the consequential cancellation of major CAPEX in the E&P sector, the offshore segment currently faces considerable challenges. In the LPG segment, particularly the small LPG market (3,000 to 8,000 cbm), rates still remained quite weak, as low oil prices and an oversupply of vessels did not help the market to recover. However, the intensification of scrapping activity, in conjunction with the small orderbook in the years to come, will positively affect our market freight rates in the coming future.
As for the performance of StealthGas, given the weak market conditions, I am pleased that our Company managed to mark a year on year revenue increase of approximately $ 10 million and to maintain profitability. Most importantly, I am confident that with the challenging expansion plan we had for the year, including the addition of ten eco LPG newbuildings which were all successfully placed on period
charters, profits will improve.
In terms of the financial management of our Company, I find it very commendable that we have managed to keep an adequate cash balance in spite of our heavy capital expenditure, whilst at the same time preserving our leverage ratio in the order of 41% LTV, which is low for our industry sector. In addition, I find it very promising that throughout 2015 our Company actively contained costs as evidenced by the lowering of our daily operating expenditure.
Given that our share price trades well below our net asset value and in a diligent effort to give value back to our shareholders, we spent close to $ 20 million during 2015 for our share buyback program, as we were able to buy back shares in our ships at a substantial discount to their market value. I would like once more to express my confidence in the LPG coastal segment, as broader environmental trends are in favor of the use of alternative fuels. The increasing use of bottled gas by developing economies both improves the environment and provides healthier and cheaper fuel for developing economies.
I would also like to thank our shareholders, as well as our bankers and financiers for their continuous support. In addition, I would like to take this opportunity to congratulate our officers, crew and management team for their strong commitment and efforts, and express my wish for a fruitful 2016 with market conditions that will assist both our balance sheet, as well as our bottom line.
Sincerely yours
Michael Jolliffe,
Chairman of the Board


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LOGO

Harry VAFIAS
Dear Shareholders,
It must be acknowledged that 2015 was quite a compelling year for the broader shipping industry. Amidst the slowdown of the global economy, we saw sectors like dry and containers taking a downturn with no clear prognosis as to when signs of improvement will be evident.
Focusing on our segment, that of small LPG carriers, the market in 2015 remained soft, with rates marking a year on year decline by as much as 15%. Taking into account that the variation of daily rates in our segment is $ 13,000 at peak times versus $ 7,000 at the bottom of the cycle, by the end of the year freight rates had nearly reached their lowest. Within this environment, I must admit that I am satisfied with our Company’s performance. We faced quite a compelling year in terms of capital expansion, as in 2015 we took the delivery of ten eco LPG newbuildings, while we sold for demolition two of our oldest LPG vessels. Given our stated strategy regarding our fleet renewal, we managed, within only one year, to reduce our average fleet age from 10.9 years to 8.8 years, which is lower than the average fleet age in our segment.
In terms of financial performance, indeed we experienced an increase in revenues as we closed the year with voyage revenues of $ 141 million, close to $ 10 million higher than in 2014. However as rates followed a declining trend and our operating base was impacted by our fleet expansion, our Company’s true earnings potential was not reflected due to the prevailing market conditions.
Strong signs of our successful financial performance are reflected both in our leverage, which was close to 41%, and a reduction in our daily operating cost.
Low oil prices and an oversupply of vessels affected the rates in our segment. However in 2015 we saw quite a promising activity in terms of vessel demolition, as 15 vessels were scrapped within the year. In addition, the
orderbook in our segment is quite low for the years to come, 16 vessels by 2018, which is less than 5% of the total coastal LPG fleet.
We will conclude our fleet expansion with the delivery of the four eco 22,000 cbm semi - ref gas carriers in 2017; and we are very pleased as we enjoy a fully funded orderbook. We strive to focus on our fleet management, and enhance even further our earnings visibility within the restraints of the market conditions.
Most importantly, we consistently strive to promote the interests of our shareholders, as we have clearly demonstrated, with the active share buyback program of close to $ 20 million that took place throughout 2015.
As a closing statement I would like to thank my fellow directors and management team, as well as our bankers for their support which is greatly acknowledged and appreciated. Most importantly I would like for yet another year to thank our shareholders for their belief in StealthGas as we strive to improve our financial performance and growth prospects within any market conditions.
Sincerely yours
Harry Vafias, President & Chief Executive Officer


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LOGO

Growing & Consolidating our Fleet
Throughout 2015 our Company realized a dynamic fleet expansion plan. Through the year, we added to our fleet 10 eco LPG Newbuildings, from top class yards all delivered according to schedule.
In addition to this and given our effort to lower further our fleet’s average age, we proceeded with the demolition of two of our oldest LPG vessels. Continuing the same strategy as to our fleet renewal in 2016, with the sale of yet another of our oldest LPG vessels for further trading in January 2016 and the delivery of one eco LPG newbuilding in February 2016, as of April 1st 2016 our Company operated 51 LPG carriers and 4 tankers.
We have agreements to further acquire 5 LPG carriers under construction with expected deliveries in the period April 2016 to December 2017.
Bank financing for deliveries is already secured. Our Company enjoys a fully funded orderbook while all equity requirements for these deliveries suffice to be funded by the Company’s existing cash.
Fleet Employment
Earnings visibility and conservative employment profile is fundamental to our Company’s strategy. Therefore in 2015 we continued the effort to keep the majority of our fleet on period charters, fixing however contracts of shorter than usual duration in order not to commit vessels for long periods in a soft market environment. Throughout 2015 we were able to arrange 37 short to long term period charters (including charter extensions) while our secured revenue base was in the order of $ 211 million.
Out of a fleet of 55 operating vessels as at the end of 2015, we had 13 of these on bareboat charters, 28 on time charters and 14 in the spot market. The higher than usual presence in the spot market was attributed to the weak market conditions that prevailed throughout 2015 and therefore our operational utilization for the year was lower than usual, in the order of 92.5%. We expect approximately 30% of our fleet to come off period charters in 2016 but we expect some of these contracts to be renewed and in conjunction we will seek opportunities for new period employment should market conditions permit so.
Strategy for the years going forward
We have followed an aggressive strategy in terms of expansion but yet conservative in terms of earnings visibility and company leverage. Our key goals for the years to come are to:
Successfully conclude with our expansion plan and aim to keep the majority of our new deliveries fixed on period charters should market conditions permit so.
Preserve, in spite of the capex schedule in place, moderate gearing and adequate cash in the balance sheet.
Continue our cost effective operations and pro active technical management.
Take steps in order to assist our stock, increase the core value of our Company and ultimately protect the interests of our shareholders.


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LOGO

The tables below describe our fleet as of April 1st, 2016
LPG Carrier Fleet
Name Vessel Size(cbm) Vessel Type Year Built
Eco Nical 7,541 F.P. 2016
Gas Cathar* 7,517 F.P. 2001
Gas Husky 7,516 F.P. 2012
Gas Esco 7,514 F.P. 2012
Eco Galaxy 7,213 F.P. 2015
Eco Chios 7,211 F.P. 2014
Eco Stream 7,210 F.P. 2014
Gas Premiership* 7,200 F.P. 2001
Gas Haralambos 7,020 F.P. 2007
Gas Marathon 6,572 F.P. 1995
Gas Moxie 6,562 F.P. 1992
Gas Flawless 6,337 F.P. 2007
Gas Ethereal 5,036 F.P. 2006
Gas Prodigy 5,031 F.P. 2003
Eco Enigma 5,025 F.P. 2015
Eco Universe 5,025 F.P. 2015
Eco Czar 5,020 F.P. 2015
Eco Nemesis 5,019 F.P. 2015
Gas Monarch 5,018 F.P. 1997
Gas Defiance 5,018 F.P. 2008
Gas Shuriken 5,018 F.P. 2008
Gas Elixir 5,018 F.P. 2011
Gas Cerberus 5,018 F.P. 2011
Gas Myth 5,018 F.P. 2011
Gas Inspiration 5,018 F.P. 2006
Eco Invictus 5,016 F.P. 2014
Gas Nirvana 5,014 F.P. 1996
Gas Icon 5,012 F.P. 1994
Gas Emperor 5,009 F.P. 1994
Gas Texiana 5,001 F.P. 1995
Eco Green 4,991 F.P. 2015
Eco Dream 4,989 F.P. 2015
Gas Sincerity 4,129 F.P. 2000
Gas Spirit 4,112 F.P. 2001
Gas Zael 4,111 F.P. 2001
Gas Sikousis 3,586 F.P. 2006
Eco Loyalty 3,529 F.P. 2015
Eco Elysium 3,526 F.P. 2014
Eco Royalty 3,525 F.P. 2015
Eco Corsair 3,524 F.P. 2014
Eco Lucidity 3,517 F.P. 2015
Gas Evoluzione 3,517 F.P. 1996
Gas Imperiale 3,515 F.P. 2008
Gas Legacy 3,514 F.P. 1998
Gas Astrid 3,514 F.P. 2009
Gas Enchanted 3,514 F.P. 2006
Gas Exelero 3,513 F.P. 2009
Gas Alice 3,513 F.P. 2006
Gas Ice 3,436 S.R. 1991
Gas Pasha 3,310 F.P. 1995
Gas Galaxy 3,312 F.P. 1997
*chartered in vessels
LPG Carriers (51 Vessels) 253,944 cbm
Name Vessel Size(cbm) Vessel Type Scheduled Delivery
To be named 22,000 S.R. Q1 2017
To be named 22,000 S.R. Q2 2017
To be named 22,000 S.R. Q2 2017
To be named 22,000 S.R. Q3 2017
Eco Dominator 7,200 F.P. Q3 2016
Contracted Newbuilding LPG Carriers (5 Vessels) 95,200 cbm
Total LPG Carrier Fleet:
56 vessels 349,144 cbm
Tanker Fleet
Name Vessel Size(cbm) Vessel Type Year Built
Navig8 Fidelity 47,000 MR product carrier 2008
Navig8 Faith 47,000 MR product carrier 2008
Stealth Bahla 46,000 MR product carrier 2009
Spike 115,804 Aframax oil tanker 2010
Product Carriers/Crude Oil Tanker (4 Vessels) 255,804 dwt
F.P.: Fully- Pressurized
S.R.: Semi-Refrigerated
M.R.: Medium Range


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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE

 

     SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

     SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

     SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

     SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-36797

 

 

STEALTHGAS INC.

(Exact name of Registrant as specified in its charter)

 

 

Not applicable

(Translation of Registrant’s Name into English)

Republic of the Marshall Islands

(Jurisdiction of incorporation or organization)

331 Kifissias Avenue, Erithrea 14561 Athens, Greece

(Address of principal executive offices)

Harry N. Vafias

331 Kifissias Avenue, Erithrea 14561, Athens, Greece

Telephone: (011) (30) (210) 625 0001

Facsimile: (011) (30) (210) 625 0018

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   The Nasdaq Stock Market LLC

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION

PURSUANT TO SECTION 15(d) OF THE ACT:

None

 

 

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2015 was: 40,517,676 shares of Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes  x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨ Yes  x No

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.  x Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x   Non-accelerated filer   ¨  (Do not check if a smaller reporting company)

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

 

U.S. GAAP x  

International Financial Reporting Standards as issued by the

International Accounting Standards Board ¨

   Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ¨ Item 17  ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No

 

 

 


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TABLE OF CONTENTS

 

FORWARD-LOOKING INFORMATION

     1   

PART I

     2   

Item 1.

     Identity of Directors, Senior Management and Advisers      2   

Item 2.

     Offer Statistics and Expected Timetable      2   

Item 3.

     Key Information      2   

Item 4.

     Information on the Company      30   

Item 4A.

     Unresolved Staff Comments      43   

Item 5.

     Operating and Financial Review and Prospects      43   

Item 6.

     Directors, Senior Management and Employees      61   

Item 7.

     Major Shareholders and Related Party Transactions      67   

Item 8.

     Financial Information      70   

Item 9.

     The Offer and Listing      71   

Item 10.

     Additional Information      72   

Item 11.

     Quantitative and Qualitative Disclosures About Market Risk      86   

Item 12.

     Description of Securities Other than Equity Securities      87   

PART II

     88   

Item 13.

     Defaults, Dividend Arrearages and Delinquencies      88   

Item 14.

     Material Modifications to the Rights of Security Holders and Use of Proceeds      88   

Item 15.

     Controls and Procedures      88   

Item 16A.

     Audit Committee Financial Expert      91   

Item 16B.

     Code of Ethics      91   

Item 16C.

     Principal Accountant Fees and Services      91   

Item 16D.

     Exemptions from the Listing Standards for Audit Committees      92   

Item 16E.

     Purchases of Equity Securities by the Issuer and Affiliated Purchasers      92   

Item 16F.

     Change in Registrant’s Certifying Accountant      93   

Item 16G.

     Corporate Governance      93   

Item 16H.

     Mine Safety Disclosures      93   

PART III

     94   

Item 17.

     Financial Statements      94   

Item 18.

     Financial Statements      94   

Item 19.

     Exhibits      94   


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FORWARD-LOOKING INFORMATION

This Annual Report on Form 20-F includes assumptions, expectations, projections, intentions and beliefs about future events. These statements are intended as “forward-looking statements.” We caution that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material.

All statements in this document that are not statements of historical fact are forward-looking statements as defined in 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, but are not limited to, such matters as:

 

   

future operating or financial results;

 

   

global and regional economic and political conditions;

 

   

pending or recent acquisitions, business strategy and expected capital spending or operating expenses;

 

   

competition in the marine transportation industry;

 

   

shipping market trends, including charter rates, factors affecting supply and demand and world fleet composition;

 

   

ability to employ our vessels profitably;

 

   

performance by the counterparties to our charter agreements;

 

   

future liquefied petroleum gas (“LPG”), refined petroleum product and oil prices and production;

 

   

future supply and demand for oil and refined petroleum products and natural gas of which LPG is a byproduct;

 

   

our financial condition and liquidity, including our ability to obtain financing in the future to fund capital expenditures, acquisitions and other general corporate activities, the terms of such financing and our ability to comply with covenants set forth in our existing and future financing arrangements;

 

   

performance by the shipyards constructing our newbuilding vessels; and

 

   

expectations regarding vessel acquisitions and dispositions.

When used in this document, the words “anticipate,” “believe,” “intend,” “estimate,” “project,” “forecast,” “plan,” “potential,” “may,” “should” and “expect” reflect forward-looking statements. Such statements reflect our current views and assumptions and all forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect our future financial results are discussed more fully under “Item 3. Key Information—Risk Factors,” as well as elsewhere in this Annual Report on Form 20-F and in our other filings with the U.S. Securities and Exchange Commission (“SEC”). We caution readers of this Annual Report not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements.

 

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PART I

StealthGas Inc. is a Marshall Islands company that is referred to in this Annual Report on Form 20-F, together with its subsidiaries, as “StealthGas,” the “Company,” “we,” “us,” or “our.” This Annual Report should be read in conjunction with our consolidated financial statements and the accompanying notes thereto, which are included in Item 18 to this Annual Report.

We use the term cubic meters, or “cbm,” in describing the size of our liquefied petroleum gas (“LPG”) carriers and the term deadweight tons, or “dwt,” in describing the size of our product carriers and crude oil tanker. We use the term “small” to describe LPG carriers of between 3,000 and 8,000 cbm in capacity. Unless otherwise indicated, all references to currency amounts in this annual report are in U.S. dollars.

 

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

 

Item 3. Key Information

A. Selected Consolidated Financial Data

The following table sets forth our selected consolidated financial data and other operating data shown in U.S. dollars, other than share and fleet data. The table should be read together with “Item 5. Operating and Financial Review and Prospects.”

 

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Our audited consolidated statements of income and comprehensive income, stockholder’s equity and cash flows for the years ended December 31, 2013, 2014, and 2015 and the audited consolidated balance sheets as of December 31, 2014 and 2015, together with the notes thereto, are included in “Item 18. Financial Statements” and should be read in their entirety. The selected consolidated income statement data for the years ended December 31, 2011 and 2012 and the selected balance sheet data as of December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements which are not included in “Item 18. Financial Statements”.

 

    Year Ended December 31,  
    2011     2012     2013     2014     2015  

INCOME STATEMENT DATA

         

Revenues

  $ 118,280,752      $ 114,848,079      $ 111,667,565      $ 122,158,892      $ 131,501,881   

Revenues—related party

    —          4,364,992        9,814,000        9,814,000        9,814,000   

Total Revenues

  $ 118,280,752      $ 119,213,071      $ 121,481,565      $ 131,972,892      $ 141,315,881   

Operating expenses:

         

Voyage expenses

    16,354,725        11,231,340        12,819,866        12,474,090        15,849,855   

Voyage expenses—related party

    1,474,495        1,472,410        1,482,764        1,613,421        1,725,683   

Vessels’ operating expenses

    36,350,153        28,674,675        32,439,404        41,335,984        46,477,583   

Vessels’ operating expenses-related party

    208,000        1,917,302        4,084,149        4,099,352        4,177,042   

Charter hire expenses

    —          —          —          320,804        4,124,960   

Dry-docking costs

    3,443,491        2,067,393        3,160,251        465,681        1,774,905   

Management fees

    4,760,865        4,315,720        4,807,010        5,501,675        6,452,145   

General and administrative expenses

    2,646,418        2,838,759        2,816,397        3,150,929        3,655,316   

Depreciation

    27,562,120        28,776,688        30,761,673        33,811,607        35,857,507   

Impairment loss

    —          —          —          6,168,747        8,238,987   

Net loss/(gain) on sale of vessels

    5,654,178        (1,372,409     —          —          (33,251

Total expenses

    98,454,445        79,921,878        92,371,514        108,942,290        128,300,732   

Income from operations

    19,826,307        39,291,193        29,110,051        23,030,602        13,015,149   

Interest and finance costs

    (8,510,516     (9,408,230     (8,189,475     (9,314,539     (10,385,261

Loss on derivatives

    (2,931,404     (1,086,258     (27,470     (1,348,384     (370,584

Interest income

    83,059        221,023        361,820        456,924        173,083   

Foreign exchange gain/(loss)

    82,345        (59,241     (37,733     (138,777     134,291   

Other expenses, net

    (11,276,516     (10,332,706     (7,892,858     (10,344,776     (10,448,471

Net income

    8,549,791        28,958,487        21,217,193        12,685,826        2,566,678   

Earnings per share, basic

  $ 0.41      $ 1.41      $ 0.75      $ 0.32      $ 0.06   

Earnings per share, diluted

  $ 0.41      $ 1.41      $ 0.75      $ 0.32      $ 0.06   

Weighted (basic and diluted) average number of shares outstanding

    20,909,154        20,552,568        28,271,746        39,305,644        41,315,127   

Dividends declared per share

  $ 0.00      $ 0.00      $ 0.00      $ 0.00      $ 0.00   

 

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    As of December 31,  
    2011     2012     2013     2014     2015  

BALANCE SHEET DATA

         

Current assets, including cash

  $ 56,521,743      $ 56,263,407      $ 97,885,057      $ 139,742,461      $ 123,372,369   

Total assets

    694,362,527        711,743,545        849,673,159        944,358,260        1,037,874,170   

Current liabilities

    55,970,499        55,674,467        62,916,872        67,289,874        103,714,126   

Derivative liability

    9,401,798        5,949,241        3,232,967        2,456,663        978,853   

Total long-term debt, including current portion(13)

    349,720,557        344,056,826        351,557,038        323,982,310        422,162,554   

Net assets

    313,098,027        342,033,442        472,594,443        592,390,274        583,051,160   

Capital stock

    211,049        211,796        326,796        442,850        442,850   

Number of shares of common stock outstanding

    20,552,568        20,627,329        32,127,329        42,889,773        40,517,676   

 

    Year ended December 31,  
    2011     2012     2013     2014     2015  

OTHER FINANCIAL DATA

         

Net cash provided by operating activities

  $ 42,375,718      $ 48,440,976      $ 49,127,375      $ 55,237,735      $ 48,054,596   

Net cash used in investing activities

    (31,593,396     (43,898,116     (119,786,421     (91,107,863     (165,005,713

Net cash provided by/(used in) financing activities

    2,953,018        (5,710,869     114,608,308        79,018,076        87,899,271   

FLEET DATA

         

Average number of vessels(1)

    37.6        36.9        39.4        44.1        48.8   

Total voyage days for fleet(2)

    13,368        13,342        14,196        16,028        18,446   

Total time and bareboat charter days for fleet(3)

    10,455        11,531        11,896        13,893        14,516   

Total spot market days for fleet(4)

    2,913        1,811        2,300        2,135        3,930   

Total calendar days for fleet(5)

    13,716        13,494        14,399        16,136        18,541   

Fleet utilization(6)

    97.5     98.9     98.6     99.3     99.5

Fleet operational utilization(7)

    89.7     95.4     92.3     93.3     92.5

AVERAGE DAILY RESULTS

         

Adjusted average charter rate(8)

  $ 7,514      $ 7,983      $ 7,550      $ 7,355      $ 6,708   

Vessel operating expenses(9)

    2,665        2,267        2,537        2,816        2,732   

General and administrative expenses(10)

    193        210        196        195        197   

Management fees(11)

    347        319        334        341        348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total daily operating expenses(12)

    2,858        2,477        2,732        3,011        2,929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Average number of vessels is the number of owned vessels that constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in that period.
(2) Our total voyage days for our fleet reflect the total days the vessels we operated were in our possession for the relevant periods, net of off-hire days associated with major repairs, drydockings or special or intermediate surveys.
(3) Total time and bareboat charter days for fleet are the number of voyage days the vessels in our fleet operated on time or bareboat charters for the relevant period.
(4) Total spot market charter days for fleet are the number of voyage days the vessels in our fleet operated on spot market charters for the relevant period.

 

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(5) Total calendar days are the total days the vessels we operated were in our possession for the relevant period including off-hire days associated with major repairs, drydockings or special or intermediate surveys.
(6) Fleet utilization is the percentage of time that our vessels were available for revenue generating voyage days, and is determined by dividing voyage days by fleet calendar days for the relevant period.
(7) Fleet operational utilization is the percentage of time that our vessels generated revenue, and is determined by dividing voyage days (excluding commercially idle days) by fleet calendar days for the relevant period.
(8) Adjusted average charter rate is a measure of the average daily revenue performance of a vessel on a per voyage basis. We determine the adjusted average charter rate by dividing voyage revenues (net of voyage expenses) by voyage days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage and are payable by us under a spot charter (which would otherwise be paid by the charterer under a time or bareboat charter contract), as well as commissions. Charter equivalent revenues and adjusted average charter rate are non-GAAP measures which provide additional meaningful information in conjunction with voyage revenues, the most directly comparable GAAP measure, because they assist Company management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance. They are also standard shipping industry performance measures used primarily to compare period-to-period changes in a shipping company’s performance despite changes in the mix of charter types (i.e., spot charters or time charters, but not bareboat charters) under which the vessels may be employed between the periods. Under bareboat charters, we are not responsible for either voyage expenses, unlike spot charters, or vessel operating expenses, unlike spot charters and time charters; however, no adjustment for such reduced vessel operating expenses for our vessels deployed under bareboat charters is reflected in the adjusted average charter rate. Reconciliation of charter equivalent revenues as reflected in the consolidated statements of income and calculation of adjusted average charter rate follow:

 

    Year ended December 31,  
    2011     2012     2013     2014     2015  

Voyage revenues

  $ 118,280,752      $ 119,213,071      $ 121,481,565      $ 131,972,892      $ 141,315,881   

Voyage expenses

    (17,829,220     (12,703,750     (14,302,630     (14,087,511     (17,575,538
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charter equivalent revenues

  $ 100,451,532      $ 106,509,321      $ 107,178,935      $ 117,885,381      $ 123,740,343   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total voyage days for fleet

    13,368        13,342        14,196        16,028        18,446   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted average charter rate

  $ 7,514      $ 7,983      $ 7,550      $ 7,355      $ 6,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(9) Vessel operating expenses, including related party vessel operating expenses, consist of crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel operating expenses by fleet calendar days for the relevant time period.
(10) Daily general and administrative expenses are calculated by dividing total general and administrative expenses by fleet calendar days for the relevant period.
(11) Management fees are based on a fixed rate management fee of $440 per day for each vessel in our fleet under spot or time charter and a fixed rate fee of $125 per day for each of the vessels operating on bareboat charter. Daily management fees are calculated by dividing total management fees by fleet calendar days for the relevant period.
(12) Total operating expenses, or “TOE”, is a measurement of our total expenses associated with operating our vessels. TOE is the sum of vessel operating expenses and general and administrative expenses. Daily TOE is calculated by dividing TOE by fleet calendar days for the relevant time period.
(13) We have early adopted the new standard Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, retrospectively during the fourth quarter of 2015. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts, instead of presenting debt issuance costs as long-term assets on the consolidated balance sheets. Total long term debt including current portion has been adjusted accordingly for all the years presented above. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method.

 

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B. Capitalization and Indebtedness

Not applicable

C. Reasons For the Offer and Use of Proceeds

Not Applicable.

D. Risk Factors

Risks Related To Our Industry

The cyclical nature of the demand for LPG transportation may lead to significant changes in our chartering and vessel utilization, which may adversely affect our revenues, profitability and financial position.

Historically, the international LPG carrier market has been cyclical with attendant volatility in profitability, charter rates and vessel values. The degree of charter rate volatility among different types of gas carriers has varied widely. Because many factors influencing the supply of, and demand for, vessel capacity are unpredictable, the timing, direction and degree of changes in the international gas carrier market are also not predictable. After improving from low levels in late 2011 until the third quarter of 2014, charter rates for small LPG carriers have since declined significantly, largely due to the fall in oil prices. If charter rates decline further, our earnings may decrease, particularly with respect to our vessels deployed in the spot market or those vessels whose charters will be subject to renewal during 2016, as they may not be extended or renewed on favorable terms when compared to the terms of the expiring charters. As of April 1, 2016, of our 51 LPG carriers in the water, including two vessels that are chartered in, 13 were deployed in the spot market while another 15 were scheduled to complete their existing charters during 2016. In addition, we expect to take delivery of one newbuilding LPG carrier in the remainder of 2016, for which we have arranged an 18-month time charter and four newbuilding LPG carriers in 2017 for which we have not yet arranged employment. Any of the foregoing factors could have an adverse effect on our revenues, profitability, liquidity, cash flow and financial position.

Future growth in the demand for LPG carriers and charter rates will depend on economic growth in the world economy and demand for LPG product transportation that exceeds the capacity of the growing worldwide LPG carrier fleet’s ability to match it. We believe that the future growth in demand for LPG carriers and the charter rate levels for LPG carriers will depend primarily upon the supply and demand for LPG, particularly in the economies of China, Japan, India and Southeast Asia, as well as U.S. shale production, and upon seasonal and regional changes in demand and changes to the capacity of the world fleet. The capacity of the world shipping fleet appears likely to increase in the near term, although growth in the 3,000 to 8,000 cbm segment of small LPG carriers is expected to be relatively limited in 2016. Oil prices may remain low and economic growth may be limited in the near term, and possibly for an extended period, as a result of the current global economic conditions, which could have an adverse effect on our business and results of operations.

The factors affecting the supply and demand for LPG carriers are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.

The factors that influence demand for our vessels include:

 

   

supply and demand for LPG products;

 

   

the price of oil;

 

   

global and regional economic conditions;

 

   

the distance LPG products are to be moved by sea;

 

   

availability of alternative transportation means;

 

   

changes in seaborne and other transportation patterns;

 

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environmental and other regulatory developments; and

 

   

weather.

The factors that influence the supply of vessel capacity include:

 

   

the number of newbuilding deliveries;

 

   

the scrapping rate of older vessels;

 

   

LPG carrier prices;

 

   

changes in environmental and other regulations that may limit the useful lives of vessels; and

 

   

the number of vessels that are out of service.

A significant decline in demand for the seaborne transport of LPG or a significant increase in the supply of LPG carrier capacity without a corresponding growth in LPG carrier demand could cause a significant decline in prevailing charter rates, which could materially adversely affect our financial condition and operating results and cash flow.

Various economic factors could materially adversely affect our business, financial position and results of operations, as well as our future prospects.

The global economy and the volume of world trade have remained relatively weak since the severe decline in the latter part of 2008 and in 2009. Recovery of the global economy is proceeding at varying speeds across regions and remains subject to downside risks, including fragility of advanced economies and concerns over sovereign debt defaults by European Union member countries such as Greece. More specifically, some LPG products we carry are used in cyclical businesses, such as the manufacturing of plastics and in the chemical industry, that were adversely affected by the economic downturn and, accordingly, continued weakness and reduction in demand in those industries could adversely affect the LPG carrier industry. In particular, an adverse change in economic conditions affecting China, Japan, India or Southeast Asia generally could have a negative effect on the demand for LPG products, thereby adversely affecting our business, financial position and results of operations, as well as our future prospects. In particular, in recent years China and India have been among the world’s fastest growing economies in terms of gross domestic product, but have shown signs of slowing growth recently, particularly in China where concerns over a potentially significant slowdown in growth have emerged. Moreover, any further deterioration in the economy of the United States or the European Union, including the impact of the European sovereign debt and banking crisis, may further adversely affect economic growth in Asia. In addition, as a result of the ongoing economic slump in Greece resulting from the sovereign debt crisis and the related austerity measures implemented by the Greek government, our operations in Greece may be subjected to new regulations that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the Greek government new taxes or other fees. Furthermore, the change in the Greek government and potential shift in its policies may undermine Greece’s political and economic stability, which may adversely affect our operations and those of our manager located in Greece. We also face the risk that strikes, work stoppages, civil unrest and violence, as well as capital controls implemented in 2015 within Greece, may disrupt our shore side operations and those of our manager located in Greece. Our business, financial position and results of operations, as well as our future prospects, could likely be materially and adversely affected by adverse economic conditions in any of these countries or regions.

 

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If the demand for LPG products and LPG shipping does not grow, or decreases, our business, results of operations and financial condition could be adversely affected.

Our growth, which depends on growth in the supply and demand for LPG products and LPG shipping, was adversely affected by the sharp decrease in world trade and the global economy experienced in the latter part of 2008 and in 2009. Although the global economy has slightly recovered, it remains relatively weak in many parts of the world with emerging concern regarding a renewed slowdown in recent months and world and regional demand for LPG products and LPG shipping can be adversely affected by a number of factors, such as:

 

   

adverse global or regional economic or political conditions, particularly in LPG consuming regions, which could reduce energy consumption;

 

   

a reduction in global or general industrial activity specifically in the plastics and chemical industries;

 

   

further decline in the price of oil which makes LPG a less attractive alternative for some uses and generally leads to reduced production of oil and gas;

 

   

changes in the cost of petroleum and natural gas from which LPG is derived;

 

   

decreases in the consumption of LPG or natural gas due to availability of new alternative energy sources, or increases in the price of LPG or natural gas relative to other energy sources, or other factors making consumption of LPG or natural gas less attractive, such as the dramatic decline in crude oil prices since the third quarter of 2014; and

 

   

increases in pipelines for LPG, which are currently few in number, linking production areas and industrial and residential areas consuming LPG, or the conversion of existing non-petroleum gas pipelines to petroleum gas pipelines in those markets.

Reduced demand for LPG products and LPG shipping would have an adverse effect on our future growth and would harm our business, results of operations and financial condition.

Our operating results are subject to seasonal fluctuations, which could affect our operating results and the amount of available cash with which we can pay dividends.

We operate our LPG carriers in markets that have historically exhibited seasonal variations in demand and, as a result, in charter hire rates. This seasonality may result in quarter-to-quarter volatility in our operating results, which could affect the amount of dividends that we may pay to our stockholders from quarter-to-quarter. The LPG carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of propane and butane for heating during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, our revenues may be stronger in fiscal quarters ended December 31 and March 31, and conversely, our revenues may be weaker during the fiscal quarters ended June 30 and September 30. This seasonality could materially affect our quarterly operating results.

Our revenues, operations and future growth could be adversely affected by a decrease in supply of liquefied natural gas, or natural gas.

In recent years, there has been a strong supply of natural gas and an increase in the construction of plants and projects involving natural gas, of which LPG is a byproduct. Several of these projects, however, have experienced delays in their completion for various reasons and thus the expected increase in the supply of LPG from these projects may be delayed significantly. The recent declines in oil prices and natural gas could exacerbate these dynamics. If the supply of natural gas decreases, we may see a concurrent reduction in the production of LPG, resulting in lesser demand and lower charter rates for our vessels, which could ultimately have a material adverse impact on our revenues, operations and future growth.

 

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The product carrier and crude oil tanker shipping sectors are cyclical, which may lead to lower charter rates and lower vessel values.

The medium range type product carrier and crude oil tanker shipping sectors are cyclical with attendant volatility in charter rates and vessel values. The first charter arrangement of our product carriers is scheduled to expire in 2016, the second arrangement is scheduled to expire in 2017, while the third charter arrangement of our product carriers is scheduled to expire in 2019. The charter for our crude oil tanker is not scheduled to expire until February 2018. If prevailing market conditions in these sectors, which declined sharply in 2008 and 2009 and remained weak before recovering since the fourth quarter of 2014 are depressed at such times as these charters expire or otherwise are terminated, we may not be able to renew or replace existing charters for these vessels at the same or similar rates. If we were required to enter into a charter when charter hire rates are low, our results of operations could be adversely affected. Charter rates in the product carrier sector, and particularly the crude oil tanker sector, have increased from depressed levels since the fourth quarter of 2014, however, the sustainability of this recovery is uncertain and rates could decline again.

An over-supply of ships may lead to a reduction in charter rates, vessel values and profitability.

The market supply of LPG carriers and tankers is affected by a number of factors, such as supply and demand for LPG, natural gas and other energy resources, including oil and petroleum products, supply and demand for seaborne transportation of such energy resources, and the current and expected purchase orders for newbuildings. If the capacity of new LPG carriers and tankers delivered exceeds the capacity of such vessel types being scrapped and converted to non-trading vessels, global fleet capacity will increase. If the supply of LPG carrier or tanker capacity increases, and if the demand for the capacity of such vessel types decreases, or does not increase correspondingly, charter rates could materially decline. A reduction in charter rates and the value of our vessels may have a material adverse effect on our results of operations.

The market values of our vessels may remain at relatively low levels for a prolonged period and over time may fluctuate significantly. When the market values of our vessels are low, we may incur a loss on sale of a vessel or record an impairment charge, as we did in 2015 and 2014, which may adversely affect our earnings and possibly lead to defaults under our loan agreements.

The market value of our vessels may fluctuate significantly, and these experienced significant declines during the economic crisis. Although small LPG carrier values recovered from 2011 to the third quarter of 2014, before declining again, and tanker rates remained low until recovering since the fourth quarter of 2014, vessel values remain well below the highs reached in 2007 and 2008. The market values of our vessels are subject to potential significant fluctuations depending on a number of factors including:

 

   

general economic and market conditions affecting the shipping industry;

 

   

age, sophistication and condition of our vessels;

 

   

types and sizes of vessels;

 

   

availability of other modes of transportation;

 

   

cost and delivery of schedules for newbuildings;

 

   

governmental and other regulations;

 

   

supply and demand for LPG products and refined petroleum products and oil, respectively;

 

   

prevailing level of LPG charter rates and, with respect to our product carriers, the prevailing level of product carrier charter rates and crude oil tanker rates, respectively; and

 

   

technological advances.

In 2015, we recognized an impairment loss of $8.2 million relating to three of our older LPG vessels whose market values had declined below their carrying values. In 2014 we recognized an impairment loss of $6.2

 

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million resulting from our decision to sell two of the older LPG carriers in our fleet for demolition. If we sell vessels at a time when vessel prices have fallen, the sale may be for less than the vessel’s carrying value in our financial statements, resulting in a loss and reduction in earnings. Furthermore, if vessel values experience significant declines, we may have to record an impairment adjustment in our financial statements, which would also result in a reduction in our earnings. If the market value of our fleet declines, we may not be in compliance with certain provisions of our existing loan agreements and we may not be able to refinance our debt or obtain additional financing or, if reinstated, pay dividends. If we are unable to pledge additional collateral, our lenders could accelerate our debt and foreclose on our fleet. The loss of our vessels would mean we could not run our business.

Technological innovation could reduce our charter hire income and the value of our vessels.

The charter hire rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and the impact of the stress of operations. If new LPG carriers or tankers are built that are more efficient or more flexible or have longer physical lives than our vessels, competition from these more technologically advanced vessels could adversely affect the amount of charter hire payments we receive for our vessels, and the resale value of our vessels could significantly decrease. Consequently, our results of operations and financial condition could be adversely affected.

Changes in fuel, or bunker, prices may adversely affect profits.

While we do not bear the cost of fuel or bunkers under time and bareboat charters, fuel is a significant expense in our shipping operations when vessels are deployed under spot charters. Changes in the price of fuel may adversely affect our profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by the OPEC (“Organization Of Petroleum Exporting Countries”) and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental concerns. Furthermore fuel, which has been less expensive since the price of oil began declining in the third quarter of 2014, may become much more expensive in the future, which may reduce profitability.

We are subject to regulation and liability under environmental laws that could require significant expenditures and affect our financial conditions and results of operations.

Our business and the operation of our vessels are materially affected by government regulation in the form of international conventions and national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the country or countries of their registration. These regulations include, but are not limited to the U.S. Oil Pollution Act of 1990, or OPA, that establishes an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills and applies to any discharges of oil from a vessel, including discharges of fuel oil (bunkers) and lubricants, the U.S. Clean Air Act, U.S. Clean Water Act and the U.S. Marine Transportation Security Act of 2002, and regulations of the International Maritime Organization, or the IMO, including the International Convention for the Prevention of Pollution from Ships of 1975, the International Convention for the Prevention of Marine Pollution of 1973, and the International Convention for the Safety of Life at Sea of 1974. To comply with these and other regulations we may be required to incur additional costs to meet new maintenance and inspection requirements, develop contingency plans for potential spills, and obtain insurance coverage. Because those laws and regulations are often revised, we cannot predict the ultimate cost of complying with them, or the impact they may have on the resale prices or useful lives of our vessels. However, a failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Additional laws and regulations may be adopted which could limit our ability to do business or increase the cost of our doing business

 

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and which could materially adversely affect our operations. We are also required by various governmental and quasi-governmental agencies to obtain permits, licenses, certificates and financial assurances with respect to our operations. These permits, licenses, certificates and financial assurances may be issued or renewed with terms that could materially and adversely affect our operations.

The operation of our vessels is affected by the requirements set forth in the International Management Code for the Safe Operation of Ships and Pollution Prevention (“ISM Code”). The ISM Code requires ship owners and bareboat charterers to develop and maintain an extensive “Safety Management System” (“SMS”) that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure of a ship owner or bareboat charterer to comply with the ISM Code may subject the owner or charterer to increased liability, may decrease available insurance coverage for the affected vessels, may result in a denial of access to, or detention in, certain ports or may result in breach of our bank covenants. Currently, each of the vessels in our fleet is ISM Code-certified. Because these certifications are critical to our business, we place a high priority on maintaining them. Nonetheless, there is the possibility that such certifications may not be renewed.

We currently maintain, for each of our vessels, pollution liability insurance coverage in the amount of $1.0 billion per incident. In addition, we carry hull and machinery and protection and indemnity insurance to cover the risks of fire and explosion. Under certain circumstances, fire and explosion could result in a catastrophic loss. We believe that our present insurance coverage is adequate, but not all risks can be insured, and there is the possibility that any specific claim may not be paid, or that we will not always be able to obtain adequate insurance coverage at reasonable rates. If the damages from a catastrophic spill exceeded our insurance coverage, the effect on our business would be severe and could possibly result in our insolvency.

We believe that regulation of the shipping industry will continue to become more stringent and compliance with such new regulations will be more expensive for us and our competitors. Substantial violations of applicable requirements or a catastrophic release from one of our vessels could have a material adverse impact on our financial condition and results of operations.

Climate change and greenhouse gas restrictions may adversely impact our operations and markets.

Due to concern over the risks of climate change, a number of countries and the International Maritime Organization, or “IMO”, have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from ships. These regulatory measures may include adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or the “Kyoto Protocol”, or any amendments or successor agreements, including the Paris Agreement adopted under the United Nations Framework Convention on Climate Change in December 2015, which contemplates commitments from each nation party thereto to take action to reduce greenhouse gas emissions and limit increases in global temperatures but did not include any restrictions or other measures specific to shipping emissions. However, restrictions on shipping emissions are likely to continue to be considered, and a new treaty may be adopted in the future that includes additional restrictions on shipping emissions to those already adopted under the International Convention for the Prevention of Marine Pollution from Ships, or the “MARPOL Convention”. Compliance with future changes in laws and regulations relating to climate change could increase the costs of operating and maintaining our ships and could require us to install new emission controls, as well as acquire allowances, pay taxes related to our greenhouse gas emissions or administer and manage a greenhouse gas emissions program.

Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have an effect on demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil, refined petroleum products, liquefied natural gas or liquefied petroleum gas in the future or

 

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create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil and gas industry could have significant financial and operational adverse impacts on our business that we cannot predict with certainty at this time.

Our vessels are subject to periodic inspections by a classification society.

The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention. Our fleet is currently classed with Lloyds Register of Shipping, Nippon Kaiji Kyokai, or NKK, the American Bureau of Shipping, RINA SpA, DNV and Bureau Veritas.

A vessel must undergo annual surveys, intermediate surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel is also required to be dry docked every two to three years for inspection of the underwater parts of such vessel. However, for vessels not exceeding 15 years that have means to facilitate underwater inspection in lieu of dry docking, the dry docking can be skipped and be conducted concurrently with the special survey.

If a vessel does not maintain its class and/or fails any annual survey, intermediate survey or special survey, the vessel will be unable to trade between ports and will be unemployable and we could be in violation of covenants in our loan agreements and insurance contracts or other financing arrangements. This would adversely impact our operations and revenues.

Maritime claimants could arrest our vessels, which could interrupt our cash flow.

Crew members, suppliers of goods and services to a vessel, shippers of cargo and others may be entitled to a maritime lien against that vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay large sums of funds to have the arrest lifted.

In addition, in some jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one vessel in our fleet for claims relating to another of our ships or, possibly, another vessel managed by Stealth Maritime, as was the case with the arrest of our vessel MT Spike in August 2015 as discussed in “Item 8. Financial Information. Legal Proceedings”.

Governments could requisition our vessels during a period of war or emergency, resulting in loss of revenues.

A government could requisition for title or seize our vessels. Requisition for title occurs when a government takes control of a vessel and becomes the owner. Also, a government could requisition our vessels for hire. Requisition for hire occurs when a government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency. Government requisition of one or more of our vessels would adversely impact our operations and revenues, thereby resulting in loss of revenues.

 

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Risks involved with operating ocean-going vessels could affect our business and reputation, which would adversely affect our revenues and stock price.

The operation of an ocean-going vessel carries inherent risks. These risks include the possibility of:

 

   

marine accident or disaster;

 

   

piracy and terrorism;

 

   

explosions;

 

   

environmental accidents;

 

   

pollution;

 

   

loss of life;

 

   

cargo and property losses or damage; and

 

   

business interruptions caused by mechanical failure, human error, war, political action in various countries, labor strikes or adverse weather conditions.

Any of these circumstances or events could increase our costs or lower our revenues. The involvement of our vessels in a serious accident could harm our reputation as a safe and reliable vessel operator and lead to a loss of business.

Our vessels may suffer damage and we may face unexpected repair costs, which could affect our cash flow and financial condition.

If our vessels suffer damage, they may need to be repaired at a shipyard facility. The costs of repairs are unpredictable and can be substantial. We may have to pay repair costs that our insurance does not cover. The loss of earnings while these vessels are being repaired and repositioned, as well as the actual cost of these repairs, would have an adverse effect on our cash flow and financial condition. We do not intend to carry business interruption insurance.

Acts of piracy on ocean-going vessels could adversely affect our business.

Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean and in the Gulf of Aden, off the coast of Somalia. Although the frequency of sea piracy worldwide leveled off somewhat in recent years, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea. If these piracy attacks occur in regions in which our vessels are deployed and are characterized by insurers as “war risk” zones, as the Gulf of Aden continues to be, or Joint War Committee (JWC) “war and strikes” listed areas, premiums payable for such coverage, for which we are responsible with respect to vessels employed on spot charters, but not vessels employed on bareboat or time charters, could increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including due to employing onboard security guards, could increase in such circumstances. We usually employ armed guards on board the vessels on time and spot charters that transit areas where Somali pirates operate. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, financial condition and results of operations.

Our operations outside the United States expose us to global risks, such as political conflict and terrorism, that may interfere with the operation of our vessels.

We are an international company and primarily conduct our operations outside the United States. Changing economic, political and governmental conditions in the countries where we are engaged in business or where our

 

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vessels are registered affect us. In the past, political conflicts, particularly in the Arabian Gulf, resulted in attacks on vessels, mining of waterways and other efforts to disrupt shipping in the area. Acts of terrorism may increase, with the continuing conflicts in the Middle East and North Africa, and our vessels may face higher risks of being attacked. In addition, future hostilities or other political instability in regions where our vessels trade could affect our trade patterns and adversely affect our operations and performance. If certain shipping lanes are closed, such as Iran’s recent threat to close the Straits of Hormuz, it could adversely affect the availability of and demand for crude oil and petroleum products, as well as LPG, and negatively affect our investment and our customers’ investment decisions over an extended period of time. In addition, sanctions against oil exporting countries such as Iran, Sudan and Syria, and the events in Ukraine and related sanctions against Russia may also impact the availability of crude oil, petroleum products and LPG and which would increase the availability of applicable vessels thereby impacting negatively charter rates. In addition, any charters that we enter into with Chinese customers may be subject to new regulations in China that may require us to incur new or additional compliance or other administrative costs and may require that we pay to the Chinese government new taxes or other fees. Changes in laws and regulations, including with regards to tax matters, and their implementation by local authorities could affect our vessels chartered to Chinese customers as well as our vessels calling to Chinese ports and could have a material adverse effect on our business, results of operations and financial condition.

Terrorist attacks, or the perception that LPG or natural gas facilities or oil refineries and LPG carriers, natural gas carriers or product carriers are potential terrorist targets, could materially and adversely affect the continued supply of LPG, natural gas and refined petroleum products to the United States and to other countries. Concern that LPG and natural gas facilities may be targeted for attack by terrorists has contributed to a significant community and environmental resistance to the construction of a number of natural gas facilities, primarily in North America. If a terrorist incident involving a gas facility or gas carrier did occur, the incident may adversely affect necessary LPG facilities or natural gas facilities currently in operation. Furthermore, future terrorist attacks could result in increased volatility of the financial markets in the United States and globally and could result in an economic recession in the United States or the world. Any of these occurrences could have a material adverse impact on our operating results, revenues and costs.

Our vessels may call on ports located in countries that are subject to sanctions and embargoes imposed by the U.S. or other governments, which could adversely affect our reputation and the market for our common stock.

From time to time on charterers’ instructions, our vessels have called and may again call on ports located in countries subject to sanctions and embargoes imposed by the United States government and countries identified by the United States government as state sponsors of terrorism, such as Iran, Sudan and Syria. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. On January 16, 2016, “Implementation Day” for the Iran Joint Comprehensive Plan of Action (JCPOA), the United States lifted its nuclear-related secondary sanctions against Iran which prohibited certain conduct by non-U.S. companies and individuals that occurred entirely outside of U.S. jurisdiction involving specified industry sectors in Iran, including the energy, petrochemical, automotive, financial, banking, mining, shipbuilding and shipping sectors. By lifting the secondary sanctions against Iran, the U.S. government effectively removed U.S. imposed restraints on dealings by non-U.S. companies, such as our Company, and individuals with these formerly targeted Iranian business sectors. Non-U.S. companies continue to be prohibited under U.S. sanctions from (i) knowingly engaging in conduct that seeks to evade U.S. restrictions on transactions or dealings with Iran or that causes the export of goods or services from the United States to Iran, (ii) exporting, re-exporting or transferring to Iran any goods, technology, or services originally exported from the U.S. and / or subject to U.S. export jurisdiction and (iii) conducting transactions with of the Iranian or Iran-related individuals and entities that remain or are placed in the future on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List), notwithstanding the lifting of secondary sanctions. The U.S. has the ability to re-impose sanctions against Iran, including if, in the future, Iran does not comply with its obligations under the nuclear agreement.

 

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The U.S. government’s primary Iran sanctions remain largely unchanged after Implementation Day and as a consequence, U.S. persons continue to be broadly prohibited from engaging in transactions or dealings with the Government of Iran and Iranian financial institutions, which effectively impacts the transfer of funds to, from, or through the U.S. financial system whether denominated in US dollars or any other currency. As a result of the lifting of U.S. secondary sanctions (and relevant EU sanctions), we can anticipate that some of our charterers may direct us to carry cargoes to or from Iran. This could have various effects on us, such as affecting our reputation and our relationships with our investors and financing sources, affecting the cost of our insurance and enhancing our exposure to foreign currency fluctuations due to the need for non-US dollar payments with respect to such voyages.

None of our vessels called in any ports in Cuba, Iran, Sudan or Syria during the three year period ended December 31, 2015. Although we believe that we are in compliance with all applicable sanctions and embargo laws and regulations and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may vary or may be subject to changing interpretations and we may be unable to prevent our charterers from violating contractual and legal restrictions on their operations of the vessels. Any such violation could result in fines or other penalties for us and could result in some investors deciding, or being required, to divest their interest, or not to invest, in the Company. Additionally, some investors may decide to divest their interest, or not to invest, in the Company simply because we do business with companies that do lawful business in sanctioned countries. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. Investor perception of the value of our common stock may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

Risks Related To Our Business

We are dependent on the ability and willingness of our charterers to honor their commitments to us for all our revenues.

We derive all our revenues from the payment of charter hire by charterers of our vessels. The ability and willingness of each of our counterparties to perform their obligations under charter agreements with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the LPG carrier sector, or in the case of our product carriers the refined petroleum product carrier sector and in the case of our crude oil tanker the oil tanker sector, of the shipping industry and the overall financial condition of the counterparties. In addition, in depressed market conditions, charterers may seek to renegotiate their charters or may default on their obligations under charters and our charterers may fail to pay charter hire or attempt to renegotiate charter rates. Should a counterparty fail to honor its obligations under agreements with us, it may be difficult to secure substitute employment for such vessel, and any new charter arrangements we secure in the spot market or on bareboat or time charters could be at lower rates. If we lose a charter, we may be unable to re-deploy the related vessel on terms as favorable to us. We would not receive any revenues from such a vessel while it remained unchartered, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition, insure it and service any indebtedness secured by such vessel. The failure by charterers to meet their obligations to us or an attempt by charterers to renegotiate our charter agreements could have a material adverse effect on our revenues, results, operations and financial condition.

We are exposed to the volatile spot market and charters at attractive rates may not be available when the charters for our vessels expire or when we are attempting to charter newbuilding LPG carriers which we have agreed to acquire, which would have an adverse impact on our revenues and financial condition.

As of April 1, 2016, of our 55 vessels, including two chartered in vessels, 42 were under period charters (bareboat charters and time charters), while 13 were deployed in the spot market. As of April 1, 2016, 62% of our

 

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anticipated fleet days were covered by period charter contracts for the remainder of 2016 and 32% for 2017 (in each case, excluding our contracted newbuilding vessels), with period charters for 16 of our vessels scheduled to expire in 2016 and 11 of our period charters scheduled to expire in 2017. We have arranged an 18-month time charter for our LPG carrier newbuilding scheduled to be delivered in 2016, and have not yet arranged employment for our four 22,000 cbm LPG carrier newbuildings scheduled to be delivered in 2017.

We are exposed to fluctuations in the charter market for the remaining anticipated voyage days that are not covered by fixed-rate contracts, and to the extent the counterparties to our fixed-rate charter contracts fail to honor their obligations to us. The successful operation of our vessels in the competitive and highly volatile spot charter market depends on, among other things, obtaining profitable spot charters, which depends greatly on vessel supply and demand, and minimizing, to the extent possible, time spent waiting for charters and time spent traveling unloaded to pick up cargo. When the current charters for our fleet expire or are terminated, it may not be possible to re-charter these vessels at similar rates, or at all, or to secure charters for our contracted LPG carrier acquisitions at similarly profitable rates, or at all. As a result, we may have to accept lower rates or experience off hire time for our vessels, which would adversely impact our revenues, results of operations and financial condition.

We depend upon a few significant customers for a large part of our revenues. The loss of one or more of these customers could adversely affect our financial performance.

In our operating history we have derived a significant part of our revenue from a small number of charterers. For the years ended December 31, 2013, 2014 and 2015, we had only one customer from which we derived more than 10% of our revenues, accounting for 11%, 13% and 13% of our revenues, respectively. Furthermore, for the year ended December 31, 2015, our three largest customers accounted for 29% of our revenues. Overall, we anticipate a limited number of customers will continue to represent significant amounts of our revenue. If these customers cease doing business or do not fulfill their obligations under the charters for our vessels, our results of operations and cash flows could be adversely affected. Further, if we encounter any difficulties in our relationships with these charterers, our results of operations, cash flows and financial condition could be adversely affected.

Our loan agreements or other financing arrangements contain restrictive covenants that may limit our liquidity and corporate activities.

Our loan agreements impose, and our future financing arrangements may impose, operating and financial restrictions on us. These restrictions may limit our ability to:

 

   

incur additional indebtedness;

 

   

create liens on our assets;

 

   

sell capital stock of our subsidiaries;

 

   

make investments;

 

   

engage in mergers or acquisitions;

 

   

pay dividends; and

 

   

make capital expenditures.

Our loan agreements require us to maintain specified financial ratios, satisfy financial covenants and contain cross-default clauses.

They also require that our Chief Executive Officer, Harry Vafias, together with his immediate family, at all times own at least 10% of our outstanding capital stock and certain of our loan agreements provide that it would

 

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be an event of default if Harry Vafias ceased to serve as an executive officer or director of our company, Harry Vafias together with his immediate family, ceased to control our company or any other person or group controlled 25% or more of the voting power of our outstanding capital stock. In addition, our loan agreements include restrictions on the payment of dividends in amounts exceeding 50% of our free cash flow in any rolling 12-month period. As of December 31, 2015, we were in compliance with the loan covenants.

As a result of the restrictions in our loan agreements, or similar restrictions in our future financing arrangements with respect to future vessels which we have yet to identify, we may need to seek permission from our lenders in order to engage in some corporate actions. Our lenders’ interests may be different from ours, and we may not be able to obtain their permission when needed. This may prevent us from taking actions that we believe are in our best interest which may adversely impact our revenues, results of operations and financial condition.

A failure by us to meet our payment and other obligations, including our financial covenants and security coverage requirement, could lead to defaults under our secured loan agreements. Our lenders could then accelerate our indebtedness and foreclose on our fleet. The loss of our vessels would mean we could not run our business.

The market values of our vessels may decrease, which could cause us to breach covenants in our credit and loan facilities, and could have a material adverse effect on our business, financial condition and results of operations.

Our loan agreements, which are secured by liens on our vessels, contain various financial covenants, including requirements that relate to our financial condition, operating performance and liquidity. For example, we are required to maintain a maximum consolidated leverage ratio that is based, in part, upon the market value of the vessels securing the applicable loan, as well as a minimum ratio of the market value of vessels securing a loan to the principal amount outstanding under such loan. The market value of LPG carriers, product carriers and crude oil tankers is sensitive to, among other things, changes in the LPG carrier, product carrier and crude oil tanker charter markets, respectively, with vessel values deteriorating in times when LPG carrier, product carrier and tanker charter rates, as applicable, are falling and improving when charter rates are anticipated to rise. Lower charter rates in the LPG carrier, product carrier and crude oil tanker markets coupled with the difficulty in obtaining financing for vessel purchases adversely affected product carrier and Aframax tanker values in the recent past, and the impact of the dramatic decline in oil prices on demand for LPG has adversely affected LPG carrier values since the fourth quarter of 2014. A continuation of these conditions would lead to a significant decline in the fair market values of our vessels, which may result in our not being in compliance with these loan covenants. If the value of our vessels deteriorates significantly, we may have to record an impairment adjustment in our financial statements as we did in 2015 and 2014, which would adversely affect our financial results and further hinder our ability to raise capital.

A failure to comply with our covenants and/or obtain covenant waivers or modifications could result in our lenders requiring us to post additional collateral, enhance our equity and liquidity, increase our interest payments or pay down our indebtedness to a level where we are in compliance with our loan covenants, sell vessels in our fleet or accelerate our indebtedness, which would impair our ability to continue to conduct our business. If our indebtedness is accelerated, we may not be able to refinance our debt or obtain additional financing and could lose our vessels if our lenders foreclose their liens. In addition, if we find it necessary to sell our vessels at a time when vessel prices are low, we will recognize losses and a reduction in our earnings, which could affect our ability to raise additional capital necessary for us to comply with our loan agreements.

 

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We may be unable to enter into definitive agreements for credit facilities for our five LPG carrier newbuildings, or to draw down the full amount thereunder if the market values of our vessels decline, which could adversely affect our ability to complete the acquisition of our LPG carrier newbuildings.

We have entered into commitment letters for credit facilities for our newbuilding LPG carrier scheduled for delivery in 2016 and two of our 22,000 cbm LPG carrier newbuildings scheduled to be delivered in 2017, and obtained a term sheet from an international lender, which remains subject to credit committee approval, for credit facilities for our other two 22,000 cbm LPG carrier newbuildings scheduled to be delivered in 2017. If we are unable to enter into definitive agreements for such credit facilities, we may be unable to obtain replacement financing on terms acceptable to us or at all. In addition, there are restrictions on the amount of cash that can be advanced to us under these expected credit facilities for our five newbuilding LPG carriers based on the market value and employment of the vessel or vessels in respect of which the advance is being made. Accordingly, if the market value of our vessels decline, or, in some cases, we are not able to secure suitable employment for our vessels, we may not be able to draw down the full amount of our expected credit facilities, or to obtain other financing on terms that are acceptable to us or at all. If we are unable to enter into definitive agreements for our expected credit facilities or drawdown the full amount thereunder, our ability to complete the acquisition of our newbuilding LPG carriers, which we intend to partially finance with borrowings under such credit facilities, could be adversely affected and we could lose the deposits made on such vessels, or we may have to reduce our existing cash balances in order to pay for the delivery of the vessels.

Global economic conditions and disruptions in world financial markets and the resulting governmental action in the United States and in other parts of the world could have a material adverse impact on our results of operations, financial condition and cash flows.

Global economic conditions and financial markets have been volatile in recent years and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and limited supply of credit. The sovereign debt crisis in countries such as Greece, for example, and concerns over debt levels of certain other European Union member states and in other countries around the world, as well as concerns about international banks, have led to increased volatility in global credit and equity markets. These issues, along with the re-pricing of credit risk and the difficulties currently experienced by financial institutions, have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the credit markets and higher capital requirements, many lenders have increased margins on lending rates, enacted tighter lending standards, required more restrictive terms (including higher collateral ratios for advances, shorter maturities and smaller loan amounts), or refused to refinance existing debt on terms similar to our current debt or at all. Furthermore, certain banks that have historically been significant lenders to the shipping industry reduced or ceased lending activities in the shipping industry. New banking regulations, including tightening of capital requirements and the resulting policies adopted by lenders, could further reduce lending activities. We may experience difficulties obtaining financing commitments or be unable to fully draw on the capacity under our committed credit facilities in the future or refinance our credit facilities when our current facilities mature if our lenders are unwilling to extend financing to us or unable to meet their funding obligations due to their own liquidity, capital or solvency issues. We cannot be certain that financing will be available on acceptable terms or at all. In the absence of available financing, we also may be unable to take advantage of business opportunities or respond to competitive pressures.

We currently maintain all of our cash and cash equivalents with a limited number of financial institutions, including financial institutions located in Greece, which subjects us to credit risk.

We currently maintain all of our cash and cash equivalents with a limited number of financial institutions located in the United Kingdom, Germany, France, The Netherlands, Luxembourg and Greece. Those financial institutions located in Greece may be subsidiaries of international banks or Greek financial institutions. Economic conditions in Greece have been, and continue to be, severely disrupted and volatile, and as a result of sovereign weakness, continued recession and fragile political stability, as well as the deposit and debt ratings of

 

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several Greek banks that reflect their weakening stand-alone financial strength and the anticipated additional pressures stemming from the country’s challenged economic prospects. In addition, in 2015, Greece implemented capital controls restricting the transfer of funds out of Greece, which could restrict our uses of the limited amount of cash we hold in Greece. We do not expect any of our balances to be covered by insurance in the event of default by any of these financial institutions. The occurrence of such a default, or in the case of restrictions in capital movements by these institutions or countries, could therefore have a material adverse effect on our business, financial condition, results of operations and cash flows, and we may lose part or all of our cash that we have deposited with such financial institutions.

Our ability to obtain additional debt financing may be dependent on the performance of our then existing charters and the creditworthiness of our charterers.

The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional capital resources that we will require in order to purchase additional vessels or may significantly increase our costs of obtaining such capital. Our inability to obtain additional financing at a higher than anticipated cost or at all may materially affect our results of operation and our ability to implement our business strategy.

A significant increase in our debt levels may adversely affect us and our cash flows.

As of December 31, 2015 we had outstanding indebtedness, net of capitalized arrangement fees of $422.2 million. As of April 1, 2016 we expected to incur further indebtedness as we finance the remaining purchase price of our five contracted vessels and further expand our fleet. This increase in the level of indebtedness and the need to service the indebtedness may impact our profitability and cash available for growth of our fleet, working capital and dividends if any. Additionally, any increase in the present low interest rate levels may increase the cost of servicing our indebtedness with similar results.

To finance our future fleet expansion program beyond our current fleet, including our contracted vessels, we expect to incur additional secured debt. We have to dedicate a portion of our cash flow from operations to pay the principal and interest on our debt. These payments limit funds otherwise available for working capital, capital expenditures, and other purposes, including any distributions of cash to our stockholders, and our inability to service our debt could lead to acceleration of our debt and foreclosure on our fleet.

Moreover, carrying secured indebtedness exposes us to increased risks if the demand for LPG, oil or oil-related marine transportation decreases and charter rates and vessel values are adversely affected.

We are exposed to volatility in the London Interbank Offered Rate (“LIBOR”).

The amounts outstanding under our senior secured credit facilities have been, and we expect borrowings under additional credit facilities we have entered into and may enter into in the future will generally be, advanced at a floating rate based on LIBOR, which has been stable, but volatile in prior years, which can affect the amount of interest payable on our debt, and which, in turn, could have an adverse effect on our earnings and cash flow. In addition, in recent years, LIBOR has been at relatively low levels, and may rise in the future as the current low interest rate environment comes to an end. Our financial condition could be materially adversely affected at any time that we have not entered into interest rate hedging arrangements to hedge our exposure to the interest rates applicable to our credit facilities and any other financing arrangements we may enter into in the future, including those we enter into to finance a portion of the amounts payable with respect to newbuildings. As of December 31, 2015, we had 22% of our loan exposure under interest rate swap arrangements. Even if we have entered into interest rate swaps or other derivative instruments for purposes of managing our interest rate exposure, our hedging strategies may not be effective and we may incur substantial losses.

 

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The derivative contracts we have entered into to hedge our exposure to fluctuations in interest rates and foreign currency exchange rates could result in higher than market interest rates and charges against our income, as well as reductions in our stockholders’ equity.

We have entered into interest rate swaps for purposes of managing our exposure to fluctuations in interest rates applicable to indebtedness under our credit facilities which were advanced at floating rates based on LIBOR. Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates or currencies move materially differently from our expectations.

To the extent our interest rate swaps do not qualify for treatment as hedges for accounting purposes, which as of April 1, 2016 had an aggregate notional amount of nil, we recognize fluctuations in the fair value of such contracts in our statement of income. In addition, changes in the fair value of any derivative contracts that do qualify for treatment as hedges, which as of April 1, 2016 had an aggregate notional amount of $66.4 million, are recognized in “Other Comprehensive Income” on our balance sheet, and can affect compliance with covenant requirements in our credit facilities. Our financial condition could also be materially adversely affected to the extent we do not hedge our exposure to interest rate fluctuations under our financing arrangements under which loans have been advanced at a floating rate based on LIBOR.

In addition, we have in the past and may in the future enter into foreign currency derivative contracts in order to hedge an exposure to foreign currencies related to shipbuilding contracts. We recognize fluctuations in the fair value of such contracts in our statement of income.

Any hedging activities we engage in may not effectively manage our interest rate and foreign exchange exposure or have the desired impact on our financial conditions or results of operations.

Because we generate all of our revenues in U.S. dollars but incur a portion of our expenses in other currencies, exchange rate fluctuations could adversely affect our results of operations.

We generate all of our revenues in U.S. dollars and the majority of our expenses are also in U.S. dollars. However, a small portion of our overall expenses, mainly executive compensation, is incurred in Euros. This could lead to fluctuations in net income due to changes in the value of the U.S. dollar relative to the other currencies, in particular the Euro. Expenses incurred in foreign currencies against which the U.S. dollar falls in value can thereby increase, decreasing our net income.

We are dependent on our relationship with Stealth Maritime Corporation S.A.

As of April 1, 2016, Stealth Maritime Corporation S.A. (“Stealth Maritime”) served as commercial manager for all 55 operating vessels in our fleet and technical manager for 34 of the 41 operating vessels in our fleet not deployed on bareboat charters, while subcontracting the technical management of the remaining seven vessels in our fleet not deployed on bareboat charters to Brave Maritime, which is affiliated with Stealth Maritime.

We are accordingly dependent upon our fleet manager, Stealth Maritime, for:

 

   

the administration, chartering and operations supervision of our fleet;

 

   

our recognition and acceptance as owners of LPG, product and crude oil carriers, including our ability to attract charterers;

 

   

relations with charterers and charter brokers;

 

   

operational expertise; and

 

   

management experience.

The loss of Stealth Maritime’s services or its failure to perform its obligations to us properly for financial or other reasons could materially and adversely affect our business and the results of our operations. Although we

 

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may have rights against Stealth Maritime if it defaults on its obligations to us, you would have no recourse against Stealth Maritime. In addition, we might not be able to find a replacement manager on terms as favorable as those currently in place with Stealth Maritime. Further, we expect that we will need to seek approval from our lenders to change our manager.

We depend on third party managers to manage part of our fleet.

Stealth Maritime subcontracts the technical management for some of our vessels to third parties, including crewing, operation, maintenance and repair. The loss of their services or their failure to perform their obligations could materially and adversely affect the results of our operations. Although we may have rights against these managers if they default on their obligations, you would have no recourse against these parties. In addition, we might not be able to find replacement technical managers on terms as favorable as those currently in place.

We may enter into certain significant transactions with companies affiliated with members of the Vafias family which may result in conflicts of interests.

In addition to our management contract with Stealth Maritime, a company controlled by other members of the Vafias family, of which our Chief Executive Officer is a member, we may enter into other transactions with companies affiliated with members of the Vafias family such as the two charters we entered into in April 2012 and the agreements for the acquisition of four newbuilding LPG carriers in September 2012. Such transactions could create conflicts of interest that could adversely affect our business or your interests as holders of our common stock, as well as our financial position, results of operations and our future prospects.

Our directors and officers may in the future hold direct or indirect interests in companies that compete with us.

Our directors and officers each have a history of involvement in the shipping industry and may in the future, directly or indirectly, hold investments in companies that compete with us. In that case, they may face conflicts between their own interests and their obligations to us.

Companies affiliated with us, including Stealth Maritime and Brave Maritime, may manage or acquire vessels that compete with our fleet.

It is possible that Stealth Maritime or companies affiliated with Stealth Maritime, including Brave Maritime, could, in the future, agree to manage vessels that compete directly with ours. As long as Stealth Maritime (or an entity with respect to which Harry N. Vafias is an executive officer, director or the principal shareholder) is our fleet manager or Harry Vafias is an executive officer or director of the Company, Stealth Maritime has granted us a right of first refusal to acquire any LPG carrier, which Stealth Maritime may acquire in the future. In addition, Stealth Maritime has agreed that it will not charter-in any LPG carrier without first offering the opportunity to charter-in such vessel to us. Our President and Chief Executive Officer, Harry N. Vafias, has granted us an equivalent right with respect to any entity that he is an executive officer, director or principal shareholder of, so long as he is an executive officer or a director of our company. Were we, however, to decline any such opportunity offered to us or if we do not have the resources or desire to accept any such opportunity, Stealth Maritime or the entity controlled by Mr. Vafias could retain and manage the vessel. This right of first refusal does not cover product carriers or crude oil tankers. In addition, these restrictions, including the right of first refusal, do not apply to Brave Maritime. Furthermore, this right of first refusal does not prohibit Stealth Maritime from managing vessels owned by unaffiliated third parties in competition with us. In such cases, they could compete with our fleet and may face conflicts between their own interests and their obligations to us. In the future, we may also consider further diversifying into wet, dry or other gas shipping sectors, which, like product carriers and crude oil tankers, are not covered by this right of first refusal agreement. Any such vessels would be in competition with Stealth Maritime and companies affiliated with Stealth Maritime. Stealth Maritime might be

 

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faced with conflicts of interest with respect to their own interests and their obligations to us that could adversely affect our business and your interests as stockholders.

As our fleet has grown in size, we have needed to improve our operations and financial systems, staff and crew; if we cannot maintain these systems or continue to recruit suitable employees, our business and results of operations may be adversely affected.

We have significantly expanded our fleet since our initial public offering in October 2005, and as a consequence of this, Stealth Maritime has invested considerable sums in upgrading its operating and financial systems, as well as hiring additional well-qualified personnel to manage the vessels now managed by Stealth Maritime. In addition, as we have expanded our fleet, we have had to rely on our technical managers to recruit suitable additional seafarers and ashore administrative and management personnel. Stealth Maritime and those technical managers may not be able to continue to hire suitable employees to the extent we continue to expand our fleet. Our vessels, in particular our LPG carriers, require a technically skilled staff with specialized training. If the technical managers’ crewing agents are unable to employ such technically skilled staff, they may not be able to adequately staff our vessels. If Stealth Maritime is unable to operate our financial and operations systems effectively or our technical managers are unable to recruit suitable employees as we expand our fleet, our results of operation and our ability to expand our fleet may be adversely affected.

Delays in the delivery of our LPG carriers under construction or any secondhand LPG carriers we agree to acquire could harm our operating results.

As of April 1, 2016, we had agreed to acquire five newbuilding eco LPG carriers under construction to be delivered to us in 2016 and 2017 upon their completion by South Korean and Japanese shipyards. Delays in the delivery of these vessels, or any additional newbuilding or secondhand vessels we may agree to acquire, would delay our receipt of revenues generated by these vessels and, to the extent we have arranged charter employment for these vessels, could possibly result in the cancellation of those charters, and therefore adversely affect our anticipated results of operations. Although this would delay our funding requirements for the installment payments to purchase these vessels, it would also delay our receipt of revenues under any charters we arrange for such vessels. The delivery of newbuilding vessels could be delayed because of, among other things: work stoppages or other labor disturbances; bankruptcy or other financial crisis of the shipyard building the vessel; hostilities or political or economic disturbances in the countries where the vessels are being built, including any escalation of recent tensions involving North Korea; weather interference or catastrophic event, such as a major earthquake, tsunami or fire; our requests for changes to the original vessel specifications; requests from our customers, with whom we have arranged charters for such vessels, to delay construction and delivery of such vessels due to weak economic conditions and shipping demand and a dispute with the shipyard building the vessel.

In addition, the refund guarantors under the newbuilding contracts, which are banks, financial institutions and other credit agencies, may also be affected by financial market conditions in the same manner as our lenders and, as a result, may be unable or unwilling to meet their obligations under their refund guarantees. If the shipbuilders or refund guarantors are unable or unwilling to meet their obligations to the sellers of the vessels, this may impact our acquisition of vessels and may materially and adversely affect our operations and our obligations under our credit facilities. Moreover, because we have agreed to acquire some of the LPG carriers under construction as “resales,” we do not have any direct contractual rights under the construction contracts, but rather have agreements with the seller that ordered the construction of such vessels and must rely on the seller to pursue its rights under the construction contract.

The delivery of any secondhand vessels could be delayed because of, among other things, hostilities or political disturbances, non-performance of the purchase agreement with respect to the vessels by the seller, our inability to obtain requisite permits, approvals or financing or damage to or destruction of the vessels while being operated by the seller prior to the delivery date.

 

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If we fail to manage our growth properly, we may not be able to successfully expand our market share.

As and when market conditions permit, we intend to continue to prudently grow our fleet over the long term, including through the acquisition of the five vessels for which we have contracted. The acquisition of these and additional vessels could impose significant additional responsibilities on our management and staff, and may necessitate that we, and they, increase the number of personnel. In the future, we may not be able to identify suitable vessels, acquire vessels on advantageous terms or obtain financing for such acquisitions. Any future growth will depend on:

 

   

locating and acquiring suitable vessels;

 

   

identifying and completing acquisitions or joint ventures;

 

   

integrating any acquired business successfully with our existing operations;

 

   

expanding our customer base; and

 

   

obtaining required financing.

Growing a business by acquisition presents numerous risks such as undisclosed liabilities and obligations, difficulty in obtaining additional qualified personnel, managing relationships with customers and our commercial and technical managers and integrating newly acquired vessels into existing infrastructures. We may not be successful in executing any growth initiatives and may incur significant expenses and losses in connection therewith.

We may decide to sell certain of the vessels in our fleet if in our view market conditions are favorable for such sales or sell our LPG carriers in our fleet that are subject to purchase options held by the charterers of the respective vessels, which, if exercised, could reduce the size of our LPG carrier fleet and reduce our future revenues.

Since our initial public offering through December 31, 2015 we have sold 20 LPG carriers from our fleet and we may decide to sell more vessels from our fleet if, in our view, the market conditions are favorable for such sales. The chartering arrangements with respect to six LPG carriers of our fleet include options for the respective charterers to purchase the vessels at stipulated prices at any time during the term of the existing charter for the respective vessels. The option exercise prices with respect to these vessels decline over time and reflect an estimate, made at the time of entry into the applicable charter in the first quarter of 2014, of market prices. In addition, the chartering arrangements for three LPG carriers in our fleet give the charterer the right to purchase the respective vessel at the end of the current charter term in 2021 and 2022. This might result in our company realizing losses or gains depending on the time each vessel option is exercised. If the charterers were to exercise these options with respect to any or all of these vessels or if we sell additional vessels, the expected size of our LPG carrier fleet would be reduced and, if there were a scarcity of secondhand LPG carriers available for acquisition at such time and because of the delay in delivery associated with commissioning newbuilding LPG carriers, we could be unable to replace these vessels with other comparable vessels, or any other vessels, quickly or, if LPG carriers values were higher than currently anticipated at the time we were required to sell these vessels, at a cost equal to the purchase price paid by the charterer. Consequently, if we sell additional vessels or if these purchase options were to be exercised, the expected size of our LPG carrier fleet would be reduced, and as a result our anticipated level of revenues would be reduced.

We may be unable to attract and retain key management personnel and other employees in the shipping industry, which may negatively affect the effectiveness of our management and our results of operation.

Our success depends to a significant extent upon the abilities and efforts of our management team, including our Chief Executive Officer, Harry Vafias. In addition, Harry Vafias is a member of the Vafias family, which controls Stealth Maritime, our fleet manager. Our success will depend upon our and Stealth Maritime’s ability to hire and retain qualified managers to oversee our operations. The loss of any of these individuals could adversely

 

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affect our business prospects and financial condition. Difficulty in hiring and retaining personnel could adversely affect our results of operations. We do not have employment agreements directly with our key personnel who are technically employees of Stealth Maritime, our fleet manager, although under our management agreement with Stealth Maritime, our relationship is governed by terms substantially similar to those typically included in employment agreements. We do not maintain “key man” life insurance on any of our officers.

In the highly competitive international LPG carrier, product carrier and crude oil tanker markets, we may not be able to compete for charters with new entrants or established companies with greater resources.

We deploy our vessels in highly competitive markets that are capital intensive. Competition arises primarily from other vessel owners, some of which have greater resources than we do. Competition for the transportation of LPG, refined petroleum products and crude oil can be intense and depends on price, location, size, age, condition and the acceptability of the vessel and its managers to the charterers. Competitors with greater resources could enter and operate larger LPG carrier fleets through consolidations or acquisitions, and many larger fleets that compete with us in each of these sectors may be able to offer more competitive prices and fleets.

We have three medium range product carriers and one Aframax crude oil tanker; however, we principally operate LPG carriers and our lack of a diversified business could adversely affect us.

Unlike many other shipping companies, which may carry dry bulk, crude oil, oil products or products or goods shipped in containers, we currently depend primarily on the transport of LPG. The vast majority of our revenue has been and is expected to be derived from this single source—the seaborne transport of LPG. Due to our lack of a more diversified business model, adverse developments in the seaborne transport of LPG and the market for LPG products have a significantly greater impact on our financial conditions and results of operations than if we maintained more diverse assets or lines of business.

We have expanded into the product carrier sector and into the crude oil tanker sector and we may not be able to successfully execute this expansion, or any further expansion, in such sectors or any other sectors, such as dry or other wet or gas shipping sectors we choose to expand into, which could have an adverse effect on our business, results of operation and financial condition.

We have expanded into the product carrier sector with the acquisition of three medium range product carriers and into the crude oil tanker sector with one Aframax tanker. In the future, we may further expand in these sectors or into dry or other wet or other gas shipping sectors if opportunities arise. We have limited experience in these sectors, including the product carrier and crude oil tanker sectors, and an inability to successfully execute our recent expansion into these sectors or any such future expansion plans could:

 

   

be costly;

 

   

distract us from our LPG carrier business; and

 

   

divert management resources,

each of which could have an adverse effect on our business, results of operation and financial condition. We may also from time to time consider various alternatives for our product carriers and crude oil tankers that could involve the sale of all or a portion of our interest in these vessels and sectors.

Purchasing and operating previously owned, or secondhand, vessels may result in increased operating costs and vessels off-hire, which could adversely affect our revenues.

Our examination of secondhand vessels, which may not include physical inspection prior to purchase, does not provide us with the same knowledge about their condition and cost of any required (or anticipated) repairs that we would have had if these vessels had been built for and operated exclusively by us. Generally, we do not receive the benefit of warranties on secondhand vessels.

 

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In general, the cost of maintaining a vessel in good operating condition increases with its age. As of April 1, 2016, the average age of the vessels in our fleet, including chartered in vessels, was approximately 9.3 years. Older vessels are typically less fuel efficient and more costly to maintain and operate than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

Governmental regulations, safety or other equipment standards related to the age of vessels may require expenditures for alterations, or the addition of new equipment, to our vessels and may restrict the type of activities in which the vessels may engage. As our vessels age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder of their useful lives. If we sell vessels, the sales prices may not equal and could be less than their carrying values at that time.

The shipping industry has inherent operational risks that may not be adequately covered by our insurance.

We procure hull and machinery insurance, protection and indemnity insurance, which include environmental damage and pollution insurance coverage, and war risk insurance for our fleet. While we endeavor to be adequately insured against all known risks related to the operation of our ships, there remains the possibility that a liability may not be adequately covered and we may not be able to obtain adequate insurance coverage for our fleet in the future. The insurers may also not pay particular claims. Even if our insurance coverage is adequate, we may not be able to timely obtain a replacement vessel in the event of a loss. Our insurance policies contain deductibles for which we will be responsible and limitations and exclusions which may increase our costs or lower our revenue.

Our major stockholder exerts considerable influence on the outcome of matters on which our stockholders are entitled to vote and his interests may be different from yours.

Our major stockholder, our Chief Executive Officer, including through a company he controls, owns approximately 11.1% of our outstanding common stock as of April 1, 2016 and exerts considerable influence on the outcome of matters on which our stockholders are entitled to vote, including the election of our Board of Directors and other significant corporate actions. The interests of this stockholder may be different from your interests.

We may have to pay tax on United States-source income, which would reduce our earnings.

Under the United States Internal Revenue Code of 1986, as amended, or the Code, 50% of the gross shipping income of vessel owning or chartering corporations, such as our subsidiaries, that is attributable to transportation that begins or ends, but does not both begin and end, in the United States is characterized as United States-source shipping income. United States-source shipping income is subject to either a (i) 4% United States federal income tax without allowance for deductions or (ii) taxation at the standard United States federal income tax rates (and potentially to a 30% branch profits tax), unless derived by a corporation that qualifies for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder.

Generally, we and our subsidiaries will qualify for this exemption for a taxable year if our shares are treated as “primarily and regularly traded” on an established securities market in the United States. Our shares of common stock will be so treated if (i) the aggregate number of our shares of common stock traded during such year on an established securities market in the United States exceeds the aggregate number of our shares of common stock traded during that year on established securities markets in any other single country, (ii) either (x) our shares of common stock are regularly quoted during such year by dealers making a market in our shares or (y) trades in our shares of common stock are effected, other than in de minimis quantities, on an established securities market in the United States on at least 60 days during such taxable year and the aggregate number of our shares of common stock traded on an established securities market in the United States during such year equals at least 10% of the average number of our shares of common stock outstanding during such taxable year

 

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and (iii) our shares of common stock are not “closely held” during such taxable year. For these purposes, our shares of common stock will be treated as closely held during a taxable year if, for more than one-half the number of days in such taxable year, one or more persons each of whom owns either directly or under applicable attribution rules, at least 5% of our shares of common stock, own, in the aggregate, 50% or more of our shares of common stock, unless we can establish, in accordance with applicable documentation requirements, that a sufficient number of the shares of common stock in the closely-held block are owned, directly or indirectly, by persons that are residents of foreign jurisdictions that provide United States shipping companies with an exemption from tax that is equivalent to that provided by Section 883 to preclude other stockholders in the closely-held block from owning 50% or more of the closely-held block of shares of common stock.

We believe that it is currently the case, and may also be the case in the future, that, one or more persons each of whom owns, either directly or under applicable attribution rules, at least 5% of our shares of common stock own, in the aggregate, 50% or more of our shares of common stock. In such circumstances, we and our subsidiaries may qualify for the exemption provided in Section 883 of the Code only if a sufficient number of shares of the closely-held block of our shares of common stock were owned or treated as owned by “qualified stockholders” so it could not be the case that, for more than half of the days in the taxable year, the shares of common stock in the closely-held block not owned or treated as owned by qualified stockholders represented 50% or more of our shares of common stock. For these purposes, a “qualified stockholder” includes an individual that owns or is treated as owning shares of our common stock and is a resident of a jurisdiction that provides an exemption that is equivalent to that provided by Section 883 of the Code and certain other persons; provided in each case that such individual or other person complies with certain documentation and certification requirements set forth in the Section 883 regulations and designed to establish status as a qualified stockholder.

Our Chief Executive Officer, who beneficially owned approximately 11.1% of our shares of common stock as of April 1, 2016, has entered into an agreement with us regarding his compliance, and the compliance by certain entities that he controls and through which he owns our shares, with the certification procedures designed to establish status as a qualified stockholder. In certain circumstances, his compliance and the compliance of such entities he controls with the terms of that agreement may enable us and our subsidiaries to qualify for the benefits of Section 883 even where persons (each of whom owns, either directly or under applicable attribution rules, 5% or more of our shares) own, in the aggregate, more than 50% of our outstanding shares. However, his compliance and the compliance of such entities he controls with the terms of that agreement may not enable us or our subsidiaries to qualify for the benefits of Section 883. We or any of our subsidiaries may not qualify for the benefits of Section 883 for any year.

If we or our subsidiaries do not qualify for the exemption under Section 883 of the Code for any taxable year, then we or our subsidiaries would be subject for those years to the 4% United States federal income tax on gross United States shipping income or, in certain circumstances, to net income taxation at the standard United States federal income tax rates (and potentially also to a 30% branch profits tax). The imposition of such tax could have a negative effect on our business and would result in decreased earnings available for distribution to our stockholders.

We could become a “passive foreign investment company,” which would have adverse United States federal income tax consequences to United States holders and, in turn, us.

A foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for United States federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income” and working capital and similar assets held pending investment in vessels will generally be

 

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treated as an asset which produces passive income. United States stockholders of a PFIC are subject to a disadvantageous United States federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.

In connection with determining our PFIC status we treat and intend to continue to treat the gross income that we derive or are deemed to derive from our time chartering and voyage chartering activities as services income, rather than rental income. We believe that our income from time chartering and voyage chartering activities does not constitute “passive income” and that the assets that we own and operate in connection with the production of that income do not constitute assets held for the production of passive income. We treat and intend to continue to treat, for purposes of the PFIC rules, the income that we derive from bareboat charters as passive income and the assets giving rise to such income as assets held for the production of passive income. There is, however, no legal authority specifically under the PFIC rules regarding our current and proposed method of operation and it is possible that the Internal Revenue Service, or IRS, may not accept our positions and that a court may uphold such challenge, in which case we and certain of our subsidiaries could be treated as PFICs. In this regard we note that a recent federal court decision addressing the characterization of time charters concludes that they constitute leases for federal income tax purposes and employs an analysis which, if applied to our time charters, could result in our treatment and the treatment of our vessel-owning subsidiaries as PFICs. In addition, in making the determination as to whether we are a PFIC, we intend to treat the deposits that we make on our newbuilding contracts and that are with respect to vessels we do not expect to bareboat charter as assets which are not held for the production of passive income for purposes of determining whether we are a PFIC. We note that there is no direct authority on this point and it is possible that the IRS may disagree with our position.

We do not believe that we were a PFIC for 2015. This belief is based in part upon our beliefs regarding the value of the assets that we hold for the production of or in connection with the production of passive income relative to the value of our other assets. Should these beliefs turn out to be incorrect, then we and certain of our subsidiaries could be treated as PFICs for 2015. In this regard we note that our beliefs and expectations regarding the relative values of our assets place us close to the threshold for PFIC status, and thus a relatively small deviance between our beliefs and expectations and actual values could result in the treatment of us and certain of our subsidiaries as PFICs. There can be no assurance that the U.S. Internal Revenue Service (“IRS”) or a court will not determine values for our assets that would cause us to be treated as a PFIC for 2015 or a subsequent year. In addition, although we do not believe that we were a PFIC for 2015, we may choose to operate our business in the current or in future taxable years in a manner that could cause us to become a PFIC for those years. Because our status as a PFIC for any taxable year will not be determinable until after the end of the taxable year, and depends upon our assets, income and operations in that taxable year, there can be no assurance that we will not be considered a PFIC for 2016 or any future taxable year.

If the IRS were to find that we are or have been a PFIC for any taxable year, our United States stockholders would face adverse United States tax consequences. Under the PFIC rules, unless those stockholders make an election available under the Code (which election could itself have adverse consequences for such stockholders, as discussed below under “Item 10. Additional Information—Tax Consequences—United States Federal Income Taxation of United States Holders”), such stockholders would be liable to pay United States federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our shares of common stock, as if the excess distribution or gain had been recognized ratably over the stockholder’s holding period of our shares of common stock. See “Item 10. Additional Information—Tax Consequences—United States Federal Income Tax Consequences—United States Federal Income Taxation of United States Holders” for a more comprehensive discussion of the United States federal income tax consequences to United States stockholders if we are treated as a PFIC. As a result of these adverse tax consequences to United States stockholders, such a finding by the IRS may result in sales of our common stock by United States stockholders, which could lower the price of our common stock and adversely affect our ability to raise capital.

 

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As a foreign private issuer we are entitled to claim an exemption from certain Nasdaq corporate governance standards, and if we elected to rely on this exemption, you may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.

As a foreign private issuer, we are entitled to claim an exemption from many of Nasdaq’s corporate governance practices other than the requirements regarding the disclosure of a going concern audit opinion, submission of a listing agreement, notification of material non-compliance with Nasdaq corporate governance practices, and the establishment and composition of an audit and compensation committee and a formal written audit and compensation committee charter. Currently, our corporate governance practices comply with the Nasdaq corporate governance standards applicable to U.S. listed companies other than that, while Nasdaq requires listed companies to obtain prior shareholder approval for certain issuances of authorized stock in transactions not involving a public offering, as permitted under Marshall Islands law and our articles of incorporation and bylaws, we do not need prior shareholder approval to issue shares of authorized stock. To the extent we rely on this exemption for stock issuance or otherwise you may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.

We are incorporated in the Republic of the Marshall Islands, which does not have a well-developed body of corporate law or a bankruptcy act.

Our corporate affairs are governed by our articles of incorporation and bylaws and by the Marshall Islands Business Corporations Act, or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Stockholder rights may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, our public stockholders may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling stockholders than would stockholders of a corporation incorporated in a U.S. jurisdiction. The Marshall Islands has no established bankruptcy act, and as a result, any bankruptcy action involving our company would have to be initiated outside the Marshall Islands, and our public stockholders may find it difficult or impossible to pursue their claims in such other jurisdictions.

It may be difficult to enforce service of process and judgments against us and our officers and directors.

We are a Marshall Islands company, and our executive offices are located outside of the United States. All of our directors and officers reside outside of the United States, and most of our assets and their assets are located outside the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in the U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws.

There is also substantial doubt that the courts of the Marshall Islands would enter judgments in original actions brought in those courts predicated on U.S., federal or state securities laws.

Risks Related To Our Common Stock

The market price of our common stock has fluctuated and may continue to fluctuate in the future.

The market price of our common stock has fluctuated widely since our initial public offering in October 2005 and may continue to do so as a result of many factors, including our actual results of operations and perceived prospects, the prospects of our competition and of the shipping industry in general and in particular the LPG carrier sector, differences between our actual financial and operating results and those expected by investors

 

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and analysts, changes in analysts’ recommendations or projections, changes in general valuations for companies in the shipping industry, particularly the LPG carrier sector, changes in general economic or market conditions and broad market fluctuations.

If the market price of our common stock remains below $5.00 per share, under stock exchange rules, our stockholders will not be able to use such shares as collateral for borrowing in margin accounts. This inability to use shares of our common stock as collateral may depress demand and certain institutional investors are restricted from investing in or holding shares priced below $5.00, which could lead to sales of such shares creating further downward pressure on and increased volatility in the market price of our common stock.

Our Board of Directors suspended the payment of cash dividends as a result of market conditions in the international shipping industry.

In light of the volatile global economic situation, which could reduce the revenues obtained from chartering our vessels and reduce the market value of our vessels, our Board of Directors decided, in the first quarter of 2009, to suspend dividend payments. As our contracted newbuildings are delivered, paid for and begin to generate revenue, our board of directors will evaluate our dividend policy consistent with our cash flows and liquidity requirements. In addition, other external factors, such as our existing loan agreements, future financing arrangements and capital expenditures, as well as Marshall Islands law, may also restrict or prohibit our declaration and payment of dividends under some circumstances. For instance, we are not permitted to declare or pay cash dividends, or repurchase shares, in any twelve month period that exceed 50% of our free cash flow in the preceding twelve month period. Due to these constraints on dividend payments we may not be able to pay regular quarterly dividends in the future. See “Item 5. Operating and Financial Review and Prospects—Credit Facilities—Financial Covenants.”

The declaration and payment of dividends will be subject at all times to the discretion of our Board of Directors. The timing and amount of future dividends will depend on the state of the LPG carrier markets, our earnings, financial condition, cash requirements and availability, fleet renewal and expansion, restrictions in our loan agreements or other financing arrangements, the provisions of Marshall Islands law affecting the payment of dividends and other factors. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the payment of such dividends.

Anti-takeover provisions in our organizational documents and other agreements could make it difficult for our stockholders to replace or remove our current Board of Directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market price of our common stock.

Several provisions of our amended and restated articles of incorporation and bylaws could make it difficult for our stockholders to change the composition of our Board of Directors in any one year, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable.

These provisions include:

 

   

authorizing our Board of Directors to issue “blank check” preferred stock without stockholder approval;

 

   

providing for a classified Board of Directors with staggered three-year terms;

 

   

prohibiting cumulative voting in the election of directors;

 

   

authorizing the removal of directors only for cause and only upon the affirmative vote of the holders of 80% of the outstanding shares of our common stock entitled to vote for the directors;

 

   

limiting the persons who may call special meetings of stockholders;

 

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establishing advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

   

prohibiting certain transactions with interested stockholders.

Our current loan agreements also require that our Chief Executive Officer, Harry Vafias, together with his immediate family, at all times own at least 10% of our outstanding capital stock and certain of our loan agreements provide that it would be an event of default if Harry Vafias ceased to serve as an executive officer or director of our company, Harry Vafias together with his immediate family, ceased to control our company or any other person or group controlled 25% or more of the voting power of our outstanding capital stock. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.

 

Item 4. Information on the Company

A. History and Development of the Company

StealthGas Inc. was incorporated in December 2004 in the Republic of the Marshall Islands. Our registered address in the Marshall Islands is Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands MH96960. The name of our registered agent at such address is The Trust Company of the Marshall Islands, Inc. Our principal executive offices are located at 331 Kifissias Avenue, Erithrea 14561 Athens, Greece. Our telephone number for calls originating from the United States is (011) (30) (210) 625-0001.

In October 2005, we completed an initial public offering of our common stock in the United States and our common stock began trading on the Nasdaq National Market and now trade on the Nasdaq Global Select Market under the symbol “GASS”.

Prior to the initial public offering, we owned nine LPG carriers. Since the initial public offering, we acquired an additional 60 LPG carriers, three product carriers and one Aframax crude oil tanker and sold 20 LPG carriers so that as of December 31, 2015, we had a fleet of 51 LPG carriers, including two LPG carriers we charter-in, three product carriers, and one Aframax crude oil tanker.

During 2015, we took delivery of 10 newbuilding LPG carriers and sold two LPG carriers. As of April 1, 2016, we had also taken delivery of one newbuilding LPG carrier in February 2016 and had agreements to acquire five LPG carriers under construction with expected deliveries in the period from the third quarter of 2016 to the third quarter of 2017. We sold one 1992-built, 3,500 cbm LPG carrier on January 21, 2016 for demolition. Once the delivery of these newbuildings is completed, our fleet will be composed of 56 LPG carriers, including two vessels that are chartered-in which aggregate 14,717 cbm in capacity, with a total capacity of approximately 253,944 cubic meters (cbm), three medium range product carriers with a total capacity of 140,000 dwt and one 115,804 dwt Aframax tanker, assuming no other acquisitions or disposals.

Our company operates through a number of subsidiaries which either directly or indirectly own or charter in the vessels in our fleet. A list of our subsidiaries, including their respective jurisdiction of incorporation, as of April 1, 2016, all of which are wholly-owned by us, is set forth in Exhibit 8 to this Annual Report on Form 20-F.

B. Business Overview

We own a fleet of LPG carriers providing international seaborne transportation services to LPG producers and users, as well as crude oil and product carriers chartered to oil producers, refiners and commodities traders. Our LPG carriers carry various petroleum gas products in liquefied form, including propane, butane, butadiene, isopropane, propylene and vinyl chloride monomer, which are all byproducts of the production of crude oil and natural gas. The three medium range product carriers in our fleet are capable of carrying refined petroleum

 

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products such as gasoline, diesel, fuel oil and jet fuel, as well as edible oils and chemicals, while our Aframax tanker is used for carrying crude oil. We believe that we have established a reputation as a safe, cost-efficient operator of modern and well-maintained LPG carriers. We also believe that these attributes, together with our strategic focus on meeting our customers’ chartering needs, has contributed to our ability to attract leading charterers as our customers and to our success in obtaining charter renewals. We are managed by Stealth Maritime, a privately owned company controlled by other members of the Vafias family, of which our Chief Executive Officer is a member.

As of April 1, 2016, our fleet consisted of 51 LPG carriers, including two chartered-in LPG carriers, with an average age of 9.4 years, two 2008-built product carriers, one 2009-built product carrier and one 2010-built Aframax crude oil tanker. We also have agreements to acquire five LPG carriers, which are scheduled to be delivered in the period from the third quarter of 2016 to the third quarter of 2017.

The table below describes our fleet and its deployment as of April 1, 2016.

LPG Carriers (51 Vessels)

 

Name

  Year
Built
  Vessel Size
(cbm)
  Vessel
Type
  Employment Status   Expiration of
Charter(1)

Eco Nical

  2016   7,541   fully-pressurized   Time Charter   January 2017

Gas Cathar(2)

  2001   7,517   fully-pressurized   Time Charter   July 2016

Gas Husky

  2012   7,516   fully-pressurized   Bareboat Charter   January 2017

Gas Esco

  2012   7,514   fully-pressurized   Time Charter   June 2017

Eco Galaxy

  2015   7,213   fully-pressurized   Spot  

Eco Chios(3)

  2014   7,211   fully-pressurized   Bareboat Charter   June 2022

Eco Stream(3)

  2014   7,210   fully-pressurized   Bareboat Charter   March 2022

Gas Premiership(2)

  2001   7,200   fully-pressurized   Time Charter   October 2016

Gas Haralambos

  2007   7,020   fully-pressurized   Time Charter   July 2016

Gas Marathon

  1995   6,572   fully-pressurized   Spot  

Gas Moxie

  1992   6,562   fully-pressurized   Spot  

Gas Flawless

  2007   6,337   fully-pressurized   Time Charter   January 2017

Gas Ethereal

  2006   5,036   fully-pressurized   Time Charter   September 2016

Gas Prodigy

  2003   5,031   fully-pressurized   Time Charter   April 2016

Eco Enigma

  2015   5,025   fully-pressurized   Time Charter   June 2016

Eco Universe

  2015   5,025   fully-pressurized   Time Charter   August 2016

Eco Czar

  2015   5,020   fully-pressurized   Time Charter   August 2016

Eco Nemesis

  2015   5,019   fully-pressurized   Time Charter   January 2017

Gas Monarch

  1997   5,018   fully-pressurized   Spot  

Gas Defiance

  2008   5,018   fully-pressurized   Time Charter   January 2018

Gas Shuriken

  2008   5,018   fully-pressurized   Time Charter   October 2017

Gas Elixir

  2011   5,018   fully-pressurized   Time Charter   February 2017

Gas Cerberus

  2011   5,018   fully-pressurized   Time Charter   June 2017

Gas Myth

  2011   5,018   fully-pressurized   Time Charter   January 2017

Gas Inspiration

  2006   5,018   fully-pressurized   Time Charter   August 2016

Eco Invictus

  2014   5,016   fully-pressurized   Time Charter   September 2016

Gas Nirvana

  1996   5,014   fully-pressurized   Spot  

Gas Icon

  1994   5,012   fully-pressurized   Time Charter   June 2016

Gas Emperor

  1994   5,009   fully-pressurized   Time Charter   January 2017

Gas Texiana .

  1995   5,001   fully-pressurized   Time Charter   July 2016

Eco Green(4)

  2015   4,991   fully-pressurized   Time Charter   November 2020

Eco Dream(4)

  2015   4,989   fully-pressurized   Time Charter   September 2020

Gas Sincerity(3)

  2000   4,129   fully-pressurized   Bareboat Charter   September 2018

Gas Spirit

  2001   4,112   fully-pressurized   Spot  

Gas Zael(3)

  2001   4,111   fully-pressurized   Bareboat Charter   February 2018

Gas Sikousis

  2006   3,586   fully-pressurized   Bareboat Charter   May 2016

 

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Name

  Year
Built
  Vessel Size
(cbm)
  Vessel
Type
    Employment Status     Expiration of
Charter(1)
 

Eco Loyalty(5)(6)

  2015   3,529     fully-pressurized        Bareboat Charter        June 2022   

Eco Elysium(5)

  2014   3,526     fully-pressurized        Bareboat Charter        September 2021   

Eco Royalty(5)(6)

  2015   3,525     fully-pressurized        Bareboat Charter        April 2022   

Eco Corsair

  2014   3,524     fully-pressurized        Spot          

Eco Lucidity

  2015   3,517     fully-pressurized        Spot          

Gas Evoluzione

  1996   3,517     fully-pressurized        Spot          

Gas Imperiale

  2008   3,515     fully-pressurized        Time Charter        December 2016   

Gas Legacy

  1998   3,514     fully-pressurized        Spot          

Gas Astrid(3)

  2009   3,514     fully-pressurized        Bareboat Charter        April 2022   

Gas Enchanted

  2006   3,514     fully-pressurized        Spot          

Gas Exelero(3)

  2009   3,513     fully-pressurized        Bareboat Charter        June 2022   

Gas Alice

  2006   3,513     fully-pressurized        Spot          

Gas Ice

  1991   3,436     semi-refrigerated        Time Charter        May 2016   

Gas Galaxy

  1997   3,312     fully-pressurized        Time Charter        January 2018   

Gas Pasha

  1995   3,310     fully-pressurized        Spot          
    253,944 cbm      

 

(1) Earliest date charters could expire.
(2) Vessel chartered-in by us under a bareboat charter scheduled to expire in the fourth quarter of 2018.
(3) Subject to a purchase option pursuant to which the charterer may purchase such vessel at any time during the charter at a price that declines over time by an agreed annual amount or pro-rated from the agreed value of the vessel at the time of entering into the charter in the first quarter of 2014.
(4) Charterer has option to extend charter for an additional year.
(5) Subject to purchase option pursuant to which charterer may purchase such vessel at the end of the charter at the price agreed at the time of entering into the agreement.
(6) Charterer has option to extend charter for an additional three-year period.

Contracted Newbuilding LPG Carriers (5 Vessels)

 

Name

   Vessel Size
(cbm)
     Vessel Type      Scheduled Delivery  

To be named

     22,000         semi-refrigerated         Q1 2017   

To be named

     22,000         semi-refrigerated         Q2 2017   

To be named

     22,000         semi-refrigerated         Q2 2017   

To be named

     22,000         semi-refrigerated         Q3 2017   

Eco Dominator(1)

     7,200         fully-pressurized         Q3 2016   
        95,200 cbm         

Total LPG Carrier Fleet:

   56 vessels      349,144 cbm         

 

(1) Scheduled to commence an 18-month time charter upon delivery from the shipyard.

Product Carriers/Crude Oil Tanker (4 Vessels)

 

Name

   Year
Built
     Vessel Size
(dwt)
   Vessel
Type
     Employment
Status
     Expiration of
Charter(1)
 

Navig8 Fidelity

     2008       47,000      MR product carrier         Bareboat Charter         January 2017   

Navig8 Faith

     2008       47,000      MR product carrier         Bareboat Charter         February 2019   

Stealth Bahla

     2009       46,000      MR product carrier         Time Charter         July 2016   

Spike

     2010       115,804      Aframax oil tanker         Bareboat Charter         February 2018   
      255,804 dwt         

 

(1) Earliest date charters could expire.

 

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Commercial and Technical Management of Our Fleet

We have a management agreement with Stealth Maritime, pursuant to which Stealth Maritime provides us with technical, administrative, commercial and certain other services. Stealth Maritime is a leading ship-management company based in Greece, established in 1999 in order to provide shipping companies with a range of services. Our manager’s safety management system is ISM certified in compliance with IMO’s regulations by Lloyd’s Register. In relation to the technical services, Stealth Maritime is responsible for arranging for the crewing of the vessels, the day to day operations, inspections and vetting, maintenance, repairs, drydocking and insurance. Administrative functions include but are not limited to accounting, back-office, reporting, legal and secretarial services. In addition, Stealth Maritime provides services for the chartering of our vessels and monitoring thereof, freight collection, and sale and purchase. In providing most of these services, Stealth Maritime pays third parties and receives reimbursement from us. In addition, Stealth Maritime may subcontract technical management and crew management for some of our vessels to third parties, including Selandia, a ship management company based in Singapore and Manila, Southfield Agencies, based in Manila and Brave Maritime (an affiliate of Stealth Maritime) based in Greece. These three technical managers are supervised by Stealth Maritime. As of April 1, 2016, the technical management of seven of our ships was subcontracted by Stealth Maritime to Brave Maritime.

Under the November 2006 agreement, which was amended effective January 1, 2007, as approved by our Board of Directors, including all of our independent directors, we pay Stealth Maritime a fixed management fee of $440 per vessel operating under a voyage or time charter per day on a monthly basis in advance, pro-rated for the calendar days we own the vessels. We pay a fixed fee of $125 per vessel per day for each of our vessels operating on bareboat charter. We are also obligated to pay Stealth Maritime a fee equal to 1.25% of the gross freight, demurrage and charter hire collected from the employment of our vessels. Stealth Maritime will also earn a fee equal to 1.0% of the contract price of any vessel bought or sold by them on our behalf. In addition, as long as Stealth Maritime (or an entity with respect to which Harry N. Vafias is an executive officer, director or the principal shareholder) is our fleet manager or Harry N. Vafias is an executive officer or director of the Company, Stealth Maritime has granted us a right of first refusal to acquire any LPG carrier which Stealth Maritime may acquire in the future. In addition, Stealth Maritime has agreed that it will not charter-in any LPG carrier without first offering the opportunity to charter-in such vessels to us. This right of first refusal does not prohibit Stealth Maritime from managing vessels owned by unaffiliated third parties in competition with us, nor does it cover product carriers or crude oil tankers.

The initial term of our management agreement with Stealth Maritime expired in June 2010; however, unless six months’ notice of non-renewal is given by either party prior to the end of the then current term, this agreement automatically extends for additional 12 month periods. No such notice has been given, and accordingly, this agreement will extend to June 2017.

For additional information about the management agreement, including the calculation of management fees, see “Item 7. Major Shareholders and Related Party Transactions” and our consolidated financial statements which are included as Item 18 to this Annual Report.

Crewing and Employees

Stealth Maritime ensures that all seamen have the qualifications and licenses required to comply with international regulations and shipping conventions, and that our vessels employ experienced and competent personnel. In 2015 Selandia crew management, Southfield agencies and PTC, each of which is based in the Philippines, were responsible for providing the crewing of the LPG fleet, to the extent that these vessels are not deployed on bareboat charters. These responsibilities include training, compensation, transportation and insurance of the crew.

Chartering of the Fleet

We, through Stealth Maritime, manage the employment of our fleet. We deploy our LPG carriers and tankers on period charters, including time and bareboat charters that can last up to several years, and spot market charters (through voyage charters and short-term time charters), which generally last from one to six months, subject to market conditions. Time and bareboat charters are for a fixed period of time. A voyage charter is

 

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generally a contract to carry a specific cargo from a loading port to a discharging port for an agreed-upon total charge. Under voyage charters we pay for voyage expenses such as port, canal and fuel costs. Under a time charter the charterer pays for voyage expenses while under a bareboat charter the charterer pays for voyage expenses and operating expenses such as crewing, supplies, maintenance and repairs including special survey and dry-docking costs.

Vessels operating in the spot market generate revenues that are less predictable but may enable us to capture increased profit margins during periods of improvements in LPG charter rates, although we are then exposed to the risk of declining LPG carrier charter rates. Typically spot market charters can last from a few days up to two months. If we commit vessels to period charters, future spot market rates may be higher or lower than those rates at which we have period chartered our vessels.

In formulating our chartering strategy we evaluate past, present and future performance of the freight markets and balance the mix of our chartering arrangements in order to achieve optimal results for the fleet. As of April 1, 2016 and including our two chartered in vessels, we had 13 LPG carriers operating in the spot market, 15 vessels on time charters expiring in 2016, 13 on time charters expiring from 2017 to 2020 and 14 on bareboat charters expiring from 2016 to 2022. In terms of charter coverage as of April 1, 2016, we had 62% of the available calendar days fixed under period charters for 2016, and 32% for 2017; in each case excluding the five LPG carriers, one to be delivered in the third quarter of 2016 and four in 2017 that we have contracted to acquire. We have not yet arranged employment for the four vessels scheduled to be delivered in 2017.

While the majority of our fleet is operating in the Far East, we deploy vessels globally. Some of the areas where we usually operate are the Middle East, the Mediterranean, North West Europe and Latin America. According to industry reports the United States may increase its exports of LPG products in the near future. In the event this creates more demand for vessels like ours, we would expect to deploy more vessels in the United States and the Caribbean. As freight rates usually vary between these areas as well as voyage and operating expenses, we evaluate such parameters when positioning our vessels for new employment.

Customers

Our assessment of a charterer’s financial condition and reliability is an important factor in negotiating employment for our vessels. Principal charterers include producers of LPG products, such as national, major and other independent energy companies and energy traders, and industrial users of those products. For the year ended December 31, 2015, we had 55 customers, with one customer accountable for more than 10% of our total revenues, generating 13% of the total revenues. In addition, vessels under bareboat charter may be sub-chartered to third parties.

Environmental and other Regulations

Government regulations significantly affect the ownership and operation of our vessels. They are subject to international conventions and national, state and local laws and regulations in force in the countries in which they may operate or are registered.

A variety of governmental and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (United States Coast Guard, harbor master or equivalent), classification societies, flag state administration (country of registry), charterers and particularly terminal operators. Certain of these entities require us to obtain permits, licenses, certificates and financial assurances for the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or result in the temporary suspension of operation of one or more of our vessels.

We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. We are required to maintain operating standards for all of our

 

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vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with United States and international regulations. We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations. However, because such laws and regulations are frequently changed and may impose increasingly stricter requirements, any future requirements may limit our ability to do business, increase our operating costs, force the early retirement of one or more of our vessels, and/or affect their resale value, all of which could have a material adverse effect on our financial condition and results of operations.

Environmental Regulations—International Maritime Organization (“IMO”)

The International Maritime Organization (“IMO”), the United Nations agency for maritime safety and the prevention of pollution by ships, has negotiated international conventions relating to pollution by ships. In 1973, IMO adopted the International Convention for the Prevention of Pollution from Ships (“MARPOL”), which has been periodically updated with relevant amendments. MARPOL addresses pollution from ships by oil, noxious liquid substances carried in bulk, harmful substances carried by sea in packaged form, sewage, garbage, and air emissions. Our vessels are subject to standards imposed by the IMO.

In September 1997, the IMO adopted MARPOL Annex VI to address air pollution from ships. Effective in May 2005, Annex VI set limits on sulfur oxide and nitrogen oxide emissions from ship exhausts and prohibited deliberate emissions of ozone depleting substances, such as chlorofluorocarbons. Annex VI also included a global cap on the sulfur content of fuel oil and allowed for special areas to be established with more stringent controls on sulfur emissions. Options for implementing the requirements of Annex VI include use of low sulfur fuels, modifications to vessel engines, or the addition of post combustion emission controls. Annex VI has been ratified by some, but not all IMO member states. Vessels that are subject to Annex VI must, if built before the effective date, obtain an International Air Pollution Prevention Certificate evidencing compliance with Annex VI not later than either the first dry docking after May 19, 2005, but no later than May 19, 2008. All vessels subject to Annex VI and built after May 19, 2005 must also have this Certificate.

In October 2008, the IMO adopted amendments to Annex VI, and United States ratified the Annex VI amendments in October 2008. Beginning in 2011 the amendments required a progressive reduction of sulfur levels in bunker fuels to be phased in by 2020 and imposed more stringent nitrogen oxide emission standards on marine diesel engines, depending on their date of installation. Since January 1, 2012, the amended Annex VI required that fuel oil contain no more than 3.50% sulfur. More stringent emission standards apply in coastal areas designated by the IMO as Emission Control Areas, or ECAs, such as the Baltic and North Seas, United States and Canadian coastal areas, and the United States Caribbean Sea. As of January 1, 2015, vessels operating within an ECA must use fuel with a sulfur content that does not exceed 0.10%. We have obtained International Air Pollution Prevention Certificates for all of our vessels and believe they are compliant in all material respects with current Annex VI requirements. We may incur costs to comply with the amended Annex VI requirements.

Our LPG carriers must have an IMO Certificate of Fitness demonstrating compliance with construction codes for LPG carriers. These codes, and similar regulations in individual member states, address fire and explosion risks posed by the transport of liquefied gases. Collectively, these standards and regulations impose detailed requirements relating to the design and arrangement of cargo tanks, vents, and pipes; construction materials and compatibility; cargo pressure; and temperature control. All of our LPG carriers have Certificates of Fitness and we intend to obtain such certificates for the vessels that we have agreed to acquire.

Many countries have ratified and follow the liability plan adopted by the IMO and set out in the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the CLC) (the United States, with its separate OPA 90 regime described below, is not a party to the CLC). This convention generally applies to vessels that carry oil in bulk as cargo. Under this convention and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, the registered owner of a regulated vessel is strictly liable for pollution damage in the territorial waters or exclusive economic zone of a contracting state caused by the discharge of any oil from the ship, subject to certain defenses. Under an amendment to the 1992 Protocol that became effective on November 1, 2003, for vessels of 5,000 to 140,000 gross tons, liability per incident is limited to 4.51 million. Special Drawing Rights (SDR)

 

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plus 631 SDR for each additional gross ton over 5,000. The SDR is an International Monetary Fund unit pegged to a basket of currencies. The right to limit liability under the CLC is forfeited where the spill is caused by the owner’s actual fault and, under the 1992 Protocol, where the spill is caused by the owner’s intentional or reckless conduct. Vessels trading to states that are parties to the CLC must provide evidence of insurance covering the liability of the owner. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law regimes govern, and liability is imposed either on the basis of fault or in a manner similar to that convention. We believe that our P&I insurance will cover any liability under the CLC.

In 2001, the IMO adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, which imposes strict liability on ship owners for pollution damage caused by discharges of bunker oil in jurisdictional waters of ratifying states. The Bunker Convention also requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). Because the Bunker Convention does not apply to pollution damage governed by the CLC, it applies only to discharges from any of our vessels that are not transporting oil. The Bunker Convention entered into force on November 21, 2008 and as of March 10, 2015, has been ratified by 78 states. In other jurisdictions, liability for spill or releases of oil from ship’s bunkers typically is determined by national or other domestic laws in the jurisdiction where the events occur.

Our LPG vessels and product carriers may also become subject to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea adopted in 1996 as amended by the Protocol to the HNS Convention, adopted in April 2010 (2010 HNS Protocol) (collectively, the “2010 HNS Convention”), if it enters into force. The Convention creates a regime of liability and compensation for damage from hazardous and noxious substances (or HNS), including liquefied gases. The 2010 HNS Convention sets up a two-tier system of compensation composed of compulsory insurance taken out by ship owners and an HNS Fund that will come into play when the insurance is insufficient to satisfy a claim or does not cover the incident. Under the 2010 HNS Convention, if damage is caused by bulk HNS, claims for compensation will first be sought from the ship owner up to a maximum of 100 million Special Drawing Rights (or SDR). If the damage is caused by packaged HNS or by both bulk and packaged HNS, the maximum liability is 115 million SDR. Once the limit is reached, compensation will be paid from the HNS Fund up to a maximum of 250 million SDR. The 2010 HNS Convention has not been ratified by a sufficient number of countries to enter into force, and at this time we cannot estimate with any certainty the costs of compliance with its requirements should it enter into force.

The IMO adopted the International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the BWM Convention, in February 2004. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements to be replaced in time with mandatory concentration limits. Upon entry into force of the BWM Convention, mid-ocean ballast exchange would be mandatory. The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. As of March 31, 2016 the BWM Convention had been adopted by 49 states, representing approximately 34.82% of the world’s tonnage. Accordingly while the BWM Convention has not yet been adopted by a sufficient number of states with sufficient tonnage to enter into force, it may be in the near future. Many of the implementation dates in the BWM Convention have already passed, so, on December 4, 2013, the IMO Assembly passed a resolution revising the dates of applicability of the requirements of the BWM Convention so that they will be triggered by the entry into force date, and not the dates originally in the BWM Convention. This, in effect, makes all vessels constructed before the entry into force date “existing vessels” and delays the date for installation of ballast water management systems until the first renewal survey following entry into force of the BWM Convention. When mid-ocean ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for our vessels, although it is difficult to predict the overall impact of such a requirement on our operations.

The operation of our vessels is also affected by the requirements set forth in the ISM Code of the IMO. The ISM Code requires shipowners and bareboat charterers to develop and maintain an extensive SMS that includes the adoption of a safety and environmental protection policy setting forth instructions and procedures for safe

 

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operation and describing procedures for dealing with emergencies. Vessel operators must obtain a “Safety Management Certificate” from the government of the vessel’s flag state to verify that it is being operated in compliance with its approved SMS. The failure of a ship owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, decrease available insurance coverage for the affected vessels and result in a denial of access to, or detention in, certain ports. Currently, each of the vessels in our fleet is ISM code-certified. However, there can be no assurance that such certification will be maintained indefinitely.

The operations of our product carriers are subject to compliance with the IMO’s International Code for the Construction and Equipment of Ships carrying Dangerous Chemicals in Bulk (IBC Code) for chemical tankers built after July 1, 1986. The IBC Code includes ship design, construction and equipment requirements and other standards for the bulk transport of certain liquid chemicals. Amendments to the IBC Code pertaining to revised international certificates of fitness for the carriage of dangerous goods entered into force in June 2014. We may need to make certain expenditures to comply with these amendments.

Environmental Regulations—The United States Oil Pollution Act of 1990 (“OPA”) and the U.S. Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”)

The United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA applies to discharges of any oil from a vessel, including discharges of fuel oil (bunkers) and lubricants. OPA affects all owners and operators whose vessels trade in the United States, its territories and possessions or whose vessels operate in United States waters, which include the United States’ territorial sea and its two hundred nautical mile exclusive economic zone. The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person owning, operating or chartering by demise, the vessel. Accordingly, both OPA and CERCLA impact our operations.

Under OPA, vessel owners, operators and bareboat charterers are “responsible parties” and are jointly, severally and strictly liable (unless the discharge of pollutants results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of pollutants from their vessels. OPA broadly defines these other damages to include:

 

   

natural resources damage and the costs of assessment thereof;

 

   

real and personal property damage;

 

   

net loss of taxes, royalties, rents, fees and other lost revenues;

 

   

lost profits or impairment of earning capacity due to property or natural resources damage; and

 

   

net cost of public services necessitated by a spill response, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.

The current limits of OPA liability are the greater of $2,200 per gross ton or $18,796,800 for double-hulled tank vessels, subject to periodic adjustment for inflation. These limits of liability do not apply if an incident was directly caused by violation of applicable United States federal safety, construction or operating regulations or by a responsible party’s gross negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with oil removal activities.

OPA requires owners and operators of vessels over 300 gross tons to establish and maintain with the United States Coast Guard evidence of financial responsibility sufficient to meet their potential liabilities under the OPA. Under the United States Coast Guard regulations implementing OPA, vessel owners and operators may evidence their financial responsibility by showing proof of insurance, surety bond, self-insurance, or guaranty. Under the OPA regulations, an owner or operator of a fleet of vessels is required only to demonstrate evidence of financial responsibility in an amount sufficient to cover the vessels in the fleet having the greatest maximum liability under OPA.

 

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CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damage for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.

We currently maintain, for each of our vessels, pollution liability coverage insurance in the amount of $1 billion per incident. In addition, we carry hull and machinery and protection and indemnity insurance to cover the risks of fire and explosion. Under certain circumstances, fire and explosion could result in a catastrophic loss. While we believe that our present insurance coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates. If the damages from a catastrophic spill exceeded our insurance coverage, it would have a severe effect on us and could possibly result in our insolvency.

OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. Under the self-insurance provisions, the ship owner or operator must have a net worth and working capital, measured in assets located in the United States against liabilities located anywhere in the world, that exceeds the applicable amount of financial responsibility. We have complied with the United States Coast Guard regulations by providing a financial guaranty evidencing sufficient self-insurance.

OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills. In some cases, states, which have enacted such legislation, have not yet issued implementing regulations defining vessels owners’ responsibilities under these laws. We intend to comply with all applicable state regulations in the ports where our vessels call.

Although the 2010 oil spill disaster in the Gulf of Mexico involved a drilling rig and well, it may result in additional legislative or regulatory initiatives for all vessels, including the raising or elimination of liability caps under OPA or more stringent operational requirements. We cannot predict what additional requirements may be enacted and what effect, if any, such requirements may have on our operations.

Environmental Regulations—Other Environmental Initiatives

The EU has also adopted legislation that: (1) requires member states to refuse access to their ports to certain sub-standard vessels, according to vessel type, flag and number of previous detentions; (2) creates an obligation on member states to inspect at least 25% of vessels using their ports annually and provides for increased surveillance of vessels posing a high risk to maritime safety or the marine environment; (3) provides the EU with greater authority and control over classification societies, including the ability to seek to suspend or revoke the authority of negligent societies; and (4) requires member states to impose criminal sanctions for certain pollution events, such as the unauthorized discharge of tank washings. It is impossible to predict what additional legislation or regulations, if any, may be promulgated by the EU or any other country or authority.

On March 23, 2012, the U.S. Coast Guard adopted new ballast water discharge standards under the U.S. National Invasive Species Act, or NISA. The regulations, which became effective on June 21, 2012, set maximum acceptable discharge limits for living organisms and established standards for ballast water

 

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management systems, and they are consistent with the requirements under the 2004 BWM Convention described above. The new requirements are being phased in based on the size of the vessel and its next drydocking date. However, the U.S. Coast Guard must approve any ballast water management technology before it is placed on a vessel, but has yet to do so.

The U.S. Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances in navigable waters and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90. Under U.S. Environmental Protection Agency (“EPA”) regulations we are required to obtain a CWA permit to discharge ballast water and other wastewaters incidental to the normal operation of our vessels if we operate within the three mile territorial waters or inland waters of the United States. This permit, which the EPA has designated as the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP, incorporates the current U.S. Coast Guard requirements for ballast water management, as well as supplemental ballast water requirements, and includes requirements applicable to 26 specific discharge streams, such as deck runoff, bilge water and gray water. The U.S. Coast Guard and the EPA have entered into a memorandum of understanding which provides for collaboration on the enforcement of the VGP requirements. As a result, it is expected that the U.S. Coast Guard will include the VGP as part of its normal Port State Control inspections. The EPA issued a new VGP that became effective in December 2013. Among other things, it contained numeric ballast water discharge limits for most vessels and more stringent requirements for exhaust gas scrubbers and required the use of environmentally friendly lubricants. We have submitted NOIs (Notices Of Intent) for Discharges Incidental to the Normal Operation of a Vessel under the 2013 VGP to the U.S. EPA for all our ships trading in U.S. waters. Vessels are subject to the EPA and Coast Guard ballast water management requirements despite the lack of U.S. Coast Guard—approved ballast water management technology. The U.S. Coast Guard has provided waivers to vessels that cannot install the as-yet unapproved technology. The EPA, on the other hand, has taken a different approach to enforcing the ballast water management standards in the 2013 VGP. Under a December 27, 2013 policy the agency may consider why vessels do not have the requisite ballast water management technology installed when taking actions to compel compliance with the requirements of the 2013 VGP. The ballast water management standards of the 2013 VGP were challenged by the Canadian Shipowners’ Association in the U.S. Second Circuit Court of Appeals. The U.S. Second Circuit Court of Appeals ruled on October 5, 2015 that EPA acted arbitrarily and capriciously with respect to certain of the ballast water provisions in the 2013 VGP. The Court remanded the issue to EPA to either justify its approach in the 2013 VGP or redraft the ballast water sections of the VGP consistent with the Court’s ruling. In the meantime, the 2013 VGP will remain in effect. Compliance with the EPA and Coast Guard ballast water management regulations could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.

Climate Control Initiatives

Although the Kyoto Protocol to the United Nations Framework Convention on Climate Change requires adopting countries to implement national programs to reduce emissions of greenhouse gases, emissions of greenhouse gases from international shipping are not currently subject to the Kyoto Protocol. The Kyoto Protocol was extended to 2020 at the 2012 United Nations Climate Change Conference, with the hope that a new climate change treaty would be adopted by 2015 and come into effect by 2020. The Paris Agreement adopted under the United Nations Framework Convention on Climate Change in December 2015, contemplates commitments from each nation party thereto to take action to reduce greenhouse gas emissions and limit increases in global temperatures but did not include any restrictions or other measures specific to shipping emissions. However, restrictions on shipping emissions are likely to continue to be considered and a new treaty may be adopted in the future that includes restrictions on shipping emissions. International or multi-national bodies or individual countries may adopt their own climate change regulatory initiatives. The IMO’s Marine Environment Protection Committee adopted two new sets of mandatory requirements to address greenhouse gas emissions from shipping that entered into force in January 2013. The Energy Efficiency Design Index establishes minimum energy

 

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efficiency levels per capacity mile and applies to new vessels. Currently operating vessels must develop and implement Ship Energy Efficiency Plans. These new requirements could cause us to incur additional costs to comply. The IMO is also considering the development of market-based mechanisms for limiting greenhouse gas emissions from ships, but it is impossible to predict the likelihood of adoption of such a standard or the impact on our operations. In April 2015, the EU adopted regulations requiring the monitoring and reporting of greenhouse gas emissions from marine vessels (of over 5,000 gross tons) beginning in January 2018. Negotiators from the European Parliament and the European Union Council provisionally adopted rules to implement the strategy and the European Parliament and Council of Ministers are expected to formally endorse the regulations. The United States EPA has issued a finding that greenhouse gas emissions endanger the public health and safety and has adopted regulations under the Clean Air Act to limit emissions of greenhouse gases from certain mobile sources and proposed regulations to limit greenhouse gas emissions from large stationary sources. Although the mobile source regulations do not apply to greenhouse gas emissions from vessels, EPA is considering a petition from the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going vessels. Any passage of climate control initiatives by the IMO, the EU or the individual countries in which we operate that limit greenhouse gas emissions from vessels could require us to limit our operations or make significant financial expenditures that we cannot predict with certainty at this time. Passage of climate control initiatives that affect the demand for LPG products and oil may also materially affect our business. Even in the absence of climate control legislation and regulations, our business may be materially affected to the extent that climate change may result in sea level changes or more intense weather events.

Vessel Security Regulations

Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Security Act of 2002, or MTSA, came into effect in the United States. To implement certain portions of the MTSA, in July 2003, the United States Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to the International Convention for the Safety of Life at Sea, or SOLAS, created a new chapter of the convention dealing specifically with maritime security. The new chapter went into effect in July 2004, and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the newly created International Ship and Port Facilities Security or, ISPS, Code. Among the various requirements are:

 

   

on-board installation of automatic information systems, or AIS, to enhance vessel-to-vessel and vessel-to-shore communications;

 

   

on-board installation of ship security alert systems;

 

   

the development of vessel security plans; and

 

   

compliance with flag state security certification requirements.

The United States Coast Guard regulation’s aim to align with international maritime security standards exempted non-United States vessels from MTSA vessel security measures provided such vessels have on board, by July 1, 2004, a valid International Ship Security Certificate (ISSC) that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. We have obtained ISSCs for all of our vessels and implemented the various security measures addressed by the MTSA, SOLAS and the ISPS Codes to ensure that our vessels attain compliance with all applicable security requirements within the prescribed time periods. We do not believe these additional requirements will have a material financial impact on our operations.

Classification and Inspection

All our vessels are certified as being “in class” by a classification society member of the International Association of Classification Societies such as Lloyds Register of Shipping, Bureau Veritas, American Bureau of

 

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Shipping, RINA SpA, DNV and Nippon Kaiji Kyokai. All new and secondhand vessels that we purchase must be certified prior to their delivery under our standard contracts and memoranda of agreement. If the vessel is not certified on the date of closing, we have no obligation to take delivery of the vessel. Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society that is a member of the International Association of Classification Societies. Every vessel’s hull and machinery is “classed” by a classification society authorized by its country of registry. The classification society certifies that the vessel has been built and maintained in accordance with the rules of such classification society and complies with applicable rules and regulations of the country of registry of the vessel and the international conventions of which that country is a member. Each vessel is inspected by a surveyor of the classification society every year—an annual survey, every two to three years—an intermediate survey, and every four to five years—a special survey. Vessels also may be required, as part of the intermediate survey process, to be dry-docked every 30 to 36 months for inspection of the underwater parts of the vessel and for necessary repairs related to such inspection; alternatively, such requirements may be met concurrently with the special survey.

In addition to the classification inspections, many of our customers, including the major oil companies, regularly inspect our vessels as a precondition to chartering voyages on these vessels. We believe that our well-maintained, high quality tonnage should provide us with a competitive advantage in the current environment of increasing regulations and customer emphasis on quality of service.

All areas subject to surveys as defined by the classification society, are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years.

Vessels are drydocked for the special survey for inspection of the underwater parts and for repairs related to inspections. If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified by the ship owner within the prescribed time limits.

Risk of Loss and Liability Insurance

General

The operation of any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. While we believe that our present insurance coverage is adequate, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.

Hull and Machinery Insurance

We have obtained marine hull and machinery and war risk insurance, which include the risk of actual or constructive total loss, for all of our vessels. The vessels are each covered up to at least fair market value, with deductibles of $100,000 per vessel.

We also maintain increased value insurance for most of our vessels. Under the increased value insurance, in case of total loss of the vessel, we will be able to recover the sum insured under the increased value policy in addition to the sum insured under the Hull and Machinery policy. Increased value insurance also covers excess liabilities which are not recoverable in full by the Hull and Machinery policies by reason of under insurance.

Protection and Indemnity Insurance

Protection and indemnity insurance, a form of mutual indemnity insurance, which covers our third party liabilities in connection with our shipping activities, is provided by mutual protection and indemnity associations,

 

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or P&I Associations or “clubs.” This includes third-party liability and other related expenses of injury or death of crew, passengers and other third parties, loss or damage to cargoes, claims arising from collisions with other vessels, damage to other third-party properties, pollution arising from oil or other substances, and salvage, towing and other related costs, including wreck removal. Subject to the “capping” discussed below, our coverage, except for pollution, is unlimited.

Our current protection and indemnity insurance coverage for pollution is $1.0 billion per vessel per incident. The 14 P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. Each P&I Association has capped its exposure to this pooling agreement at $4.5 billion. As a member of a P&I Association, which is a member of the International Group, we are subject to calls payable to the associations based on its claim records as well as the claim records of all other members of the individual associations, and members of the pool of P&I Associations comprising the International Group.

Competition

We operate in a highly competitive global market based primarily on supply and demand of vessels and cargoes. While the worldwide LPG sector is comparatively smaller than other shipping sectors, consisting of vessels of varying sizes between 1,000 and 85,000 cbm, it is a diversified global market with many charterers, owners and operators of vessels. As of April 1, 2016, our LPG carrier fleet, including our two chartered in vessels, had an average age of 9.4 years, and we had five newbuildings scheduled to be delivered from the third quarter of 2016 to the third quarter of 2017, representing an aggregate capacity of approximately 37.5% of our existing fleet’s capacity. Accordingly, we believe we are well positioned from a competitive standpoint in terms of our vessels meeting the ongoing needs of charterers. Also, as of April 1, 2016, we had one of the largest single-owned fleets in our primary sector segment (3,000 cbm to 8,000 cbm), which, in our view, also positions us well from the standpoint of charterers and competitors. We believe, however, that the LPG shipping sector will continue to be highly competitive, and will be driven by both energy production and consumption.

Ownership of medium range product carriers and crude oil tankers capable of transporting crude oil and refined petroleum products, such as gasoline, diesel, fuel oil and jet fuel, as well as edible oils and chemicals, is highly diversified and is divided among many independent tanker owners. Many oil companies and other oil trading companies, the principal charterers of our product carriers and crude oil tankers, also operate their own vessels and transport oil for themselves and third party charterers in direct competition with independent owners and operators. Competition for charters, including for the transportation of oil and oil products, can be intense and depends on price as well as on the location, size, age, condition, specifications and acceptability of the vessel and its operator to the charterer and is frequently tied to having an available vessel with the appropriate approvals from oil majors. Principal factors that are important to our charterers include the quality and suitability of the vessel, its age, technical sophistication, safety record, compliance with IMO standards and the heightened industry standards that have been set by some energy companies, and the competitiveness of the bid in terms of overall price.

Seasonality

The LPG carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of propane and butane for heating during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, our revenues may be stronger in fiscal quarters ended December 31 and March 31 and relatively weaker during the fiscal quarters ended June 30 and September 30, as was the case in each of the last five fiscal years. We have limited exposure to seasonality with respect to our product carriers, as two of them have been deployed on fixed rate bareboat charters which expire in 2017 and 2019, while our third product carrier is employed under a time charter which expires in July 2016. The Aframax crude oil tanker is deployed on a fixed rate bareboat charter expiring in February 2018.

 

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C. Organizational Structure

As of December 31, 2015, we were the sole owner of all the outstanding shares of the subsidiaries listed in Exhibit 8.

D. Properties

Other than our vessels we do not have any material property. For information on our fleet see “Item 4. Information on the Company—Business Overview.” Our vessels are subject to priority mortgages, which secure our obligations under our various credit facilities. For further details regarding our credit facilities, refer to “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Credit Facilities.”

We have no freehold or material leasehold interest in any real property. We lease office space from an affiliated company of Stealth Maritime. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Office Space.”

 

Item 4A. Unresolved Staff Comments

None.

 

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Item 3. Key Information—Risk Factors” and elsewhere in this Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a provider of international seaborne transportation services to LPG producers and users, as well as crude oil and product carriers to oil producers, refineries and commodities traders. As of December 31, 2015 we operated a fleet of 51 LPG carriers, including 49 vessels we own and two vessels we charter-in, that carry various petroleum gas products in liquefied form, including propane, butane, butadiene, isopropane, propylene and VCM (“Vinyl Chloride Monomer”), three medium range product carriers that carry refined petroleum products such as gasoline, diesel, fuel oil and jet fuel, as well as edible oils and chemicals, and one Aframax tanker which is used for carrying crude oil. We took delivery of one newbuilding eco LPG carrier in February 2016, and sold one 1992-built, 3,500 cbm LPG carrier in January 2016. In addition, we are scheduled to take delivery of a further newbuilding eco LPG carrier in the third quarter of 2016, with an additional four newbuilding eco LPG carriers of 22,000 cbm each, scheduled for delivery in 2017. Once the delivery of these newbuildings is completed, our fleet will be composed of 54 LPG carriers, excluding the two vessels that are chartered in, with a total capacity of 334,427 cbm, three medium range product carriers with a total capacity of 140,000 dwt and one 115,804 dwt crude oil tanker, assuming no further acquisitions or dispositions. For the years ended December 31, 2013, 2014 and 2015, we owned an average of 39.4, 44.1 and 48.8 vessels, respectively, generating revenues of $121.5 million, $132.0 million and $141.3 million, respectively.

We, through Stealth Maritime, manage the employment of our fleet. We intend to continue to deploy our fleet under period charters including time and bareboat charters, which can last up to several years, and spot market or voyage charters, which generally last from one to six months, subject to market conditions. Period charters and short term time charters are for a fixed period of time.

 

   

Charters and revenues. Under a time charter, the charterer pays a fixed rate per day over the term of the charter; a time charter, including a short term time charter, may provide for rate adjustments and

 

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profit sharing. Under a bareboat charter, the charterer pays us a fixed rate for its use of our ship for the term of the charter. Under a voyage charter, we agree to transport a specified cargo from a loading port to a discharging port for a fixed amount.

 

   

Charters and expenses. Under a time charter, we are responsible for the vessel’s operating costs (crew, provisions, stores, lubricants, insurance, maintenance and repairs) incurred during the term of the charter, while the charterer pays voyage expenses (port, canal and fuel costs) that are unique to each particular voyage. Under a bareboat charter, the charterer is responsible for all vessel operating expenses and voyage expenses incurred during the term of the charter. Under a voyage or spot charter, we are responsible for both the vessel operating expenses and the voyage expenses incurred in performing the charter

As of April 1, 2016, 11 of our LPG carriers, two of our medium range product carriers and our Aframax crude oil tanker were deployed on bareboat charters, under which the charterer is responsible for the costs associated with the operations of the vessels. Of the remaining vessels in our fleet, as of April 1, 2016, 13 were employed in the spot market, with the remaining vessels deployed on time charters. As of April 1, 2016, 62% of our anticipated fleet days for the existing fleet were covered by period charter contracts for the remainder of 2016 and 32% for 2017 (in each case excluding the newbuilding LPG carriers which we have agreed to acquire, but have not yet been delivered). The corresponding forward coverage as of April 1, 2015 was 63% for the remainder of 2015 and 34% for 2016. We are, however, exposed to prevailing charter rate fluctuations for the remaining anticipated fleet days not covered by period charter contracts, as well as performance by our counterparties for the chartered days.

A. Operating Results

Factors Affecting Our Results of Operations

We believe that the important measures for analyzing trends in the results of our operations consist of the following:

 

   

Calendar days. We define calendar days as the total number of days in a period during which each vessel in our fleet was in our possession including off-hire days associated with major repairs, drydockings or special or intermediate surveys. Calendar days are an indicator of the size of our fleet over a period and affect both the amount of revenue and the amount of expense that we record during that period. In January 2016, we sold the 1992-built, 3,500 cbm LPG carrier Gas Arctic. We may also elect to sell additional older vessels in our fleet from time to time. Six of our LPG carriers are subject to arrangements pursuant to which the charterer has options to purchase the vessels at declining stipulated prices at any time during the current charter for the respective vessels, in addition three of our vessels are subject to arrangements pursuant to which the charterer has options to purchase the vessels at the end of their current charters in 2021 and 2022. If any of these purchase options were to be exercised, the expected size of our LPG carrier fleet would be reduced, and as a result our anticipated level of calendar days and revenues would be reduced.

 

   

Voyage days. We define voyage days as the total number of days in a period during which each vessel in our fleet was in our possession net of off-hire days associated with major repairs, drydockings or special or intermediate surveys. The shipping industry uses voyage days (also referred to as available days) to measure the number of days in a period during which vessels are available to generate revenues.

 

   

Fleet utilization; Fleet operational utilization. We calculate fleet utilization by dividing the number of our voyage days during a period by the number of our calendar days during that period, and we calculate fleet operational utilization by dividing the number of our voyage days (excluding commercially idle days) during a period by the number of our calendar days during that period. The shipping industry uses fleet utilization to measure a company’s efficiency in minimizing the amount of

 

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days that its vessels are off-hire for reasons such as scheduled repairs, vessel upgrades or drydockings and other surveys, and uses fleet operational utilization to also measure a company’s efficiency in finding suitable employment for its vessels.

 

   

Cyclicality. The international gas carrier market, including the transport of LPG, is cyclical with attendant volatility in profitability, charter rates and vessel values, resulting from changes in the supply of, and demand for, LPG carrier capacity. From the last quarter of 2011 until the third quarter of 2014, LPG carrier market conditions generally improved from low levels with higher LPG carrier charter rates and utilization levels, however, the impact of the dramatic decline in oil prices on demand for LPG has adversely affected LPG carrier charter rates and utilization levels since the fourth quarter of 2014, particularly in the smaller vessel classes. As of April 1, 2016, we had 13 vessels trading in the spot market. We expect to take delivery of five LPG carrier newbuildings from the third quarter of 2016 to the third quarter of 2017. Four of these newbuilding vessels, each scheduled to be delivered in 2017, do not yet have employment arranged. Charter rates remain subject to further downside risks, including in the event of increased weakness in the global economy and lower demand for the seaborne transport of LPG, which may result from lower oil prices and reduced supply from lower oil and natural gas production.

With regard to the vessels in the spot market, we are exposed to changes in spot rates for LPG carriers and such changes affect our earnings and the value of our LPG carriers at any given time. When LPG vessel prices are considered to be low, companies not usually involved in shipping may make speculative vessel orders, thereby increasing the global supply of LPG carriers, satisfying demand sooner and potentially suppressing charter rates. With regard to the four tankers in our fleet, one of our product carriers is on a fixed rate time charter expiring in July 2016 and two of the product carriers are deployed on fixed rate bareboat charters expiring in 2017 and 2019, while the Aframax tanker is deployed on a fixed rate bareboat charter that expires in 2018, which has limited our exposure to fluctuations in charter rates for these vessels. However they will be exposed to prevailing charter rates in the product tanker sector when their existing charters expire.

 

   

Seasonality. The LPG carrier market is typically stronger in the fall and winter months in anticipation of increased consumption of propane and butane for heating during the winter months. In addition, unpredictable weather patterns in these months tend to disrupt vessel scheduling and supplies of certain commodities. As a result, our revenues may be stronger in fiscal quarters ending December 31 and March 31 and relatively weaker during the fiscal quarters ending June 30 and September 30, as was the case in 2013, 2014 and 2015. We have limited exposure to seasonality with respect to our product carriers and Aframax tanker as these are deployed on long term or medium term fixed rate charters.

Our ability to control our fixed and variable expenses, including those for commission expenses, crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses also affect our financial results. Factors beyond our control, such as developments relating to market premiums for insurance and the value of the U.S. dollar compared to currencies in which certain of our expenses, primarily crew wages, are denominated can also cause our vessel operating expenses to increase. In addition, our net income is affected by our financing arrangements, including our interest rate swap arrangements.

Basis of Presentation and General Information

Revenues

Our voyage revenues are driven primarily by the number of vessels in our fleet, the number of voyage days during which our vessels generate revenues and the amount of daily charter hire that our vessels earn under charters which, in turn, are affected by a number of factors, including our decisions relating to vessel acquisitions and disposals, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend in dry dock undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our vessels and the levels of supply and demand in the LPG carrier, product carrier and crude oil tanker charter markets.

 

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We employ our vessels under time, bareboat and spot charters. Bareboat charters provide for the charterer to bear the cost of operating the vessel and as such typically market rates for bareboat charters are lower than those for time charters. Vessels operating on period charters, principally time and bareboat charters, provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot charter market during periods characterized by favorable market conditions. As a result, during the time our vessels are committed on period charters we will be unable, during periods of improving charter markets, to take advantage of improving charter rates as we could if our vessels were employed only on spot charters. Vessels operating in the spot charter market generate revenues that are less predictable but may enable us to capture increased profit margins during periods of improving charter rates, although we are then exposed to the risk of declining LPG carrier, product carrier or crude oil tanker charter rates, which may have a materially adverse impact on our financial performance. If we commit vessels on period charters, future spot market rates may be higher or lower than those rates at which we have time chartered our vessels.

Voyage Expenses

Voyage expenses include port and canal charges, bunkers (fuel oil) expenses and commissions. These charges and expenses increase in periods during which vessels are employed on the spot market, because under these charters, these expenses are for the account of the vessel owner. Under period charters, these charges and expenses, including bunkers (fuel oil) but excluding commissions which are always paid by the vessel owner, are paid by the charterer. Bunkers (fuel oil), the price of which has declined since the third quarter of 2014 as a result of the decline in oil prices, accounted for 48.7% of total voyage expenses for the year ended December 31, 2015, 53.6% of total voyage expenses for the year ended December 31, 2014 and 58.4% of total voyage expenses for the year ended December 31, 2013. Commissions on hire are paid to our manager Stealth Maritime and/or third party brokers. Stealth Maritime receives a fixed brokerage commission of 1.25% on freight, hire and demurrage for each vessel based on our management agreement since 2005. In 2015, port and canal charges and bunker expenses represented a relatively small portion of our vessels’ overall expenses, 9.8%, because the majority of our vessels were employed under period charters, including time and bareboat charters, that require the charterer to bear such expenses. As of April 1, 2016, we had 13 vessels in the spot market for which we pay voyage expenses; the corresponding number as of April 1, 2015 was ten and as of April 1, 2014 was five.

Vessel Operating Expenses

Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses for repairs and maintenance, the cost of spares and consumable stores, tonnage taxes and other miscellaneous expenses. Our ability to control these fixed and variable expenses, also affects our financial results. In addition, the type of charter under which our vessels are employed (time, bareboat or spot charter) also affects our operating expenses because we do not pay the operating expenses of vessels that we deploy on bareboat charters. Factors beyond our control, some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for insurance and regulations related to safety and environmental matters may also cause these expenses to increase.

Management Fees

During 2015, we paid Stealth Maritime, our fleet manager, a fixed rate management fee of $440 per day for each vessel in our fleet under spot or time charter and a fixed rate fee of $125 per day for each of the vessels operating on bareboat charter. These rates have been in effect since January 1, 2007. Stealth Maritime also receives a fee equal to 1.0% calculated on the price stated in the relevant memorandum of agreement for any vessel bought or sold by them on our behalf. From these management fees paid to Stealth Maritime, Stealth Maritime pays one technical manager that is responsible for the technical management of some of our vessels that are not technically managed by Stealth Maritime on a day-to-day basis.

 

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General and Administrative Expenses

We incur general and administrative expenses that consist primarily of legal fees, audit fees, office rental fees, officers and board remuneration or reimbursement, directors and officers insurance, listing fees and other general and administrative expenses. Our general and administrative expenses also include our direct compensation expenses and the value of non-cash executive services provided through, and other expenses arising from, our management agreement with Stealth Maritime, our directors’ compensation and the value of the lease expense for the space we rent from Stealth Maritime. For our compensation expenses, pursuant to our management agreement, we reimburse Stealth Maritime for its payment of the compensation of our Chief Executive Officer, Deputy Chairman and Executive Director, Chief Technical Officer, and Internal Auditor. During the year ended December 31, 2015, such compensation was in the aggregate amount of $1.1 million. We had $0.5 million of unrecognized stock-based compensation expense as of December 31, 2015, relating to equity awards issued to our executive officers and non-executive members of our Board of Directors in 2014. Of these equity awards, 50% vested in November 2015, 25% are scheduled to vest in November 2016 and 25% are scheduled to vest in November 2017. Such expenses will be recognized as general and administrative expenses over the vesting period until November 2017.

Inflation

Inflation has only a moderate effect on our expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase our operating, voyage, administrative and financing expenses.

Depreciation and Dry docking

We depreciate our vessels on a straight-line basis over their estimated useful lives, determined to be 30 years from the date of their initial delivery from the shipyard in the case of our LPG carriers and 25 years in the case of our product carriers and crude oil tanker. Depreciation is based on cost less the estimated scrap value of the vessels. We expense costs associated with dry dockings and special and intermediate surveys as incurred which may affect the volatility of our results. During 2015, we dry docked four vessels at a total cost of $1.8 million. We expect that during 2016 our dry docking costs will be higher, as seven vessels are scheduled to be dry docked in 2016.

Impairment Loss

Based on the accounting standards followed by the Company, impairment losses are recognized on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts and the asset’s carrying value exceeds its fair value. If indicators of impairment are present, the Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value and the difference is recorded as an impairment loss in the consolidated statements of income. For the year ended December 31, 2015, we recognized an impairment loss of $8.2 million with respect to three of our older vessels. In December 2014, the Company recognized an impairment loss of $6.2 million on two vessels scrapped within 2015. No impairment loss was identified or recorded for the year ended December 31, 2013.

Gain / Loss on Sale of Vessels

The carrying value of our vessels includes the original cost of the vessels plus capitalized expenses since acquisition relating to improvements and upgrading of the vessel, less accumulated depreciation and less any impairment. Depreciation is calculated using the straight line method, from the date the vessel was originally built, over an estimated useful life of 25 years for the tankers in our fleet and 30 years for the LPG carriers in our fleet. LPG carriers tend to trade for longer periods due to the less corrosive nature of the cargoes they carry. Residual values used in depreciation calculations are based on $350 per light weight ton.

 

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On January 21, 2016, we sold the Gas Arctic for which we recognized a gain of $0.3 million. On April 1, 2015, we sold the Gas Kaizen, while on April 16, 2015 we sold the Gas Crystal, both for demolition; we recognized a gain of $0.02 million and $0.01 million respectively on the sale of these two vessels. During the year ended December 31, 2014, we sold two vessels, the Gas Cathar and the Gas Premiership that were leased back by our Company on a bareboat hire basis for a period of four years. The aforementioned transaction is classified as a sale and lease back transaction and in accordance with US GAAP ASC, 840-40, the net gain on sale of vessels of $0.8 million must be amortized throughout the lease period of the vessels. During the year ended December 31, 2013, no vessels were sold.

Loss on Derivatives

Five of our seven interest rate swaps, as of December 31, 2015, are accounted for as cash flow hedges and the changes in their fair values are recorded in “Accumulated other comprehensive income/loss”, while the other two interest rate swaps expired in March 2016. All changes in the fair value of our cash flow interest rate swaps and foreign currency exchange agreements that are not accounted for as cash flow hedges, are recorded in earnings under “Loss on Derivatives.” To the extent we have interest rate swaps and foreign currency exchange agreements in this category, this increases the potential volatility in our reported earnings, in comparison to the case where such arrangements did qualify for hedge accounting, due to the recognition of non-cash fair value movements of our cash flow interest rate swaps and foreign currency exchange arrangements directly in our statement of income.

Interest Expense and Finance Costs

We have entered into credit facilities to fund a portion of the purchase price of the vessels in our fleet, which are described in the “Credit Facilities” section below. We incur interest expense on outstanding indebtedness under these credit facilities, which we include in interest expense. We also incurred financing costs in connection with establishing those facilities, which are deferred and amortized over the period of the facility, which we also include in interest expense. We will incur additional interest expenses under any new credit facilities we enter into to finance or refinance the purchase price of additional vessels as described in the “Liquidity and Capital Resources” section below.

Results of Operations

Year ended December 31, 2015 compared to the year ended December 31, 2014

The average number of vessels in our fleet was 48.8 for the year ended December 31, 2015 compared to 44.1 for the year ended December 31, 2014.

REVENUES—Voyage revenues for the year ended December 31, 2015 were $141.3 million compared to $132.0 million for the year ended December 31, 2014, an increase of $9.3 million. Total calendar days for our fleet were 18,541 for the year ended December 31, 2015 compared to 16,136 for the year ended December 31, 2014; due to the increase in the average number of vessels in our fleet. Of the total calendar days in 2015, 5,543 or 29.9% were bareboat charter days and 8,973 or 48.4% were time charter days. This compares to 5,201 or 32.2% bareboat charter days and 8,692 or 53.9% time charter days in 2014. Our fleet operational utilization was 92.5% and 93.3% for the years ended December 31, 2015 and December 31, 2014, respectively. Although rates have decreased, revenues increased in 2015 due primarily to the higher number of voyage days for our fleet.

VOYAGE EXPENSES—Voyage expenses were $17.6 million for the year ended December 31, 2015 compared to $14.1 million for the year ended December 31, 2014, an increase of $3.5 million, or 24.8%. This was primarily due the higher number of vessels operating under spot charters. Voyage expenses consisted largely of bunker charges in the amount of $8.6 million for 2015 compared to bunker charges in the amount of $7.6 million for 2014, an increase of $1.0 million, due to the increase in the number of spot charter days. Under spot

 

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charters we are responsible for paying the vessels’ bunkers consumption, as well as most expenses. Voyage expenses also included port expenses of $4.0 million for the year ended December 31, 2015 compared to $2.3 million for the year ended December 31, 2014, an increase of $1.7 million and commissions to third parties which were $2.4 million for the year ended December 31, 2015 compared to $2.1 million for the year ended December 31, 2014, an increase of $0.3 million.

VESSEL OPERATING EXPENSES—Vessel operating expenses were $50.7 million for the year ended December 31, 2015 compared to $45.4 million for the year ended December 31, 2014, an increase of $5.3 million, or 11.7%. The main reason for this increase was the higher number of vessels in the fleet, as ten new vessels were added to our fleet. Other components of vessel operating expenses were spares and consumable stores, which increased from $7.1 million in the year ended December 31, 2014 to $8.0 million in the year ended December 31, 2015 while repairs and maintenance costs were $5.2 million in the year ended December 31, 2014 compared to $5.1 million in the year ended December 31, 2015.

DRY DOCKING COSTS—Dry docking costs were $1.8 million for the year ended December 31, 2015 compared to $0.5 million for the year ended December 31, 2014, an increase of $1.3 million, or 260%. Dry docking costs increased due to a higher number of vessels having to undergo dry docking inspections in the year ended December 31, 2015 compared to the number of vessels that underwent dry docking inspections in the year ended December 31, 2014. For the year ended December 31, 2015, four vessels were dry docked compared to one vessel for the year ended December 31, 2014.

MANAGEMENT FEES—Management fees were $6.5 million for the year ended December 31, 2015 compared to $5.5 million for the year ended December 31, 2014, an increase of $1.0 million or 18.2%. The increase was due to the higher average number of vessels in the fleet; 48.8 for the year ended December 31, 2015 compared to 44.1 for the year ended December 31, 2014. The daily management fees per vessel did not change during these periods. For the year ended December 31, 2015, 69.6% of our total calendar days related to vessels under time or spot charter while for the year ended December 31, 2014, 67.8% related to vessels under time or spot charter. Accordingly, both the total number of calendar days due to the increase in the average size of our fleet and the number of time and spot charter days, for each of which the higher rate of $440 per vessel per day management fee was paid, compared to bareboat charter days, for which the lower $125 per vessel per day management fee was paid, increased in 2015 from 2014. As a result of the above, management fees increased.

GENERAL AND ADMINISTRATIVE EXPENSES—General and administrative expenses for the year ended December 31, 2015 were $3.7 million compared to $3.2 million for the year ended December 31, 2014, an increase of $0.5 million or 15.6%. Included in the general and administrative expenses for the years ended December 31, 2015 and December 31, 2014 are $1.1 million and $1.3 million, respectively, paid to our manager for the services of the Company’s executive officers pursuant to our management agreement.

DEPRECIATION—Depreciation expenses for the 48.8 average number of vessels in our fleet for the year ended December 31, 2015 were $35.9 million compared to $33.8 million for the 44.1 average number of vessels in our fleet for the year ended December 31, 2014 an increase of $2.1 million, or 6.2%. The increase is due to the higher average number of vessels in our fleet in the 2015 period.

IMPAIRMENT LOSS—During the year ended December 31, 2015, the Company recognized an impairment loss of $8.2 million, while for the year ended December 31, 2014 the Company recognized an impairment loss of $6.2 million.

NET GAIN ON SALE OF VESSELS—During the year ended December 31, 2015 we sold two of our oldest vessels, the Gas Kaizen and the Gas Crystal for demolition. The net gain on the sale of these vessels was $33.3 thousands. During the year ended December 31, 2014, we sold two vessels, the Gas Cathar and the Gas Premiership, that were leased back by our Company on a bareboat hire basis for a period of four years. The aforementioned transaction is classified as a sale and lease back transaction and in accordance with US GAAP

 

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ASC, 840-40, the net gain on sale of vessels of $0.8 million, is amortized throughout the lease period of the vessels. Amortization of deferred gain on sale and leaseback of the vessels for the year ended December 31, 2015 was $0.2 million and is included in Charter hire expenses in the consolidated statements of income.

INTEREST AND FINANCE COSTS—Interest and finance costs were $10.4 million for the year ended December 31, 2015 compared to $9.3 million for the year ended December 31, 2014, an increase of $1.1 million, or 11.8%. The increase in interest and finance cost was mainly due to an increase in loan interest expenses as a result to increase in our leverage.

LOSS ON DERIVATIVES—Included in the results for the year ended December 31, 2015 are net losses from interest rate derivative instruments and foreign currency hedging arrangements of $0.4 million. Interest paid on interest rate swap arrangements amounted to $1.4 million for the year ended December 31, 2015, compared to $1.9 million for the year ended December 31, 2014 and net gains from change in fair value of the same arrangements amounted to $1.2 million for the year ended December 31, 2015 compared to $1.7 million for the year ended December 31, 2014.

INTEREST INCOME—Interest income was $0.2 million for the year ended December 31, 2015 compared to $0.5 million for the year ended December 31, 2014, a decrease of $0.3 million, related mostly to lower interest on deposits offered by financial institutions.

NET INCOME—As a result of the above factors, we recorded a net income of $2.6 million for the year ended December 31, 2015, compared to net income of $12.7 million for the year ended December 31, 2014.

Year ended December 31, 2014 compared to the year ended December 31, 2013

The average number of vessels in our fleet was 44.1 in the year ended December 31, 2014 compared to 39.4 in the year ended December 31, 2013.

REVENUES—Voyage revenues for the year ended December 31, 2014 were $132.0 million compared to $121.5 million for the year ended December 31, 2013, an increase of $10.5 million. Total calendar days for our fleet were 16,136 in the year ended December 31, 2014 compared to 14,399 for the year ended December 31, 2013; the difference was due to the increase in the average number of vessels in our fleet. Of the total calendar days in 2014, 5,201, or 32.2% were bareboat charter days and 8,692, or 53.9% were time charter days. This compares to 4,944, or 34.3%, bareboat charter days and 6,952, or 48.3%, time charter days in 2013. Our fleet operational utilization was 93.3% and 92.3% for the years ended December 31, 2014 and December 31, 2013 respectively. Although rates have decreased, revenues increased in 2014 due primarily to the higher number of calendar days for our fleet.

VOYAGE EXPENSES—Voyage expenses were $14.1 million for the year ended December 31, 2014 compared to $14.3 million for the year ended December 31, 2013, a decrease of $0.2 million, or 1.4%. This was primarily due the lower number of vessels operating under spot charters. Voyage expenses consisted largely of bunker charges in the amount of $7.6 million for 2014 compared to bunker charges in the amount of $8.3 million for 2013, a decrease of $0.7 million, due to the decrease in the number of spot charter days. Under spot charters we are responsible for paying the vessels’ bunkers consumption, as well as most expenses. Voyage expenses also included port expenses of $2.3 million for the year ended December 31, 2014 compared to $2.1 million for the year ended December 31, 2013, an increase of $0.2 million and commissions to third parties which were $2.1 million for the year ended December 31, 2014 compared to $1.8 million for the year ended December 31, 2013, an increase of $0.3 million.

VESSEL OPERATING EXPENSES—Vessel operating expenses were $45.4 million for the year ended December 31, 2014 compared to $36.5 million for the year ended December 31, 2013, an increase of $8.9 million, or 24.4%. The main reason for this increase was the higher number of vessels in the fleet, as five new

 

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vessels were added and two more vessels came off bareboat charters and were operated under time charters during 2014. Other components of vessel operating expenses were spares and consumable stores, which increased from $5.8 million in the year ended December 31, 2013 to $7.1 million in the year ended December 31, 2014, while repairs and maintenance costs were $5.2 million in the year ended December 31, 2014 compared to $4.2 million in the year ended December 31, 2013.

DRY DOCKING COSTS—Dry docking costs were $0.5 million for the year ended December 31, 2014 compared to $ 3.2 million for the year ended December 31, 2013, a decrease of $2.7 million, or 84.4%. Dry docking costs decreased due to a lower number of vessels having to undergo dry docking inspections in the year ended December 31, 2014 compared to the number of vessels that underwent dry docking inspections in the year ended December 31, 2013. For the year ended December 31, 2014, one vessel was dry docked compared to seven vessels for the year ended December 31, 2013.

MANAGEMENT FEES—Management fees were $5.5 million for the year ended December 31, 2014 compared to $4.8 million for the year ended December 31, 2013, an increase of $0.7 million or 14.6%. The increase was due to the higher average number of vessels in the fleet; 44.1 for the year ended December 31, 2014 compared to 39.4 for the year ended December 31, 2013. The daily management fees per vessel did not change during these periods. For the year ended December 31, 2014, 67.8% of our total calendar days related to vessels under time or spot charter while for the year ended December 31, 2013, 65.7% related to vessels under time or spot charter. Accordingly, both the total number of calendar days due to the increase in the average size of our fleet and the number of time and spot charter days, for each of which the higher $440 per vessel per day management fee was paid, compared to bareboat charter days, for which the lower $125 per vessel per day management fee was paid, increased in 2014 from 2013. As a result of the above, management fees increased.

GENERAL AND ADMINISTRATIVE EXPENSES—General and administrative expenses for the year ended December 31, 2014 were $3.2 million compared to $2.8 million for the year ended December 31, 2013, an increase of $0.4 million or 14.3%. Included in the general and administrative expenses for the years ended December 31, 2014 and December 31, 2013 are $1.3 million and $1.2 million, respectively, paid to our manager for the services of the Company’s executive officers pursuant to our management agreement.

DEPRECIATION—Depreciation expenses for the 44.1 average number of vessels in our fleet for the year ended December 31, 2014 were $33.8 million compared to $30.8 million for the 39.4 average number of vessels in our fleet for the year ended December 31, 2013, an increase of $3.0 million, or 9.7%. The increase is due to the higher average number of vessels in our fleet in the 2014 period.

IMPAIRMENT LOSS—During the year ended December 31, 2014, the Company recognized an impairment loss of $6.2 million on vessels planned to be scrapped within 2015. No impairment loss was recognized in 2013.

NET GAIN ON SALE OF VESSELS—During the year ended December 31, 2014, we sold two vessels, the Gas Cathar and the Gas Premiership, that were leased back by our Company on a bareboat hire basis for a period of four years. The aforementioned transaction is classified as a sale and lease back transaction and in accordance with US GAAP ASC, 840-40, the net gain on sale of vessels of $0.8 million, will be amortized throughout the lease period of the vessels. Amortization of deferred gain on sale and leaseback of the vessels for the year ended December 31, 2014 was $0.005 million and is included in Charter hire expenses in the consolidated statement of income.

INTEREST AND FINANCE COSTS—Interest and finance costs were $ 9.3 million for the year ended December 31, 2014 compared to $8.2 million for the year ended December 31, 2013, an increase of $1.1 million, or 13.4%. The increase in interest and finance cost was mainly due to an increase in commitment costs relating to the financing arranged for vessels that are currently under construction.

 

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LOSS ON DERIVATIVES—Included in the results for the year ended December 31, 2014 are net losses from interest rate derivative instruments and foreign currency hedging arrangements of $ 1.3 million. Interest paid on interest rate swap arrangements amounted to $1.9 million for the year ended December 31, 2014, compared to $2.8 million for the year ended December 31, 2013 and net gains from change in fair value of the same arrangements amounted to $1.7 million for the year ended December 31, 2014 compared to $2.8 million for the year ended December 31, 2013.

INTEREST INCOME—Interest income was $0.5 million for the year ended December 31, 2014, compared to $0.4 million for the year ended December 31, 2013, an increase of $0.1 million, related to higher average cash balances on deposit throughout the year ended December 31, 2014 compared to the year ended December 31, 2013.

NET INCOME—As a result of the above factors, we recorded a net income of $12.7 million for the year ended December 31, 2014, compared to net income of $21.2 million for the year ended December 31, 2013.

A. Liquidity and Capital Resources

As of December 31, 2015, we had cash and cash equivalents of $100.1 million and $13.5 million in restricted cash classified as current assets.

Our principal sources of funds for our liquidity needs are cash flows from operations and long-term bank borrowings. Additional sources of funds include proceeds from vessel sales and equity offerings.

We had net proceeds of $2.0 million from vessel sales in 2015 and $27.9 million in 2014. We sold the Gas Arctic on January 21, 2016 from which we received net proceeds of $1.1 million. We raised capital through a follow-on public common stock offering in the second quarter of 2013 with net proceeds of $109.1 million and in 2014 through three registered common stock offerings with net proceeds of approximately $112.3 million. Our principal use of funds has been to acquire our vessels, maintain the quality of our vessels, service our debt and fund working capital requirements, as well to repurchase shares of our common stock as described below.

Our liquidity needs, as of December 31, 2015 through the end of 2016, primarily relate to scheduled debt repayments, funding expenses for operating our vessels, general and administrative expenses and capital expenditures related to the acquisition of two LPG carriers. Generally, our primary sources of funds, in the short term, have been cash from operating activities, and, in the long term, bank borrowings and equity financings. As of April 1, 2016 we had already taken the delivery of one LPG carrier. We expect to fund the remaining purchase price of $18.6 million for one newbuilding vessel scheduled to be delivered in the third quarter of 2016, with available cash and borrowings under a new credit facility for which we have a commitment letter. Beyond 2016, our liquidity needs will additionally include capital expenditures for the remaining balance of the purchase price of four additional LPG carrier newbuildings which amounts to approximately $145.8 million.

As of December 31, 2015, we had paid a total of $44.0 million in deposits for six LPG carrier newbuildings which had a $208.2 million remaining purchase price. The aforementioned amount is payable in the amount of $62.4 million in 2016 and $145.8 million in 2017. From January 1, 2016 to April 1, 2016, we took delivery of one newbuilding eco LPG carrier and paid $4.0 million from cash on hand and $15.6 million from new bank borrowings. We expect to fund the remaining amount of the purchase price for the remaining newbuildings through existing and internally generated funds and new credit facilities. As of April 1, 2016 we had obtained commitment letters or entered into loan agreements for three of our newbuildings while for the remaining two we had a signed loan term sheet in respect of which the commitment of the funds is in the process of bank credit committee approval. The total amount under the aforementioned committed loans is up to $92.5 million and under the loans for which we have a term sheet subject to credit committee approval expected to be up to $76.0 million, in each case depending on the vessels’ employment and market value at the time of their respective deliveries in 2016 and 2017.

 

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As of December 31, 2015, our aggregate debt outstanding net of capitalized arrangement fees was $422.2 million, of which $74.9 million was payable within 12 months. This amount includes a balloon payment of approximately $24.6 million which may be refinanced within 2016. We believe our working capital is sufficient for our present short-term liquidity requirements. If there is a major and sustained downturn in market conditions applicable to our specific shipping industry segment our ability to draw down the full amount of certain of our committed credit facilities may be restricted. These facilities contain restrictions on the amount of cash that can be advanced to us based on the market value, or in some cases employment, of the vessel in respect of which the advance is being made. We believe our internally generated cash flows and the borrowings under already arranged credit facilities will be sufficient to fund our operations, including working capital requirements, for at least 12 months taking into account our existing capital commitments and debt service requirements.

For a description of our credit facilities please refer to the discussion under the heading “—Credit Facilities” below.

On November 26, 2014, we publicly announced that our Board of Directors had authorized the repurchase of up to $10,000,000 of shares of our common stock and on February 26, 2015 we publicly announced that our Board of Directors had approved an additional $20,000,000 of common stock repurchases. There is no fixed time period for this repurchase program. As of April 1, 2016, 3,859,297 shares of common stock had been repurchased for an aggregate of $20.2 million. Our dividend policy will also affect our liquidity position. See “Item 8. Financial Information—Dividend Policy.”

Cash Flows

Net cash provided by operating activities—was $48.1 million for the year ended December 31, 2015, $55.2 million for the year ended December 31, 2014, and $49.1 million for the year ended December 31, 2013. This represents the net amount of cash, after expenses, generated by chartering our vessels. The decrease in net cash provided by operating activities in 2015 was mainly due to the lower net income as a result of increased voyage and operating costs due to our fleet expansion and the decline in freight rates that took place in 2015. The increase in net cash provided by operating activities in 2014 was mainly due to the increase in revenues (net of voyage expenses) generated by operations due to the higher number of vessels in our fleet and the decrease in the drydocking costs which amounted to $3.2 million in 2013, and $0.5 million in 2014 and corresponding to one vessel being drydocked in 2014, compared to seven vessels drydocked in 2013.

Net cash used in investing activities—was $165.0 million for the year ended December 31, 2015, $91.1 million for the year ended December 31, 2014 and $119.8 million for the year ended December 31, 2013. During 2015, we acquired ten LPG vessels, the Eco Lucidity, the Eco Enigma, the Eco Galaxy, the Eco Universe, the Eco Royalty, the Eco Loyalty, the Eco Dream, the Eco Green, the Eco Nemesis and the Eco Czar, for which we paid a total of $149.9 million. In addition to payments related to vessel deliveries for 2015, during the aforementioned year we paid an amount of $5.2 million as advances for the five vessels expected to be delivered in the years 2016 and 2017. With regards to the sale of vessels, during 2015 we sold two of our oldest vessels, the Gas Kaizen and the Gas Crystal, for demolition, with net sale proceeds of $2.0 million. During 2014, we acquired five LPG vessels, the Eco Stream, the Eco Chios, the Eco Invictus, the Eco Elysium, and the Eco Corsair, for which we paid $81.6 million. During 2014 we also agreed to acquire sixteen newbuildings for which we paid advances of $48.4 million. During 2014 we sold two vessels, the Gas Cathar and Gas Premiership, with net proceeds of $27.9 million and we had net proceeds related to the cancellation of vessels acquisition amounting to $10.0 million. During 2013, outflows of $73.2 million reflect payments to the shipyard for the delivery of the Gas Enchanted, the Gas Alice, the Gas Inspiration, the Gas Ethereal, and the Sakura Symphony, while $51.2 million was paid as a deposit for the acquisition of 11 newbuilding vessels under construction.

Net cash provided by financing activities—was $87.9 million for the year ended December 31, 2015 consisting mainly of $155.1 million in proceeds from long-term debt while $55.9 million in loan repayments of which $42.4 million were regular loan installments and $13.5 million was a voluntary repayment of an existing

 

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credit facility. In addition, in the year ended December 31, 2015, $13.4 million was spent in relation to the Company’s stock repurchase program. Net cash provided by financing activities was $79.0 million for the year ended December 31, 2014 consisting mainly of $112.3 million net proceeds from common stock issuances, $47.9 million in loan proceeds for the acquisition of five vessels and $75.3 million in loan repayments of which $42.5 million were regular loan installments, $13.8 million were repayments related to the sale of vessels in 2014 and $19.0 million was a voluntary repayment of an existing credit facility. Net cash provided by financing activities was $114.6 million for the year ended December 31, 2013 consisting principally of $109.1 million net proceeds from common stock issuance, $45.2 million in bank loan proceeds for the acquisition of five vessels and $37.7 million in loan repayments under existing facilities.

As and when we identify assets that we believe will provide attractive returns, we generally enter into specific term loan facilities and borrow amounts under these facilities as the vessels are delivered to us. This is the primary driver of the timing and amount of cash provided to us by our financing activities, however, from time to time to bolster our cash position and take advantage of financing opportunities, including to refinance the acquisition cost of vessels acquired earlier, we have entered into and may in the future borrow under credit facilities secured by previously unencumbered vessels in our then-existing fleet.

Credit Facilities

We, and certain of our subsidiaries, have entered into a number of credit facilities in connection with financing the acquisition of certain vessels in our fleet. The following summarizes certain terms of our credit facilities under which we had aggregate outstanding indebtedness of $422.2 million, as of December 31, 2015 which is reflected in our balance sheet as “Long-term debt” and “Current portion of long-term debt.” For a description of our credit facilities also see Note 11 to our consolidated financial statements included elsewhere in this report.

 

Credit Facility

Issue Date

   Outstanding
Principal
Amount (in
millions)
     Maturity    Installment
Frequency
   Installment
Amount (in
millions)
     Balloon
(in
millions)
     Mortgaged
Vessels

December 5, 2005

   $ 8.8       Mar 2016    Semi-Annual    $ 2.51       $ 8.8       Gas Marathon, Gas
Sincerity, Gas
Legacy, Gas
Monarch, Gas
Flawless

June 6, 2006

   $ 1.3       Jun 2016    Semi-Annual    $ 0.24       $ 1.05       Gas Pasha

June 21, 2007

   $ 17.5       Dec 2017    Semi-Annual    $ 1.54       $ 11.33       Navig8 Fidelity

July 30, 2008

   $ 19.7       Nov 2020    Semi-Annual    $ 0.97       $ 9.97       Gas Defiance, Gas
Shuriken

February 12, 2008

   $ 19.4       Feb 2020    Quarterly    $ 0.63       $ 9.4       Navig8 Faith

October 9, 2008

   $ 7.9       Oct 2020    Semi-Annual    $ 0.39       $ 3.97       Gas Sikousis

April 14, 2014

   $ 17.1       Apr 2020    Quarterly    $ 0.55       $ 9.60       Gas Astrid, Gas
Exelero, Gas Galaxy

April 16, 2014

   $ 25.7       Apr 2020    Quarterly    $ 0.83       $ 13.2       Gas Haralambos,
Gas Spirit, Eco
Lucidity

 

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Credit Facility

Issue Date

   Outstanding
Principal
Amount (in
millions)
     Maturity      Installment
Frequency
   Installment
Amount (in
millions)
     Balloon
(in
millions)
     Mortgaged
Vessels

January 30, 2009

   $ 27.2         Jul 2016       Quarterly    $ 0.85       $ 24.60       Spike, Gas Zael

February 1, 2011

   $ 11.3         Mar 2018       Quarterly    $ 0.28       $ 8.80       Gas Elixir
   $ 11.5         Apr 2018       Quarterly    $ 0.28       $ 8.70       Gas Cerberus
   $ 11.8         Sept 2018       Quarterly    $ 0.28       $ 8.80       Gas Myth

March 1, 2011

   $ 16.1         Jan 2020       Quarterly    $ 0.38       $ 9.75       Gas Husky
   $ 16.3         Jun 2020       Quarterly    $ 0.38       $ 9.50       Gas Esco

September 23, 2013

   $ 33.8         Sept 2020       Quarterly    $ 1.26       $ 11.11       Gas Ethereal, Gas
Alice, Gas
Enchanted, Gas
Inspiration, Gas
Imperiale

March 24, 2014

   $ 15.3         Mar 2021       Quarterly    $ 0.63       $ 8.33       Eco Stream
   $ 15.3         Jun 2021       Quarterly    $ 0.63       $ 8.33       Eco Chios
   $ 15.9         Jul 2022       Quarterly    $ 0.54       $ 8.33       Eco Galaxy

June 12, 2014

   $ 12.1         Oct 2020       Quarterly    $ 0.22       $ 7.72       Eco Invictus

June 20, 2014

   $ 9.6         Jan 2023       Quarterly    $ 0.17       $ 4.64       Eco Corsair
   $ 10.3         Jan 2023       Quarterly    $ 0.19       $ 4.93       Eco Elysium

July 29, 2014

   $ 12.4         Jul 2023       Quarterly    $ 0.26       $ 4.23       Eco Enigma
   $ 12.4         Jul 2023       Quarterly    $ 0.26       $ 4.23       Eco Universe

July 4, 2014

   $ 11.17         Aug 2021       Quarterly    $ 0.20       $ 6.50       Eco Czar
   $ 11.17         Sep 2021       Quarterly    $ 0.20       $ 6.50       Eco Nemesis

December 20, 2013

   $ 15.75         Sep 2022       Quarterly    $ 0.25       $ 9.00       Eco Dream
   $ 15.75         Sep 2022       Quarterly    $ 0.25       $ 9.00       Eco Green

December 24, 2015

   $ 11.2         Dec 2022       Quarterly    $ 0.19       $ 5.97       Eco Royalty
   $ 11.2         Dec 2022       Quarterly    $ 0.19       $ 5.97       Eco Loyalty

The interest rates on the outstanding loans as of December 31, 2015 are based on Libor plus a margin which varies from 0.70% to 3.00%. The average interest rates (including the margin) on the above outstanding loans were 2.67% for the year ended December 31, 2015 and 2.28% for the year ended December 31, 2014. As of December 31, 2015, $92.2 million of our outstanding loans were covered by the interest rate swap agreements paying fixed rates ranging from 1.52% to 4.73% and received floating rates based on LIBOR.

As of April 1, 2016, fourteen of our vessels, the Gas Evoluzione, the Gas Texiana, the Stealth Bahla, the Gas Emperor, the Gas Ice, the Gas Moxie, the Gas Icon, the Gas Prodigy, the Gas Nirvana, the Gas Flawless, the Gas Legacy, the Gas Monarch, the Gas Marathon and the Gas Sincerity were unencumbered.

Other than amounts to be drawn down under the new credit facilities for the partial financing of the five LPG vessels under construction, as further described below, we had no other undrawn borrowing capacity under our existing credit facilities.

As of April 1, 2016, we had a commitment letter for a credit facility of up to $18.0 million to partially finance our newbuilding LPG carrier scheduled for delivery in 2016, a commitment letter for credit facilities of

 

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up to $74.5 million to partially finance two of our 22,000 cbm LPG carrier newbuildings scheduled to be delivered in 2017, and obtained a term sheet from an international lender, which remains subject to credit committee approval, for credit facilities of up to $76.0 million to partially finance our other two 22,000 cbm LPG carrier newbuildings scheduled to be delivered in 2017, or in each case a lesser amount depending on the vessels’ employment and market value at the time of their respective deliveries. In addition to a first priority mortgage over the vessels being financed, the term loans are expected to be secured by the assignment of the respective vessels’ insurances, earnings, operating and retention accounts and the guarantee of the ship owning subsidiaries. The credit facilities are expected to contain similar events of default and financial covenants as those contained in our other credit facilities.

Financial Covenants

Our credit facilities contain financial covenants requiring us to:

 

   

ensure that our leverage, which is defined as total debt net of cash/total market adjusted assets, does not at any time exceed 80%;

 

   

maintain a ratio of the aggregate market value of the vessels securing the loan to the principal amount outstanding under such loan (which we sometimes refer to as the value maintenance or security coverage clause) at all times in excess of a range from 125% to 130% depending on our different loan agreements;

 

   

ensure that our ratio of EBITDA to interest expense over the preceding twelve months is at all times more than 2.5 times; and

 

   

to maintain on a monthly basis a cash balance of a proportionate amount of the next installment and relevant interest plus a minimum aggregate cash balance of $5,146,877 in the earnings account with the relevant banks.

We are also required to maintain at the end of each quarter a free cash balance of $10,000,000.

Our current loan agreements also require that our Chief Executive Officer, Harry Vafias, together with his immediate family, at all times own at least 10% of our outstanding capital stock and certain of our loan agreements provide that it would be an event of default if Harry Vafias ceased to serve as an executive officer or director of our company, Harry Vafias, together with his immediate family, ceased to control our company or any other person or group controlled 25% or more of the voting power of our outstanding capital stock. In addition, our loan agreements include restrictions on the payment of dividends in amounts exceeding 50% of our free cash flow in any rolling 12-month period.

Our existing credit facility agreements contain customary events of default with respect to us and our applicable subsidiaries, including upon the non-payment of amounts due under the credit facility; breach of covenants; matters affecting the collateral under such facility; insolvency proceedings and the occurrence of any event that, in light of which, the lender considers that there is a significant risk that the borrowers are, or will later become, unable to discharge their liabilities as they fall due.

Our credit facilities provide that upon the occurrence of an event of default, the lenders may require that all amounts outstanding under the credit facility be repaid immediately and terminate our ability to borrow under the credit facility and foreclose on the mortgages over the vessels and the related collateral. Our credit facilities also contain cross-default clauses.

B. Research and Development, Patents and Licenses

None

 

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C. Trend Information

Our results of operations depend primarily on the charter hire rates that we are able to realize. In turn, charter rates are determined by the underlying balance in demand and supply for our vessels. Demand for LPG transportation is influenced by various global economic factors and trade patterns, while the supply is primarily a factor of the fleet growth, determined by the number of vessels in the order book entering the fleet and the number of vessels exiting the fleet, primarily sold for demolition. As a result, the LPG shipping sector has been a highly cyclical industry experiencing volatility in charter hire rates and vessel values.

After increasing throughout 2007 and into 2008, charter rates for small LPG carriers declined in the second half of 2008 and in 2009 as a result of slowdown in the world economy. Although there had been some improvement from the fourth quarter of 2011 to the third quarter of 2014, charter rates have since declined due largely to the dramatic decline in oil prices and rates remain well below levels reached in 2007 and 2008 and could further decline. Future growth in the demand for LPG carriers and charter rates will depend on economic growth in the world economy and demand for LPG product transportation that exceeds the capacity of the growing worldwide LPG carrier fleet’s ability to match it. Global financial conditions remain volatile and demand for LPG transportation may decrease in the future. We believe that the future growth in demand for LPG carriers and the charter rate levels will depend primarily upon the supply and demand for LPG particularly in the economies of the Middle East where large quantities are produced and the Far East, and upon seasonal and regional changes in demand and changes to the capacity of the world fleet. The capacity of the world shipping fleet appears likely to increase in the near term, although growth in the LPG sector of 3,000 to 8,000 cbm small LPG carriers is expected to be relatively limited in 2016 and 2017.

As a result of the volatility and rate declines witnessed in the overall shipping markets during the past few years and the global financial conditions credit to finance vessel acquisitions has become scarcer. Companies in the shipping sector generally depend on credit facilities, among other, to finance their acquisitions. Scarcity of credit facilities may impede our ability to grow our fleet. During 2015 we acquired 10 LPG carriers; for all these vessels we had arranged for credit facilities and used them to pay for a portion of the acquisition cost. As of April 1, 2016 we have five LPG carriers that are currently under construction. We have committed credit facilities for three of these vessels while for two of them we have a signed credit term sheet for which the loan commitment is currently under the credit approval process.

D. Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

E. Contractual Obligations

Contractual obligations as of December 31, 2015 were:

 

     Payments due by period (in thousands)  
     Total      Less than 1
year (2016)
     1-3 years
(2017-2018)
     3-5 years
(2019-2020)
     More than
5 years
(After
January 1,
2021)
 

Long-term debt obligations

   $ 424,660       $ 75,547       $ 107,714       $ 135,308       $ 106,091   

Interest on principal amounts outstanding(1)

   $ 55,932       $ 12,175       $ 21,416       $ 15,647       $ 6,694   

Interest on interest rate swap arrangements outstanding(1)

   $ 2,166       $ 1,148       $ 858       $ 191       ($ 31

Management fees(2)

   $ 11,021       $ 7,347       $ 3,674         —           —     

Operating lease

   $ 12,648       $ 4,320       $ 8,328         —           —     

Vessel purchase commitments

   $ 208,189       $ 62,365       $ 145,824         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 714,616       $ 162,902       $ 287,814       $ 151,146       $ 112,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) Based on assumed 3M LIBOR rates of 0.62% for 2016, 0.98% for 2017, 1.24% for 2018, 1.46% for 2019, 1.66% for 2020 and 1.87% thereafter and assumed 6M LIBOR rates of 0.70% for 2016, 1.01% for 2017, 1.27% for 2018, 1.49% for 2019, 1.69% for 2020 and 1.90% thereafter, and the effect of our interest rate swap arrangements.
(2) Based on our management agreement with Stealth Maritime, we pay it $125 per vessel per day for vessels on bareboat charter and $440 per vessel per day for vessels not on bareboat charter for our existing fleet (but excluding our contracted vessels). We also pay 1.25% of the gross freight, demurrage and charter hire collected from employment of our ships and 1.0% of the contract price of any vessels bought or sold on our behalf.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those that reflect significant judgments or uncertainties, and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies that involve a high degree of judgment and the methods of their application. For a description of all of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere herein.

Impairment or disposal of long-lived assets: We follow the Accounting Standards Codification (“ASC”) Subtopic 360-10, “Property, Plant and Equipment” (“ASC 360-10”), which requires long-lived assets used in operations be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We perform an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets in connection, with our performance of an annual review on December 31 and whenever indicators of impairment are present. If the carrying value of the related asset exceeds the undiscounted cash flows and the fair market value of the asset, the carrying value is reduced to its fair value and the difference is recorded as an impairment loss in the consolidated statement of comprehensive income.

We review certain indicators of potential impairment, such as undiscounted projected operating cash flows, vessel sales and purchases, business plans and overall market conditions including any regulatory changes that may have a material impact on the vessel lives. The decline in the values of some of the vessels included in our LPG fleet and the decline in the global economy were considered to be indicators of potential impairment. As of December 31, 2015, we performed step one, the undiscounted cash flow test as required by the ASC guidance. We determined undiscounted projected net operating cash flows for each vessel and compared it to the vessel’s carrying value. This assessment was made at the individual vessel level since separately identifiable cash flow information for each vessel was available. In developing estimates of future cash flows to be generated over remaining useful lives of the vessels, we made assumptions about the future, such as: (1) vessel charter rates, (2) vessel utilization rates, (3) vessel operating expenses, (4) dry docking costs, (5) vessel scrap values at the end of vessels’ remaining useful lives and (6) the remaining useful lives of the vessels. These assumptions were based on historical trends as well as future expectations in line with our historical performance and our expectations for future fleet utilization under our current fleet deployment strategy, vessel sales and purchases, and overall market conditions.

Projected cash flows were determined for the vessels by considering the revenues from existing charters for those vessels that have long term employment, and:

 

   

revenue estimates based on nine year historical average rates (base rate) for periods for which there is no charter in place for vessels of less than twenty years of age and,

 

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revenue estimates based on five year historical average rates for periods for which there is no charter in place for vessels of twenty years of age and above,

with an annual 1% revenue increase for both categories.

We also assumed an average annual inflation rate of 1.5% for operating expenses using as a base rate:

 

   

the actual operating expenses as per vessel for the year ended December 31, 2015 for the vessels of less than twenty years of age, and

 

   

the average operating expenses of the last five years for the vessels of twenty years of age and above.

Utilization rate was assumed to be:

 

   

94.0% for vessels of less than twenty years of age, and

 

   

actual five year historical average utilization rate for the vessels of twenty years of age and above.

Based on our historical experience and future expectations, we believe the use of different assumptions for these items depending on whether a vessel is less than 20 years old or 20 years old or more, provides a better estimate of the expected future chartering profile and associated operating expenses for vessels in these different age groups. Although we believe that the assumptions we use to calculate future cash flows are reasonable and appropriate, such assumptions are highly subjective. Based on these assumptions we determined that the undiscounted cash flows support each vessel’s carrying values as of December 31, 2015 with the exception of three of the oldest vessels of the fleet, the Gas Arctic, the Gas Ice, and the Gas Marathon. The undiscounted net operating cash flows of each of these vessels did not exceed the respective vessel’s carrying value. As a result, the Company identified and recorded an impairment loss of $ 8,238,987. As of December 31, 2014, the Company identified and recorded an impairment loss of $6,168,747.

Our impairment test exercise is highly sensitive to variances in future estimates of the time charter rates and useful life of vessels. Our current analysis, which involved also a sensitivity analysis by assigning possible alternative values to these inputs, indicates that there is no impairment of individual long lived assets.

The carrying values of our vessels may not represent their fair market value at any point in time since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings.

Sensitivity Analysis.

The impairment test is highly sensitive to variances in future charter rates. When we conducted the analysis of the impairment test as of December 31, 2015 we also performed a sensitivity analysis related to the future cash flow estimates. Set forth below is an analysis, as of December 31, 2015, of the percentage difference between the current average rates for our fleet compared with the base rates used in the impairment test as described above, as well as an analysis of the impact on our impairment analysis if we were to utilize the most recent five-year, three-year and one-year historical average rates, which shows the number of vessels whose carrying value would not have been recovered and the aggregate carrying value that would not have been recovered.

 

      Percentage
difference between
our average 2015
rates as compared
with base rates
   

 

5-year historical
average rate

    

 

3-year historical
average rate

    

 

1-year historical
average rate

 
     No of
vessels
     Amount
($ million)
     No of
vessels
     Amount
($ million)
     No of
vessels
     Amount
($ million)
 

LPG Carriers

     -8.87     —           —           —           —           —           —     

Product Carriers

     -26.76     —           —           —           —           2         5.8   

Aframax Tanker

     -7.87     —           —           —           —           —           —     

 

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Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, such assumptions are highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their current levels or whether they will improve by any significant degree. Charter rates may remain at relatively low levels for some time, or decline, which could adversely affect our revenue and profitability, and future assessments of vessel impairment.

Based on the carrying value of each of our vessels as of December 31, 2015 and what we believe the charter-free market values of each of our vessels was as of December 31, 2015, 20 of our 53 owned vessels in the water have current carrying values above their market values (24 of our 45 vessels in the water as at December 31, 2014). We believe that the aggregate carrying value of these vessels, assessed separately, exceeds their aggregate charter-free market value by approximately $54 million and $73 million as of December 31, 2015 and 2014, respectively. However, we believe that, with respect to these 20 vessels, except for the Gas Ice and Gas Marathon for which we recorded an impairment loss as of December 31, 2015 and Gas Arctic for which we recorded an impairment loss as of June 30, 2015, we will recover their carrying values at the end of their useful lives, based on their undiscounted cash flows.

We currently do not expect to sell any other of these vessels, or otherwise dispose of them, significantly before the end of their estimated useful life.

The Company’s estimates of market values assume that the vessels are all in good and seaworthy condition without need for repair and, if inspected, would be certified as being in class without recommendations of any kind. In addition, because vessel values are highly volatile, these estimates may not be indicative of either the current or future prices that the Company could achieve if it were to sell any of the vessels. The Company would not record an impairment charge for any of the vessels for which the fair market value is below its carrying value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel’s carrying amount is not recoverable. The Company believes that the undiscounted projected net operating cash flows over the estimated remaining useful lives for those vessels that have experienced declines in estimated market values below their carrying values exceed such vessels’ carrying values as of December 31, 2015, and accordingly has not recorded an impairment charge except for the impairment charge recorded for the vessels Gas Arctic, Gas Ice and Gas Marathon discussed above.

Vessel depreciation: We record the value of our vessels at their cost (which includes acquisition costs directly attributable to the vessel and expenditures made to prepare the vessel for its initial voyage) less accumulated depreciation. We depreciate our vessels on a straight-line basis over their estimated useful lives, estimated to be 25 to 30 years from date of initial delivery from the shipyard. We believe that a 30-year depreciable life is consistent with that of other gas vessel owners and reflects management’s intended use and a 25-year depreciable life is consistent with other product carrier vessel owners and reflects management’s intended use. Depreciation is based on cost less the estimated residual scrap value. An increase in the useful life of the vessel or in the residual value would have the effect of decreasing the annual depreciation charge and extending it into later periods. A decrease in the useful life of the vessel or in the residual value would have the effect of increasing the annual depreciation charge. No events or circumstances occurred in 2015 that would require us to revise estimates related to depreciation and such revisions are not expected to occur in the future.

G. Safe Harbor

See section “Forward-Looking Information” at the beginning of this annual report.

 

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Item 6. Directors, Senior Management and Employees

A. Directors, Senior Management and Employees

The following table sets forth, as of April 1, 2016, information for each of our directors and executive officers.

 

Name

  Age    

Positions

  Year
Became
Director
    Year
Director’s
Current
Term
Expires
 

Harry N. Vafias

    38      Chief Executive, Chief Financial Officer and Class III Director     2004        2018   

Michael G. Jolliffe

    66      Chairman of the Board, Class II Director     2004        2016   

Lambros Babilis

    48      Deputy Chairman and Class I Director     2007        2017   

Markos Drakos

    56      Class III Director     2006        2018   

John Kostoyannis

    50      Class II Director     2010        2016   

Certain biographical information about each of these individuals is set forth below.

Harry N. Vafias has been our President and Chief Executive Officer and a member of our Board of Directors since our inception in December 2004 and our Chief Financial Officer since January 2014. Mr. Vafias has been actively involved in the tanker and gas shipping industry since 1999. Mr. Vafias worked at Seascope, a leading ship brokering firm specializing in sale and purchase of vessels and chartering of oil tankers. Mr. Vafias also worked at Braemar, a leading ship brokering firm, where he gained extensive experience in tanker and dry cargo chartering. Seascope and Braemar merged in 2001 to form Braemar Seascope Group plc, a public company quoted on the London Stock Exchange and one of the world’s largest ship brokering and shipping service groups. From 2000 until 2004, he worked at Brave Maritime and Stealth Maritime, companies providing comprehensive ship management services, where Mr. Vafias headed the operations and chartering departments of Stealth Maritime and served as manager for the sale and purchase departments of both Brave Maritime and Stealth Maritime. Mr. Vafias graduated from City University Business School in the City of London in 1999 with a B.A. in Management Science and from Metropolitan University in 2000 with a Masters degree in Shipping, Trade and Transport.

Michael G. Jolliffe has been Chairman of our Board of Directors since 2004. He is a director of a number of companies in shipping, agency representation, shipbroking, capital services, mining and telemarketing. Mr. Jolliffe is Deputy Chairman of Tsakos Energy Navigation Ltd, an oil, product carrier and LNG shipping company listed on the New York Stock Exchange. He is also Chairman of the Wighams Group of companies owning companies involved in shipbroking, agency representation and capital markets businesses. Mr. Jolliffe is also the Chairman of Papua Mining Plc a gold and copper mining company quoted on the London AIM market.

Lambros Babilis has been Deputy Chairman of our Board of Directors and an Executive Director since 2007. Mr. Babilis was the Technical Manager of Stealth Maritime Corporation from 2006 until 2011 when he became the Chief Operating Officer, and has worked for the Stealth Maritime Corporation since 2000. From 1997 until 2000, Mr. Babilis worked in the Technical Department of Multi Trading Ship Management, a company specializing in chemical tankers. From 1993 until 1997, Mr. Babilis worked in a consulting or research capacity for various EEC Shipping related projects and worked as a consultant to shipping companies and as a representative of the Technical Chamber of Greece to the Joint Committee of Health and Safety of Ship Repair (Perama Zone). In addition, from 1996 until 1997, Mr. Babilis was involved in the construction of the Landing Ships at Eleusis Shipyards (Detachment of Hellenic Navy). From 1992 until 1993, Mr. Babilis worked for an international consortium, including PricewaterhouseCoopers and Port and Transport Consulting of Bremen, for the design of the Port Management Information System of Piraeus Port Authority. Mr. Babilis started his career in the Operations Department of Trade and Transport Inc. Mr. Babilis has been involved in the research center of Athens University of Economics and Business and in the Ocean Transportation Economics department at the National Technical University of Athens. From 1994 until 1996, Mr. Babilis was the General Secretary of the Hellenic Association of Naval Architects. Mr. Babilis graduated from the National Technical University of Athens, department of Naval Architecture and Marine Engineering, in 1990, and received an honorary scholarship from the Hellenic Scholarship foundation.

 

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Markos Drakos has been a member of our Board of Directors since 2006 and Chairman of our Audit Committee. In 1988, Mr. Drakos co-founded Touche Ross & Co (Cyprus), later renamed Deloitte & Touche, Nicosia and served as co-managing partner of the company’s Nicosia office in Cyprus until 2002. Following the December 2002 reorganization of Deloitte & Touche, Nicosia, Mr. Drakos founded Markos Drakos Consultants Group, a consulting company, which served as successor to the consulting, special services and international business division of Deloitte & Touche, Nicosia. From 2000 until 2003, Mr. Drakos also served as Vice Chairman of the Cyprus Telecommunications Authority, the leading telecommunications company in Cyprus. Mr. Drakos has also served as a member of the Offshore, Shipping & Foreign Investment Committee of the Institute of Certified Public Accountants of Cyprus. Mr. Drakos received a Bachelor of Science degree in Economics from the London School of Economics and is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Institute of Certified Public Accountants of Cyprus.

John Kostoyannis joined our Board of Directors in 2010. Mr. Kostoyannis is a Managing Director at Allied Shipbroking Inc., a leading shipbroking house in Greece, providing Sale and Purchase and Chartering services in the shipping industry. Before joining Allied Shipbroking, from 1991 until September 2001, Mr. Kostoyannis worked in several prominent shipbroking houses in London and Piraeus. He is a member of the Hellenic Shipbrokers Association. Mr. Kostoyannis graduated from the City of London Polytechnic in 1988 where he studied Shipping and Economics.

B. Compensation of Directors and Senior Management

The Chairman of our Board of Directors receives annual fees of $70,000, plus reimbursement for his out-of-pocket expenses, while each of our other independent directors receives fees of up to $35,000 per annum, plus reimbursement of their out-of-pocket expenses. Executive directors received no compensation for their services as directors. We do not have service contracts with any of our directors. In addition, we have not paid any compensation to our executive officers. Under our management agreement with Stealth Maritime, we reimburse Stealth Maritime for its payment of the compensation to our Chief Executive Officer, Chief Financial Officer, Deputy Chairman and Executive Director and Internal Auditor and, beginning in 2014, our Chief Technical Officer. The aggregate of such compensation for 2013, 2014 and 2015 was $1.2 million, $1.3 million and $1.1 million, respectively.

Our executive officers and directors are also eligible to receive awards under our equity compensation plan described below under “—Equity Compensation Plan.” In November 2014, we awarded an aggregate of 230,713 restricted shares of common stock to directors and officers, 50% of which vested on November 20, 2015 and 25% of which vest on each of the second and third anniversaries of grant. The restricted shares are subject to forfeiture until they become vested. We did not grant any awards under our equity compensation plan to directors or officers of the Company during the years ended December 31, 2015 and 2013. We recognized share-based compensation expense of $0.3 million, $0.4 million and $1.1 million in 2013, 2014 and 2015, respectively.

C. Board Practices

The Board of Directors may change the number of directors by a vote of a majority of the entire Board. Each director is elected to serve until the third succeeding annual meeting of stockholders and until his or her successor shall have been duly elected and qualified, except in the event of death, resignation or removal. A vacancy on the board created by death, resignation, removal (which may only be for cause), or failure of the stockholders to elect the entire class of directors to be elected at any election of directors or for any other reason, may be filled only by an affirmative vote of a majority of the remaining directors then in office, even if less than a quorum, at any special meeting called for that purpose or at any regular meeting of the board of directors. Our Board of Directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term.

At December 31, 2015 and April 1, 2016, we had five members on our Board of Directors named above. Our Board of Directors has determined that Michael G. Jolliffe, Markos Drakos and John Kostoyannis are independent directors within the meaning of the applicable Nasdaq listing requirements and SEC independence

 

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requirements applicable to Audit Committee members since none of them has received any compensation from the Company except for director’s fees and restricted stock awards to directors and none of them has any relationship or has had any transaction with the Company which the Board believes would compromise their independence. Officers are elected from time to time by vote of our Board of Directors and hold office until a successor is elected.

We have no service contracts with any of our directors that provide for benefits upon termination of employment.

During the fiscal year ended December 31, 2015, the full Board of Directors held four meetings. Each director attended all of the meetings of the Board of Directors and meetings of committees.

To promote open discussion among the independent directors, those directors met four times in 2015 in regularly scheduled executive sessions without participation of our Company’s management and will continue to do so in the remainder of 2016 and in 2017. Mr. Jolliffe has served as the presiding director for purposes of these meetings. Stockholders who wish to send communications on any topic to the Board of Directors or to the independent directors as a group, or to the presiding director, Mr. Jolliffe, may do so by writing to StealthGas Inc., 331 Kifissias Avenue, Erithrea 14561 Athens, Greece.

Corporate Governance

Our Board of Directors and our Company’s management reviews our corporate governance practices in order to oversee our compliance with the applicable corporate governance rules of the Nasdaq Stock Market and the SEC.

We have adopted a number of key documents that are the foundation of our corporate governance, including:

 

   

a Code of Business Conduct and Ethics;

 

   

a Nominating and Corporate Governance Committee Charter;

 

   

a Compensation Committee Charter; and

 

   

an Audit Committee Charter.

We will provide a paper copy of any of these documents upon the written request of a stockholder. Stockholders may direct their requests to the attention of Investor Relations, c/o Harry Vafias, StealthGas Inc., 331 Kifissias Avenue, Erithrea 14561 Athens, Greece. These documents are also available on our website at www.stealthgas.com under the heading “Corporate Governance.”

Committees of the Board of Directors

The Board of Directors has established an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee. As of April 1, 2016, the Audit Committee consists of Messrs. Markos Drakos (Chairman), Michael Jolliffe, and John Kostoyannis. The Nominating and Corporate Governance Committee consists of Messrs. Michael Jolliffe (Chairman), Markos Drakos and John Kostoyannis. The Compensation Committee consists of Messrs. Michael Jolliffe (Chairman), Markos Drakos and John Kostoyannis. Each of the directors on these committees has been determined by our Board of Directors to be independent under the standards of the Nasdaq Stock Market, and, in the case of the Audit Committee, the Securities and Exchange Commission.

 

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Audit Committee

The Audit Committee is governed by a written charter, which is approved and annually adopted by the Board. The Board has determined that the members of the Audit Committee meet the applicable independence requirements of the SEC and the Nasdaq Stock Market, that all members of the Audit Committee fulfill the requirement of being financially literate and that Mr. Drakos is an Audit Committee financial expert as defined under current SEC regulations.

The Audit Committee is appointed by the Board and is responsible for, among other matters, overseeing the:

 

   

integrity of the Company’s financial statements, including its system of internal controls;

 

   

Company’s compliance with legal and regulatory requirements;

 

   

independent auditor’s appointment, qualifications and independence;

 

   

retention, setting of compensation for, termination and evaluation of the activities of the Company’s independent auditors, subject to any required shareholder approval; and

 

   

performance of the Company’s independent audit function and independent auditors, as well preparing an Audit Committee Report to be included in our annual proxy statement.

Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee is appointed by the Board and is responsible for, among other matters:

 

   

reviewing the Board structure, size and composition and making recommendations to the Board with regard to any adjustments that are deemed necessary;

 

   

evaluating and recommending to the Board the slate of nominees for directors to be elected by the stockholders at the Company’s next annual meeting of stockholders and, where applicable, to fill vacancies;

 

   

recommending to the Board the responsibilities of the Board committees, including each committee’s structure, operations, and authority to delegate to subcommittees;

 

   

evaluating and recommending to the Board those directors to be appointed to the various Board committees, including the persons recommended to serve as chairperson of each committee;

 

   

reviewing annually the compensation of non-employee directors and the principles upon which such compensation is determined;

 

   

consulting with the Chief Executive Officer, as appropriate, and other Board members to ensure that its decisions are consistent with the sound relationship among the Board, Board committees, individual directors and management;

 

   

overseeing the Board’s annual evaluation of its own performance and the performance of other Board committees;

 

   

retaining, setting compensation and retentions terms for and terminating any search firm to be used to identify candidates; and

 

   

developing and recommending to the Board for adoption a set of Corporate Governance Guidelines applicable to the Company and periodically reviewing the same.

Compensation Committee

The Compensation Committee is appointed by the Board and is responsible for, among other matters:

 

   

establishing and periodically reviewing the Company’s compensation programs;

 

   

administering the Company’s equity compensation plan;

 

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reviewing the performance of directors, officers and employees of the Company who are eligible for awards and benefits under any plan or program and adjust compensation arrangements as appropriate based on performance;

 

   

reviewing and monitoring management development and succession plans and activities;

 

   

from time to time when necessary, reviewing with the Chief Executive Officer the latter’s proposed succession plan for each executive officer and the Chief Executive Officer’s evaluation of each such executive officer;

 

   

in case of unexpected unavailability, reviewing with the Board the Company’s succession plan for the CEO and other executive officers, including plans for emergency succession;

 

   

retaining, setting compensation and retention terms for, and terminating any consultants, legal counsel or other advisors that the Compensation Committee determines to employ to assist it in the performance of its duties; and

 

   

preparing any Compensation Committee report included in our annual proxy statement.

D. Employees

Our manager employs and provides us with the services of our Chief Executive Officer and Chief Financial Officer, our Deputy Chairman and Executive Director, our Internal Auditor and, beginning in 2014, our Chief Technical Officer. In each case, their services are provided under the management agreement with Stealth Maritime. Stealth Maritime compensates each of these individuals for their services and we, in turn, reimburse Stealth Maritime for their compensation.

As of December 31, 2015, 446 officers and 459 crew members served on board the vessels in our fleet. However, these officers and crew are not directly employed by the Company.

E. Share Ownership

The shares of common stock beneficially owned by our directors and senior managers and/or companies affiliated with these individuals are disclosed in “Item 7. Major Shareholders and Related Party Transactions” below.

Equity Compensation Plan

We have an equity compensation plan, the 2015 Equity Compensation Plan (the “2015 Plan”), which was approved by our stockholders on September 17, 2015 and replaced our previous equity compensation plan (the “2007 Plan”) which expired in August 2015. The 2015 Plan is generally administered by the Compensation Committee of our Board of Directors, except that the full board may act at any time to administer the 2015 Plan, and authority to administer any aspect of the 2015 Plan, other than grants of awards to executive officers and as prohibited by law or stock exchange regulation, may be delegated by our Board of Directors or by the Compensation Committee to an executive officer or any other person. The 2015 Plan allows the plan administrator to grant awards of shares of our common stock or the right to receive or purchase shares of our common stock (including options to purchase common stock, restricted stock and stock units, bonus stock, share units, performance units, and stock appreciation rights) to officers, directors or other persons or entities providing significant services to us or our subsidiaries. The actual terms of an award, including the number of shares of common stock relating to the award, any exercise or purchase price, any vesting, forfeiture or transfer restrictions, the time or times of exercisability for, or delivery of, shares of common stock, are determined by the plan administrator and set forth in a written award agreement with the participant.

The aggregate number of shares of our common stock for which awards may be granted under the 2015 Plan cannot exceed 10% of the number of shares of our common stock issued and outstanding at the time any award is

 

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granted. Awards made under the 2015 Plan that have been forfeited (including our repurchase of shares of common stock subject to an award for the price, if any, paid to us for such shares of common stock, or for their par value), cancelled or have expired, will not be treated as having been granted for purposes of the preceding sentence. In November 2014, we awarded an aggregate of 230,713 restricted shares of common stock to directors and officers, 50% of which vested on November 20, 2015 and 25% of which vest on each of the second and third anniversaries of grant. No equity awards were made for the years ended December 31, 2015 and 2013. As of April 1, 2016, no awards had been granted under the 2015 Plan and awards with respect to 555,479 shares of our common stock were granted under our 2007 Plan from its adoption in 2005 to its expiration in August 2015. As of April 1, 2016, there are 115,357 unvested shares of restricted stock under the 2007 Plan, of which 57,678 restricted shares will vest on November 20, 2016 and the remaining 57,678 restricted shares will vest on November 20, 2017, subject to the respective recipients’ continued service to the Company. Awards previously granted under our 2007 Plan will continue to be governed by such plan. No additional awards can be granted under our 2007 Plan.

The 2015 Plan permits the plan administrator to make an equitable adjustment to the number, kind and exercise price per share of awards in the event of our recapitalization, reorganization, merger, spin-off, share exchange, dividend of common stock, liquidation, dissolution or other similar transaction or events. In addition, the plan administrator may make adjustments in the terms and conditions of any awards in recognition of any unusual or nonrecurring events.

Except in connection with a corporate transaction, including any stock dividend, distribution, stock split, extraordinary cash dividend, recapitalization, change in control, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of common shares or other securities, or similar transactions, we may not, without obtaining stockholder approval, (i) amend the terms of outstanding stock options or stock appreciation rights to reduce the exercise price of such outstanding stock options or base price of such stock appreciation rights, (ii) cancel outstanding stock options or stock appreciation rights in exchange for stock options or stock appreciation rights with an exercise price or base price, as applicable, that is less than the exercise price or base price of the original stock options or stock appreciation rights or (iii) cancel outstanding stock options or stock appreciation rights with an exercise price or base price, as applicable, above the current stock price in exchange for cash or other securities.

The 2015 Plan provides for “double trigger vesting” after a change in control. Unless the plan administrator determines otherwise, if a change in control occurs in which the Company is not the surviving corporation (or the Company survives only as a subsidiary of another corporation), all outstanding awards that are not exercised or paid at the time of the change in control will be assumed by, or replaced with awards that have comparable terms by, the surviving corporation (or a parent or subsidiary of the surviving corporation). Unless the award agreement provides otherwise, if a participant’s employment is terminated by us without cause, or the participant terminates employment for good reason, in either case within 12 months following the change in control, the participant’s outstanding awards will become fully vested as of the date of termination. If the vesting of any such award is based, in whole or in part, on performance, the applicable award agreement will specify how the portion of the award that becomes vested upon termination will be calculated.

In the event of a change in control, if all outstanding awards are not assumed by, or replaced with awards with comparable terms by, the surviving corporation (or a parent or subsidiary of the surviving corporation), the plan administrator may take any of the following actions with respect to any or all outstanding awards, without the consent of any participant: (i) may determine that outstanding stock options and stock appreciation rights will automatically accelerate and become fully exercisable, and the restrictions and conditions on outstanding awards will immediately lapse; (ii) may determine that participants will receive a payment in settlement of outstanding awards in such amount and form as may be determined by the plan administrator; (iii) may require that participants surrender their outstanding stock options and stock appreciation rights in exchange for a payment, in cash or stock as determined by the plan administrator, equal to the amount (if any) by which the fair market value of the shares of common stock subject to the unexercised stock option and stock appreciation right exceed the

 

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stock option exercise price or base price and (iv) the plan administrator may terminate outstanding stock options and stock appreciation rights after giving participants an opportunity to exercise the outstanding stock options and stock appreciation rights. Such surrender, termination or payment will take place as of the date of the change in control or such other date as the plan administrator may specify. If the per share fair market value of our stock does not exceed the per share exercise price or base price, as applicable, we will not be required to make any payment to the participant upon surrender of the stock option or stock appreciation right.

Our Board of Directors may, at any time, alter, amend, suspend or discontinue the 2015 Plan. The 2015 Plan will automatically terminate ten years after it has been most recently approved by our stockholders.

 

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

The following table sets forth certain information regarding the beneficial ownership of our outstanding shares of common stock as of April 1, 2016 by:

 

   

each person or entity that we know beneficially owns 5% or more of our shares of common stock;

 

   

our Chief Executive Officer and our other members of senior management;

 

   

each of our directors; and

 

   

all of our current directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. In general, a person who has or shares voting power and/or dispositive power with respect to securities is treated as a beneficial owner of those securities. It does not necessarily imply that the named person has the economic or other benefits of ownership. For purposes of this table, shares subject to options, warrants or rights currently exercisable or exercisable within 60 days of April 1, 2016 are considered as beneficially owned by the person holding such options, warrants or rights. Each shareholder is entitled to one vote for each share held. The applicable percentage of ownership for each shareholder is based on 39,873,498 shares of common stock outstanding as of April 1, 2016. Information for certain holders is based on their latest filings with the Securities and Exchange Commission or information delivered to us.

 

     Shares Beneficially Owned  
Name of Beneficial Owner    Number      Percentage  

Principal Stockholders

     

Flawless Management Inc.(1)

     4,000,000         10.0%   

MSDC Management, L.P.(2)

     3,708,819         9.3%   

FMR LLC(3)

     3,168,889         7.9%   

Redwood Capital Management, LLC(4)

     2,415,287         6.1%   

Executive Officers and Directors

     

Harry N. Vafias(1)

     4,418,094         11.1%   

Michael G. Jolliffe

     *         *   

Lambros Babilis

     *         *   

Markos Drakos

     *         *   

John Kostoyannis

     *         *   

All executive officers and directors as a group (5 persons)

     4,505,347         11.3%   

 

 * Less than 1%.
(1) According to Amendment No. 3 to a Schedule 13G jointly filed with the SEC on February 17, 2015 by Flawless Management Inc. and Harry N. Vafias, Harry N. Vafias beneficially owns 4,418,094 shares of common stock, of which 4,000,000 shares are owned by Flawless Management Inc. Harry N. Vafias has sole voting power and sole dispositive power with respect to all such shares. Excludes any shares of common stock which maybe held by members of Mr. Vafias’ immediate family in accordance with the determination of beneficial ownership under Section 13(d) of the Securities Exchange Act of 1934.

 

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(2) According to Amendment No. 2 to a Schedule 13G jointly filed by and on behalf of each of MSDC Management, L.P. (“MSDC”) and MSD Credit Opportunity Master Fund, L.P. with the SEC on February 16, 2016, MSDC is the investment manager of, and may be deemed to beneficially own 3,708,819 shares of common stock beneficially owned by, MSD Credit Opportunity Master Fund, L.P. and has sole voting power and joint dispositive power with respect to all such shares.
(3) According to Amendment No. 1 to a Schedule 13G jointly filed by and on behalf of each of FMR LLC, Edward C. Johnson 3d, Abigail P. Johnson and Select Energy Service Portfolio with the SEC on February 12, 2016.
(4) According to Amendment No. 2 to a Schedule 13G jointly filed by and on behalf of each Redwood Capital Management, LLC, Redwood Master Fund, Ltd. and Jonathan Kolatch, which may each be deemed to have shared voting power and joint dispositive power with respect to all such shares, on February 11, 2016.

We effected a registered public offering of our common stock and our common stock began trading on the Nasdaq National Market in October 2005. Our major stockholders have the same voting rights as our other shareholders. As of April 1, 2016, we had approximately 18 shareholders of record. Four of the stockholders of record were located in the United States and held in the aggregate 34,943,247 shares of common stock representing approximately 87.6% of our outstanding shares of common stock. However, the four United States shareholders of record include CEDEFAST, which, as nominee for The Depository Trust Company, is the record holder of 34,941,947 shares of common stock. Accordingly, we believe that the shares held by CEDEFAST include shares of common stock beneficially owned by both holders in the United States and non-United States beneficial owners. As a result, these numbers may not accurately represent the number of beneficial owners in the United States.

We are not aware of any arrangements the operation of which may at a subsequent date result in a change of control of the Company.

On November 26, 2014, we publicly announced that our Board of Directors had authorized the repurchase of up to $10,000,000 of shares of our common stock and on February 26, 2015 we publicly announced that our Board of Directors had approved an additional $20,000,000, of common stock repurchases. Shares may be purchased from time to time in open market or privately negotiated transactions, which may include derivative transactions, at times and prices that are considered to be appropriate by the Company and the program may be discontinued at any time. There is no fixed time period for this repurchase program. As of April 1, 2016, 3,859,297 shares of common stock had been repurchased (843,022 in 2014, 2,372,097 in 2015 and 644,178 in 2016), for an aggregate of $20.2 million.

B. Related Party Transactions

Pursuant to our Audit Committee Charter, our Audit Committee is responsible for establishing procedures for the approval of all related party transactions involving executive officers and directors, which procedures require the audit committee to approve any such transaction. Our Code of Business Conduct and Ethics requires our Audit Committee to review and approve any “related party” transaction as defined in Item 7.B of Form 20-F before it is consummated.

Management Affiliations

Harry Vafias, our president, chief executive officer and one of our directors, is an officer, director and the sole shareholder of Flawless Management Inc., our largest stockholder. He is also the son of the principal and founder of Brave Maritime, an affiliate of Stealth Maritime, which is our management company. Stealth Maritime subcontracts the technical management of some of our LPG carriers to Brave Maritime the fees for which technical management services are paid by Stealth Maritime out of the fees we pay to it as described below.

 

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Management and Other Fees

We have a management agreement with Stealth Maritime, pursuant to which Stealth Maritime provides us with technical, administrative, commercial and certain other services. In relation to the technical services, Stealth Maritime is responsible for arranging for the crewing of the vessels, the day to day operations, inspections and vetting, supplies, maintenance, repairs, bunkering drydocking and insurance. Administrative functions include but are not limited to accounting, back-office, reporting, legal and secretarial services. In addition, Stealth Maritime provides services for the chartering of our vessels and monitoring thereof, freight collection, and sale and purchase. In providing most of these services, Stealth Maritime pays third parties and receives reimbursement from us. Under the management agreement Stealth Maritime may subcontract certain of its obligations.

In the year ended December 31, 2015, we paid Stealth Maritime a fixed management fee of $440 per vessel operating under a voyage or time charter per day, pro-rated for the calendar days we own the vessels. We paid a fixed fee of $125 per vessel per day for each of our vessels operating on bareboat charter. These fixed daily fees are based on the management agreement with Stealth Maritime and have not changed since 2007. Management fees for the years ended December 31, 2013, 2014 and 2015 were $4.8 million, $5.5 million and $6.5 million, respectively. In addition, our manager arranges for supervision onboard the vessels, when required, by superintendent engineers and when such visits exceed a period of five days in a twelve-month period we are charged $500 for each additional day. In the years ended December 31, 2013, 2014 and 2015 we paid $0.15 million, $0.17 million and $0.25 million, respectively, related to onboard supervision. We pay our manager, Stealth Maritime, a fee equal to 1.25% of the gross freight, demurrage and charter hire collected from the employment of our vessels. For the years ended December 31, 2013, 2014 and 2015, total brokerage commissions of 1.25% amounted to $1.5 million, $1.6 million and $1.7 million, respectively, and were included in our income statement under “Voyage expenses—related party.” Stealth Maritime also receives a fee equal to 1.0% calculated on the price as stated in the relevant memorandum of agreement for any vessel bought or sold by them on our behalf. For the years ended December 31, 2013, 2014 and 2015, the amounts of $0.7 million, $1.0 million and $1.9 million, respectively, were capitalized to the cost of the vessels in respect of the 1.0% purchase fee.

For the years ended December 31, 2014 and 2015, the amounts of $0.3 million and $0.02 million, respectively, were recognized as commission expenses relating to the sale of vessels and are included in our consolidated statements of income under the caption “Net (gain)/loss on sale of vessels”. For the year ended December 31, 2013 no such commission expense was recognized as no sale of vessel occurred.

We also reimburse Stealth Maritime for its payment for executive services related to our Chief Executive Officer, Deputy Chairman and Executive Director, Chief Financial Officer, Internal Auditor and Chief Technical Officer. During the years ended December 31, 2013, 2014 and 2015, such compensation was in the aggregate amount of $1.2 million, $1.3 million and $1.1 million, respectively.

Additional vessels that we may acquire in the future may be managed by Stealth Maritime or other unaffiliated management companies.

The initial term of our management agreement with Stealth Maritime expired in June 2010 but is extended on a year-to-year basis thereafter unless six-month written notice is provided prior to the expiration of the term. Such notice has not been given by either party.

On May 26, 2014, we entered into an agreement with Brave Maritime for the supervision of the construction of eight of our newbuilding vessels for a fixed fee of Euro 390,000 per vessel. On February 24, 2016, we entered into a new supervision agreement with Brave Maritime for the supervision of the construction of our four 22,000 cbm semi- refrigerated newbuilding vessels at Euro 490,000 per ship. For the years ended December 31, 2015 and 2014, the supervision fees amounted to $1,726,265 and $984,204, respectively, and were capitalized to the cost of the respective vessels.

 

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Right of First Refusal

As long as Stealth Maritime (or an entity with respect to which Harry N. Vafias is an executive officer, director or shareholder) is our fleet manager or Harry N. Vafias, is an executive officer or director of the Company, Stealth Maritime has granted us a right of first refusal to acquire any LPG carrier, which Stealth Maritime may acquire in the future. Stealth Maritime has also agreed that it will not charter-in any LPG carrier without first offering the opportunity to charter-in such vessel to us. Our President and Chief Executive Officer Harry N. Vafias has granted us an equivalent right with respect to any entity that he is an executive officer, director or principal shareholder of, so long as he is an executive officer or director of us. This right of first refusal does not prohibit Stealth Maritime or an entity controlled by Mr. Vafias from managing vessels owned by unaffiliated third parties in competition with us, nor does it cover product carriers or crude oil tankers.

Office Space

We lease office space from an entity affiliated with Stealth Maritime. In the years ended December 31, 2013, 2014 and 2015, we made lease payments of $78,070, $76,788 and $72,753, respectively. The lease rate for 2016 is €66,000 per year.

Vessel Charters and Acquisitions

In April 2012, we entered into time charter out agreements with an entity affiliated with members of the Vafias family for the vessels Alpine Endurance (renamed Stealth Bahla) and Gas Esco. The Alpine Endurance charter commenced in June 2012, upon its delivery from the previous charterer. The duration of the charter is four years and there is an option to extend the charter for an additional year. The five-year charter for the Gas Esco commenced in June 2012. Revenues from these two charters for the years ended December 31, 2013, 2014 and 2015 were $9.8 million, $9.8 million and $9.8 million, respectively, which are recorded in our income statement under “Revenues—related party”. The vessel operating expenses in accordance with the terms of the respective time charter agreements for the Stealth Bahla and the Gas Esco, for the years ended December 31, 2013, 2014 and 2015, were $3.9 million, $3.9 million and $3.9 million, respectively, which are recorded in our income statement under “Vessel Operating Expenses—related party.”

In August 2012, we entered into separate memoranda of agreements with an affiliated company of the Vafias Group to acquire four LPG carriers under construction that were scheduled to be delivered during 2014 (the delivery of which was subsequently rescheduled to the first half of 2015). The aggregate purchase price of these vessels was $96.0 million. As provided by the agreements an advance payment of $19.2 million was paid on September 8, 2012. In July 2014, the acquisition of two of the above LPG carriers was cancelled, and in September 2014 we collected the full amount of the advances paid to the affiliated company with the capitalized interest, totaling to $10.0 million. The remaining two vessels, “Eco Dream” and “Eco Green”, were delivered to the Company on August 18, 2015 and on September 25, 2015, respectively, at which time the remainder of the purchase price of the respective vessels was paid. The acquisition price for these vessels was set at the average of the assessed value of the acquired vessels by two independent international sale and purchase brokers.

C. Interest of Experts and Counsel

Not applicable

 

Item 8. Financial Information

See “Item 18. Financial Statements” below.

Significant Changes. Other than as described in Note 18 “Subsequent Events” to our consolidated financial statements included in this Annual Report, no significant change has occurred since the date of such consolidated financial statements.

 

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Legal Proceedings. In connection with the proceeding initiated In the High Court of South Africa, Kawazulu-Natal Local Division, Durban (Case No. A64/2015) entitled In the matter between Super Shipping Ltd. and MT “Spike” and TankPunk Inc., we have classified as current restricted cash $9.8 million that has been placed in a restricted bank account as of December 31, 2015 in relation to a bank guarantee we have furnished Super Shipping Ltd the former charterer of one of our vessels, the MT Spike, to secure the vessel’s release shortly after being arrested in a South African port in August 2015. The action relates to security sought in connection with an arbitration proceeding involving a vessel not in the Company’s fleet that the applicant claims is under common control with the MT Spike. We believe that the basis for the charterer’s action is groundless and we are vigorously contesting it in order to have the bank guarantee released.

To our knowledge we are not currently a party to any material lawsuit that, if adversely determined, would have a material effect on our financial position, results of operations or liquidity. From time to time in the future we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. We have not been involved in any legal proceedings which may have, or have had a material effect on our financial position, results of operations or liquidity, nor are we aware of any proceedings that are pending or threatened which may have a significant effect on our financial position, results of operations or liquidity.

 

Item 9. The Offer and Listing

Trading on the Nasdaq Stock Market

Following our initial public offering in the United States in October 2005, our shares of common stock were quoted on the Nasdaq National Market, and are now listed on the Nasdaq Global Select Market, under the symbol “GASS”. The following table shows the high and low closing prices for our shares of common stock during the indicated periods.

 

     High      Low  

Year Ended December 31, 2011

   $ 8.37       $ 3.55   

Year Ended December 31, 2012

     8.23         4.00   

Year Ended December 31, 2013

     12.88         8.10   

Year Ended December 31, 2014

     11.67         5.37   

Year Ended December 31, 2015

     7.02         3.03   

2014

     

First Quarter

     11.67         9.51   

Second Quarter

     11.55         9.90   

Third Quarter

     11.59         8.98   

Fourth Quarter

     8.98         5.37   

2015

     

First Quarter

     6.84         5.28   

Second Quarter

     7.02         6.39   

Third Quarter

     6.61         4.12   

Fourth Quarter

     4.98         3.03   

October 2015

     4.98         4.16   

November 2015

     4.41         3.79   

December 2015

     3.95         3.03   

2016

     

First Quarter

     3.59         2.49   

January 2016

     3.43         2.63   

February 2016

     3.30         2.49   

March 2016

     3.59         3.23   

April 2016 (through April 15)

     3.93         3.61   

 

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Comparison of Cumulative Total Shareholder Return

Set forth below is a graph comparing the cumulative total shareholder return of our common stock between December 31, 2010 and December 31, 2015, with the cumulative total return of the Dow Jones Marine Transportation Index and the S&P 500 Index. Total stockholder return represents stock price changes and assumes the reinvestment of dividends. The graph assumes the investment of $100 on December 31, 2010. Past performance is not necessarily an indicator of future results.

 

 

LOGO

 

Item 10. Additional Information

A. Share Capital

Under our articles of incorporation, our authorized capital stock consists of 5,000,000 shares of preferred stock, $0.01 par value per share, none of which is issued or outstanding and 100,000,000 shares of common stock, $0.01 par value per share, of which 44,285,108 shares were issued, including 3,767,432 shares repurchased by the Company and held as treasury stock, and 40,517,676 shares outstanding and fully paid as of December 31, 2015; while as of April 1, 2016, we had 44,285,108 shares issued, including 4,411,610 shares repurchased by the Company and held as treasury stock, and 39,873,498 shares outstanding and fully paid. All of our shares of stock are in registered form.

Common Stock

Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of shares of common stock are entitled to receive ratably all dividends, if any, declared by our Board of Directors out of funds legally available for dividends. Holders of common stock do not have conversion, redemption or preemptive rights to subscribe to any of our securities. All outstanding shares of common stock are, and the shares to be sold in this offering when issued and paid for will be, fully paid and non-assessable. The rights, preferences and privileges of holders of common stock are subject to the rights of the holders of any shares of preferred stock which we may issue in the future.

 

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Blank Check Preferred Stock

Under the terms of our articles of incorporation, our Board of Directors has authority, without any further vote or action by our stockholders, to issue up to 5,000,000 shares of blank check preferred stock. Our Board of Directors could issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

Dividends

We have not paid a dividend since March 2009. In the first quarter of 2009, our Board of Directors determined to suspend the payment of cash dividends as a result of weak market conditions in the international shipping industry and to preserve the Company’s liquid cash resources. As our contracted newbuildings are delivered, paid for and begin to generate revenue, our board of directors will evaluate our dividend policy consistent with our cash flows and liquidity requirements.

Declaration and payment of any dividend is subject to the discretion of our Board of Directors. The timing and amount of dividend payments will be dependent upon our earnings, financial condition, cash requirements and availability, restrictions in our loan agreements, or other financing arrangements, the provisions of Marshall Islands law affecting the payment of distributions to stockholders and other factors. Because we are a holding company with no material assets other than the stock of our subsidiaries, our ability to pay dividends will depend on the earnings and cash flow of our subsidiaries and their ability to pay dividends to us. Marshall Islands law generally prohibits the payment of dividends other than from surplus or while a company is insolvent or would be rendered insolvent upon the payment thereof.

Under the terms of our existing credit facilities, we are generally permitted to declare or pay cash dividends in any twelve month period as long as the amount of the dividends and share repurchases do not exceed 50% of the Company’s free cash flow (as defined in our credit agreements) and provided we are not in default under the other covenants contained in these credit facilities. See “Item 3. Key Information—Risk Factors—Risks Related To Our Common Stock—Our Board of Directors has suspended the payment of cash dividends as a result of market conditions in the international shipping industry”.

B. Articles of Incorporation and Bylaws

Our purpose is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Marshall Islands Business Corporations Act, or BCA. Our articles of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.

Under our bylaws, annual stockholder meetings will be held at a time and place selected by our Board of Directors. The meetings may be held in or outside of the Marshall Islands. Special meetings may be called by the Board of Directors. Our Board of Directors may set a record date between 15 and 60 days before the date of any meeting to determine the stockholders that will be eligible to receive notice and vote at the meeting.

Directors. Our directors are elected by a plurality of the votes cast at a meeting of the stockholders by the holders of shares entitled to vote in the election. There is no provision for cumulative voting.

The Board of Directors may change the number of directors by a vote of a majority of the entire board. Each director shall be elected to serve until his successor shall have been duly elected and qualified, except in the event of his death, resignation, removal, or the earlier termination of his term of office. The Board of Directors has the authority to fix the amounts which shall be payable to the members of our Board of Directors for attendance at any meeting or for services rendered to us.

Dissenters’ Rights of Appraisal and Payment. Under the BCA, our stockholders have the right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made in

 

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the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting stockholder under the BCA to receive payment of the fair value of his shares is not available for the shares of any class or series of stock, which shares or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of the stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a securities exchange or admitted for trading on an interdealer quotation system or (ii) held of record by more than 2,000 holders. The right of a dissenting stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation. In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed appraiser.

Stockholders’ Derivative Actions. Under the BCA, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction to which the action relates.

Anti-takeover Provisions of our Charter Documents. Several provisions of our articles of incorporation and bylaws may have anti-takeover effects. These provisions are intended to avoid costly takeover battles, lessen our vulnerability to a hostile change of control and enhance the ability of our Board of Directors to maximize stockholder value in connection with any unsolicited offer to acquire us. However, these anti-takeover provisions, which are summarized below, could also discourage, delay or prevent (1) the merger or acquisition of our company by means of a tender offer, a proxy contest or otherwise, that a stockholder may consider in its best interest and (2) the removal of incumbent officers and directors.

Blank Check Preferred Stock. Under the terms of our articles of incorporation, our Board of Directors has authority, without any further vote or action by our stockholders, to issue up to 5,000,000 shares of blank check preferred stock. Our Board of Directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management.

Classified Board of Directors. Our articles of incorporation provide for a Board of Directors serving staggered, three-year terms. Approximately one-third of our Board of Directors will be elected each year. This classified board provision could discourage a third party from making a tender offer for our shares or attempting to obtain control of our company. It could also delay stockholders who do not agree with the policies of the Board of Directors from removing a majority of the Board of Directors for two years.

Election and Removal of Directors. Our articles of incorporation and bylaws prohibit cumulative voting in the election of directors. Our bylaws require parties other than the Board of Directors to give advance written notice of nominations for the election of directors. Our bylaws also provide that our directors may be removed only for cause and only upon the affirmative vote of the holders of at least 80% of the outstanding shares of our capital stock entitled to vote for those directors. These provisions may discourage, delay or prevent the removal of incumbent officers and directors.

Calling of Special Meetings of Stockholders. Our bylaws provide that special meetings of our stockholders may be called only by resolution of our Board of Directors.

Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our bylaws provide that stockholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of stockholders must provide timely notice of their proposal in writing to the corporate secretary.

 

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Generally, to be timely, a stockholder’s notice must be received at our principal executive offices not less than 90 days or more than 120 days prior to the first anniversary date of the previous year’s annual meeting. If, however, the date of our annual meeting is more than 30 days before or 60 days after the first anniversary date of the previous year’s annual meeting, a stockholder’s notice must be received at our principal executive offices by the later of (i) the close of business on the 90th day prior to the annual meeting date or (ii) the close of business on the tenth day following the date on which such annual meeting date is first publicly announced or disclosed by us. Our bylaws also specify requirements as to the form and content of a stockholder’s notice. These provisions may impede stockholders’ ability to bring matters before an annual meeting of stockholders or make nominations for directors at an annual meeting of stockholders.

Business Combinations. Our articles of incorporation prohibit us from engaging in a “business combination” with certain persons for three years following the date the person becomes an interested stockholder. Interested stockholders generally include:

 

   

persons who are the beneficial owners of 15% or more of the outstanding voting stock of the corporation; and

 

   

persons who are affiliates or associates of the corporation and who hold 15% or more of the corporation’s outstanding voting stock at any time within three years before the date on which the person’s status as an interested stockholder is determined.

Subject to certain exceptions, a business combination includes, among other things:

 

   

certain mergers or consolidations of the corporation or any direct or indirect majority-owned subsidiary of the company;

 

   

the sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the corporation, determined on a consolidated basis, or the aggregate value of all the outstanding stock of the corporation;

 

   

certain transactions that result in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

   

any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation that is owned directly or indirectly by the interested stockholder; and

 

   

any receipt by the interested stockholder of the benefit (except as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

These provisions of our articles of incorporation do not apply to a business combination if:

 

   

before a person becomes an interested stockholder, the board of directors of the corporation approves the business combination or transaction in which the stockholder became an interested stockholder;

 

   

upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, other than certain excluded shares;

 

   

following a transaction in which the person became an interested stockholder, the business combination is (a) approved by the board of directors of the corporation and (b) authorized at a regular or special meeting of stockholders, and not by written consent, by the vote of the holders of at least two-thirds of the voting stock of the corporation not owned by the stockholder; or

 

   

a transaction with a stockholder that was or became an interested stockholder prior to the consummation of our initial public offering.

 

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Stockholder Rights Plan

The rights issued pursuant to a rights agreement, dated as of December 23, 2014, between us and American Stock Transfer & Trust Company, LLC, as rights agent, expired on December 22, 2015. Accordingly, our shares of common stock no longer include a right entitling the holder to purchase from us a unit consisting of one-thousandth of a share of our Series A participating preferred stock. The adoption of the rights agreement was approved by our Board of Directors on December 23, 2014.

C. Material Contracts

We refer to “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions” for a discussion of our material agreements that we have been a party to outside the ordinary course of our business during the two-year period immediately preceding the date of this annual report.

Other than the agreements discussed in the aforementioned sections of this annual report, we have no material contracts, other than contracts entered into in the ordinary course of business, to which we or any member of the group is a party.

D. Exchange Controls and Other Limitations Affecting Stockholders

Under Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of our common stock. On July 22, 2015, Greece implemented capital controls restricting the transfer of funds out of Greece, which restricted our use of the limited amount of cash we held in Greece at that date for remittances outside of Greece. Cash deposited in Greek banks after that date is not restricted for remittances outside Greece.

We are not aware of any limitations on the rights to own our common stock, including rights of non-resident or foreign stockholders to hold or exercise voting rights on our common stock, imposed by foreign law or by our articles of incorporation or bylaws.

E. Tax Considerations

Marshall Islands Tax Consequences

We are incorporated in the Marshall Islands. Because we and our subsidiaries do not, and we do not expect that we and our subsidiaries will, conduct business or operations in the Republic of The Marshall Islands, under current Marshall Islands law we are not subject to tax on income or capital gains and no Marshall Islands withholding tax will be imposed upon payments of dividends by us to our stockholders so long as such stockholders do not reside in, maintain offices in, or engage in business in the Republic of The Marshall Islands. In addition, holders of shares of our common stock will not be subject to Marshall Islands stamp, capital gains or other taxes on the purchase, ownership or disposition of shares of our common stock and will not be required by the Republic of The Marshall Islands to file a tax return relating to such common stock.

United States Federal Income Tax Consequences

Except as otherwise noted, this discussion is based on the assumption that we will not maintain an office or other fixed place of business within the United States. We have no current intention of maintaining such an office. References in this discussion to “we” and “us” are to StealthGas Inc. and its subsidiaries on a consolidated basis, unless the context otherwise requires.

 

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United States Federal Income Taxation of Our Company

Taxation of Operating Income: In General

Unless exempt from United States federal income taxation under the rules discussed below, a foreign corporation is subject to United States federal income taxation in respect of any income that is derived from the use of vessels, from the hiring or leasing of vessels for use on a time, voyage or bareboat charter basis, from the participation in a pool, partnership, strategic alliance, joint operating agreement or other joint venture it directly or indirectly owns or participates in that generates such income, or from the performance of services directly related to those uses, which we refer to as “shipping income,” to the extent that the shipping income is derived from sources within the United States. For these purposes, 50% of shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States constitutes income from sources within the United States, which we refer to as “United States-source shipping income.”

Shipping income attributable to transportation that both begins and ends in the United States is generally considered to be 100% from sources within the United States. We do not expect to engage in transportation that produces income which is considered to be 100% from sources within the United States.

Shipping income attributable to transportation exclusively between non-United States ports is generally considered to be 100% derived from sources outside the United States. Shipping income derived from sources outside the United States will not be subject to any United States federal income tax.

In the absence of exemption from tax under Section 883, our gross United States-source shipping income, unless determined to be effectively connected with the conduct of a United States trade or business, as described below, would be subject to a 4% tax imposed without allowance for deductions as described below.

Exemption of Operating Income from United States Federal Income Taxation

Under Section 883 of the Code, an entity, such as us and our vessel-owning subsidiaries, that is treated for United States federal income tax purposes as a non-United States on-United States corporation will be exempt from United States federal income taxation on its United States-source shipping income if:

(i) the entity is organized in a country other than the United States (an “equivalent exemption jurisdiction”) that grants an exemption to corporations organized in the United States that is equivalent to that provided for in Section 883 of the Code (an “equivalent exemption”); and

(ii) either (A) for more than half of the days in the relevant tax year more than 50% of the value of the entity’s stock is owned, directly or under applicable constructive ownership rules, by individuals who are residents of equivalent exemption jurisdictions or certain other qualified shareholders (the “50% Ownership Test”) and certain ownership certification requirements are complied with or (B) for the relevant tax year the entity’s stock is “primarily and regularly traded on an established securities market” in an equivalent exemption jurisdiction or the United States (the “Publicly-Traded Test”).

We believe, based on Revenue Ruling 2008-17, 2008-12 IRB 626, and the exchanges of notes referred to therein, that each of Malta, the Marshall Islands, Liberia and Cyprus the jurisdictions in which we and our vessel-owning subsidiaries are organized, is an equivalent exemption jurisdiction with respect to income from bareboat and time or voyage charters. Under the rules described in the preceding paragraph, our wholly-owned vessel-owning subsidiaries that are directly or indirectly wholly-owned by us throughout a taxable year will be entitled to the benefits of Section 883 for such taxable year if we satisfy the 50% Ownership Test or the Publicly-Traded Test for such year. Due to the widely-held ownership of our stock, it may be difficult for us to satisfy the 50% Ownership Test. Our ability to satisfy the Publicly-Traded Test is discussed below.

The Section 883 regulations provide, in pertinent part, that stock of a foreign corporation will be considered to be “primarily traded” on an established securities market in a particular country if the number of shares of

 

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each class of stock that are traded during any taxable year on all established securities markets in that country exceeds the number of shares in each such class that are traded during that year on established securities markets in any other single country. Our common stock, which is the sole class of our issued and outstanding stock is “primarily traded” on the Nasdaq Global Select Market.

Under the regulations, our common stock will be considered to be “regularly traded” on an established securities market if one or more classes of our stock representing more than 50% of our outstanding shares, by total combined voting power of all classes of stock entitled to vote and total value, is listed on the market. We refer to this as the listing threshold. Since our common stock is the sole class of stock listed on the Nasdaq Global Select Market, we will satisfy the listing requirement.

It is further required that with respect to each class of stock relied upon to meet the listing threshold (i) such class of the stock is traded on the market, other than in minimal quantities, on at least 60 days during the taxable year or 1/6 of the days in a short taxable year; and (ii) the aggregate number of shares of such class of stock traded on such market is at least 10% of the average number of shares of such class of stock outstanding during such year or as appropriately adjusted in the case of a short taxable year. We believe we will satisfy the trading frequency and trading volume tests. Even if this were not the case, the regulations provide that the trading frequency and trading volume tests will be deemed satisfied if, as we believe to be the case with our common stock, such class of stock is traded on an established market in the United States and such stock is regularly quoted by dealers making a market in such stock.

Notwithstanding the foregoing, the regulations provide, in pertinent part, that a class of our stock will not be considered to be “regularly traded” on an established securities market for any taxable year in which 50% or more of such class of our outstanding shares of the stock is owned, actually or constructively under specified stock attribution rules, on more than half the days during the taxable year by persons who each own 5% or more of the value of such class of our outstanding stock, which we refer to as the “5% Override Rule.”

For purposes of being able to determine the persons who own 5% or more of our stock, or “5% Stockholders,” the regulations permit us to rely on those persons that are identified on Schedule 13G and Schedule 13D filings with the United States Securities and Exchange Commission, or the “SEC,” as having a 5% or more beneficial interest in our common stock. The regulations further provide that an investment company which is registered under the Investment Company Act of 1940, as amended, will not be treated as a 5% Stockholder for such purposes.

Our shares of common stock are currently and may in the future also be, owned, actually or under applicable attribution rules, such that 5% Stockholders own, in the aggregate, 50% or more of our common stock. In such circumstances, we will be subject to the 5% Override Rule unless we can establish that among the shares included in the closely-held block of our shares of common stock are a sufficient number of shares of common stock that are owned or treated as owned by “qualified share-holders” that the shares of common stock included in such block that are not so treated could not constitute 50% or more of the shares of our common stock for more than half the number of days during the taxable year. In order to establish this, such qualified share-holders would have to comply with certain documentation and certification requirements designed to substantiate their identity as qualified share-holders. For these purposes, a “qualified share-holder” includes (i) an individual that owns or is treated as owning shares of our common stock and is a resident of a jurisdiction that provides an exemption that is equivalent to that provided by Section 883 of the Code and (ii) certain other persons. There can be no assurance that we will not be subject to the 5% Override Rule.

Our Chief Executive Officer, who is treated under applicable ownership attribution rules as owning approximately 11.1% of our shares of common stock as of April 1, 2016, has entered into an agreement with us regarding his compliance, and the compliance by certain entities that he controls and through which he owns our shares, with the certification requirements designed to substantiate status as qualified stockholders. In certain circumstances, his compliance and the compliance of such entities he controls with the terms of that agreement

 

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may enable us and our subsidiaries to qualify for the benefits of Section 883 even where persons each of whom owns, either directly or under applicable attribution rules, 5% or more of our shares own, in the aggregate, more than 50% of our outstanding shares. There can be no assurance, however, that his compliance and the compliance of such entities he controls with the terms of that agreement will enable us or our subsidiaries to qualify for the benefits of Section 883.

We do not believe that we or our subsidiaries derived a material amount of United States-source shipping income in 2015.

There can be no assurance that we or any of our subsidiaries will qualify for the benefits of Section 883 for any year.

To the extent the benefits of Section 883 are unavailable, our United States-source shipping income and that at our subsidiaries, to the extent not considered to be “effectively connected” with the conduct of a United States trade or business, as described below, would be subject to a 4% tax imposed by Section 887 of the Code on a gross basis, without the benefit of deductions. Since under the sourcing rules described above, we expect that no more than 50% of our shipping income and that of our subsidiaries would be treated as being derived from United States-sources, we expect that the maximum effective rate of United States federal income tax on such gross shipping income would never exceed 2% under the 4% gross basis tax regime.

To the extent the benefits of the Section 883 exemption are unavailable and our United States-source shipping income or that of our subsidiaries is considered to be “effectively connected” with the conduct of a United States trade or business, as described below, any such “effectively connected” United States-source shipping income, net of applicable deductions, would be subject to the United States federal corporate income tax currently imposed at rates of up to 35%. In addition, we or our subsidiaries may be subject to the 30% “branch profits” taxes on earnings effectively connected with the conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of a United States trade or business by us or our subsidiaries.

Our United States-source shipping income and that of our subsidiaries, other than leasing income, will be considered “effectively connected” with the conduct of a United States trade or business only if:

 

   

we or our subsidiaries have, or are considered to have, a fixed place of business in the United States involved in the earning of shipping income; and

 

   

substantially all (at least 90%) of our United States-source shipping income, other than leasing income or that of a subsidiary, is attributable to regularly scheduled transportation, such as the operation of a vessel that follows a published schedule with repeated sailings at regular intervals between the same points for voyages that begin or end in the United States.

We do not intend to have, or permit circumstances that would result in having, any vessel operating to the United States on a regularly scheduled basis.

Our United States-source shipping income from leasing or that of our subsidiaries will be considered “effectively connected” with the conduct of a United States trade or business only if:

 

   

we or our subsidiaries have, or are considered to have, a fixed place of business in the United States that is involved in the meaning of such leasing income; and

 

   

substantially all (at least 90%) of our United States-source shipping income from leasing or that of a subsidiary is attributable to such fixed place of business.

For these purposes, leasing income is treated as attributable to a fixed place of business where such place of business is a material factor in the realization of such income and such income is realized in the ordinary course

 

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of business carried on through such fixed place of business. Based on the foregoing and on the expected mode of our shipping operations and other activities, we believe that none of our United States-source shipping income or that of our subsidiaries is “effectively connected” with the conduct of a United States trade or business.

United States Taxation of Gain on Sale of Vessels

Regardless of whether we qualify for exemption under Section 883, we will not be subject to United States federal income taxation with respect to gain realized on a sale of a vessel, provided the sale is considered to occur outside of the United States under United States federal income tax principles. In general, a sale of a vessel will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside of the United States. It is expected that any sale of a vessel will be so structured that it will be considered to occur outside of the United States.

United States Federal Income Taxation of United States Holders

As used herein, the term “United States Holder” means a beneficial owner of common stock that is a United States citizen or resident, United States corporation or other United States entity taxable as a corporation, an estate the income of which is subject to United States federal income taxation regardless of its source, or a trust if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust.

This discussion applies only to beneficial owners of common stock that own the common stock as “capital assets” (generally, for investment purposes) and does not comment on all aspects of U.S. federal income taxation that may be important to certain shareholders in light of their particular circumstances, such as shareholders subject to special tax rules (e.g., financial institutions, regulated investment companies, real estate investment trusts, insurance companies, traders in securities that have elected the mark-to-market method of accounting for their securities, persons liable for alternative minimum tax, broker-dealers, tax-exempt organizations, partnerships or other pass-through entities and their investors or former citizens or long-term residents of the United States) or shareholders that will hold common stock as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, all of whom may be subject to U.S. federal income tax rules that differ significantly from those summarized below.

If a partnership (or an entity treated as a partnership for United States federal income tax purposes) holds our common stock, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partner in a partnership holding our common stock, you are encouraged to consult your tax advisor.

Distributions

Subject to the discussion of passive foreign investment companies below, any distributions made by us with respect to our common stock to a United States Holder will generally constitute dividends, which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the United States Holder’s tax basis in his common stock on a dollar for dollar basis and thereafter as capital gain. Because we are not a United States corporation, United States Holders that are corporations will not be entitled to claim a dividends received deduction with respect to any distributions they receive from us. Dividends paid with respect to our common stock will generally be treated as passive category income or, in the case of certain types of United States Holders, general category income for purposes of computing allowable foreign tax credits for United States foreign tax credit purposes.

Dividends paid on our common stock to a United States Holder who is an individual, trust or estate (a “United States Individual Holder”) should be treated as “qualified dividend income” that is taxable to such

 

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United States Individual Holders at preferential tax rates provided that (1) the common stock is readily tradable on an established securities market in the United States (such as the Nasdaq Global Select Market); (2) we are not a passive foreign investment company, or PFIC, for the taxable year during which the dividend is paid or the immediately preceding taxable year see the discussion under the heading “PFIC Status and Significant Tax Consequences” below for a discussion of our potential qualification as a PFIC; and (3) the United States Individual Holder owns the common stock (and has not been protected from risk of loss) for more than 60 days in the 121-day period beginning 60 days before the date on which the common stock becomes ex-dividend. Special rules may apply to any “extraordinary dividend”. Generally, an extraordinary dividend is a dividend in an amount which is equal to or in excess of ten percent of a stockholder’s adjusted basis (or fair market value in certain circumstances) in a share of common stock paid by us. If we pay an “extraordinary dividend” on our common stock that is treated as “qualified dividend income,” then any loss derived by a United States Individual Holder from the sale or exchange of such common stock will be treated as long-term capital loss to the extent of such dividend. There is no assurance that any dividends paid on our common stock will be eligible for these preferential rates in the hands of a United States Individual Holder. Any dividends paid by us which are not eligible for these preferential rates will be taxed to a United States Individual Holder at the standard ordinary income rates. Legislation has been proposed which, if enacted into law in its present form, would likely preclude, prospectively from the date of enactment, our dividends from being treated as “qualified dividend income” eligible for the preferential tax rates described above.

Sale, Exchange or other Disposition of Common Stock

Assuming we do not constitute a PFIC for any taxable year, a United States Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common stock in an amount equal to the difference between the amount realized by the United States Holder from such sale, exchange or other disposition and the United States Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the United States Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition. Such capital gain or loss will generally be treated as United States-source income or loss, as applicable, for United States foreign tax credit purposes. A United States Holder’s ability to deduct capital losses is subject to certain limitations.

PFIC Status and Significant Tax Consequences

Special United States federal income tax rules apply to a United States Holder that holds stock in a foreign corporation classified as a PFIC for United States federal income tax purposes. In general, we will be treated as a PFIC with respect to a United States Holder if, for any taxable year in which such holder held our common stock, either:

 

   

at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains and rents derived other than in the active conduct of a rental business); or

 

   

at least 50% of the average value of our assets during such taxable year produce, or are held for the production of, passive income.

For purposes of determining whether we are a PFIC, we will be treated as earning and owning our proportionate share of the income and assets, respectively, of any of our subsidiary corporations in which we own at least 25 percent of the value of the subsidiary’s stock. Income earned, or deemed earned, by us in connection with the performance of services will not constitute passive income. By contrast, rental income will generally constitute “passive income” unless we are treated under specific rules as deriving our rental income in the active conduct of a trade or business.

We may hold, directly or indirectly, interests in other entities that are PFICs (“Subsidiary PFICs”). If we are a PFIC, each United States Holder will be treated as owning its pro rata share by value of the stock of any such Subsidiary PFICs.

 

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In connection with determining our PFIC status we treat and intend to continue to treat the gross income that we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. We believe that our income from time chartering activities does not constitute “passive income” and that the assets that we own and operate in connection with the production of that income do not constitute assets held for the production of passive income. We treat and intend to continue to treat, for purposes of the PFIC rules, the income that we derive from bareboat charters as passive income and the assets giving rise to such income as assets held for the production of passive income. We believe there is substantial authority supporting our position consisting of case law and IRS pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. There is, however, no legal authority specifically under the PFIC rules regarding our current and proposed method of operation and it is possible that the Internal Revenue Service, or IRS, may not accept our positions and that a court may uphold such challenge, in which case we and certain of our subsidiaries could be treated as PFICs. In this regard we note that a recent federal court decision, Tidewater Inc. and Subsidiaries v. United States, 565 F.3d 299 (5th Cir. 2009), held that income derived from certain time chartering activities should be treated as rental income rather than services income for purposes of the “foreign sales corporation” rules under the Code. The IRS has stated that it disagrees with and will not acquiesce to the Tidewater decision, and in its discussion stated that the time charters at issue in Tidewater would be treated as producing services income for PFIC purposes. However, the IRS’s statement with respect to the Tidewater decision was an administrative action that cannot be relied upon or otherwise cited as precedent by taxpayers. Consequently, in the absence of any binding legal authority specifically relating to the statutory provisions governing PFICs, there can be no assurance that the IRS or a court would agree with the Tidewater decision. In addition, in making the determination as to whether we are a PFIC, we intend to treat the deposits that we make on our newbuilding contracts and that are with respect to vessels we do not expect to bareboat charter as assets which are not held for the production of passive income for purposes of determining whether we are a PFIC. We note that there is no direct authority on this point and it is possible that the IRS may disagree with our position. However, if the principles of the Tidewater decision were applicable to our time charters, or our new build deposits were treated as assets producing passive income, we would likely be treated as a PFIC. Moreover, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC, we cannot assure you that the nature of our assets, income and operations will not change, or that we can avoid being treated as a PFIC for any taxable year.

We do not believe that we were a PFIC for 2015. This belief is based in part upon our beliefs regarding the value of the assets that we hold for the production of or in connection with the production of passive income relative to the value of our other assets. Should these beliefs turn out to be incorrect, then we and certain of our subsidiaries could be treated as PFICs for 2015. In this regard we note that our beliefs and expectations regarding the relative values of our assets place us close to the threshold for PFIC status, and thus a relatively small deviance between our beliefs and expectations and actual values could result in the treatment of us and certain of our subsidiaries as PFICs. There can be no assurance that the IRS or a court will not determine values for our assets that would cause us to be treated as a PFIC for 2015 or a subsequent year. In addition, although we do not believe that we were a PFIC for 2015, we may choose to operate our business in the current or in future taxable years in a manner that could cause us to become a PFIC for those years. Because our status as a PFIC for any taxable year will not be determinable until after the end of the taxable year, and depends upon our assets, income and operations in that taxable year, there can be no assurance that we will not be considered a PFIC for 2016 or any future taxable year.

As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a United States Holder would be subject to different taxation rules depending on whether the United States Holder makes an election to treat us as a “Qualified Electing Fund,” which election we refer to as a “QEF election.” As an alternative to making a QEF election, a United States Holder should be able to make a “mark-to-market” election with respect to our common stock, as discussed below. Regardless of whether a United States Holder makes a QEF election or a mark-to-market election, if we were to be treated as a PFIC for any taxable year ending on or after December 31, 2015, the United States Holder generally would be required to file an IRS Form 8621 reporting his ownership of shares in a PFIC.

 

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Taxation of United States Holders Making a Timely QEF Election

If a United States Holder makes a timely QEF election, which United States Holder we refer to as an “Electing Holder,” the Electing Holder must report each year for United States federal income tax purposes his pro-rata share of our ordinary earnings and our net capital gain, if any, for our taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing Holder. Generally, a QEF election should be made on or before the due date for filing the electing United States Holder’s U.S. federal income tax return for the first taxable year in which our common stock is held by such United States Holder and we are classified as a PFIC. The Electing Holder’s adjusted tax basis in the common stock will be increased to reflect taxed but undistributed earnings and profits. Distributions of earnings and profits that had been previously taxed will result in a corresponding reduction in the adjusted tax basis in the common stock and will not be taxed again once distributed. An Electing Holder would generally recognize capital gain or loss on the sale, exchange or other disposition of our common stock. A United States Holder would make a QEF election with respect to any year that our company and any PFIC Subsidiary is a PFIC by filing one copy of IRS Form 8621 with his United States federal income tax return and a second copy in accordance with the instructions to such form. If we were aware that we were to be treated as a PFIC for any taxable year, we would provide each United States Holder with all necessary information in order to make the QEF election described above with respect to our common stock and the stock of any Subsidiary PFIC.

Taxation of United States Holders Making a “Mark-to-Market” Election

Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate, our common stock is treated as “marketable stock,” a United States Holder would be allowed to make a “mark-to-market” election with respect to our common stock, provided the United States Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made, the United States Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the common stock at the end of the taxable year over such holder’s adjusted tax basis in the common stock. The United States Holder would also be permitted an ordinary loss in respect of the excess, if any, of the United States Holder’s adjusted tax basis in the common stock over its fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A United States Holder’s tax basis in his common stock would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of our common stock would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the common stock would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included by the United States Holder. A mark-to-market election under the PFIC rules with respect to our common stock would not apply to a Subsidiary PFIC, and a United States Holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that Subsidiary PFIC. Consequently, United States Holders of our common stock could be subject to the PFIC rules with respect to income of the Subsidiary PFIC, the value of which already had been taken into account indirectly via mark-to-market adjustments.

Taxation of United States Holders Not Making a Timely QEF or Mark-to-Market Election

If we were to be treated as a PFIC for any taxable year, a United States Holder who does not make either a QEF election or a “mark-to-market” election for that year, whom we refer to as a “Non-Electing Holder,” would be subject to special rules with respect to (1) any excess distribution (i.e., the portion of any distributions received by the Non-Electing Holder on our common stock in a taxable year in excess of 125 percent of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for the common stock), and (2) any gain realized on the sale, exchange or other disposition of our common stock. Under these special rules:

 

   

the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for the common stock;

 

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the amount allocated to the current taxable year or to any portion of the United States Holder’s holding period prior to the first taxable year for which we were a PFIC would be taxed as ordinary income; and

 

   

the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.

These penalties would not apply to a pension or profit sharing trust or other tax-exempt organization that did not borrow funds or otherwise utilize leverage in connection with its acquisition of our common stock.

Other PFIC Elections.

If a United States Holder held our stock during a period when we were treated as a PFIC but the United States Holder did not have a QEF election in effect with respect to us, then in the event that we were not treated as a PFIC for a subsequent taxable year, the United States Holder could elect to cease to be subject to the rules described above with respect to those shares by making a “deemed sale” or, in certain circumstances, a “deemed dividend” election with respect to our stock. If the United States Holder makes a deemed sale election, the United States Holder will be treated, for purposes of applying the rules described above under the heading “Taxation of United States Holders Not Making a Timely QEF or Mark-to-Market Election”, as having disposed of our stock for its fair market value on the last day of the last taxable year for which we qualified as a PFIC (the “termination date”). The United States Holder would increase his, her or its basis in such common stock by the amount of the gain on the deemed sale described in the preceding sentence. Following a deemed sale election, the United States Holder would not be treated, for purposes of the PFIC rules, as having owned the common stock during a period prior to the termination date when we qualified as a PFIC.

If we were treated as a “controlled foreign corporation” for United States federal income tax purposes for the taxable year that included the termination date, then a United States Holder could make a “deemed dividend” election with respect to our common stock. If a deemed dividend election is made, the United States Holder is required to include in income as a dividend his, her or its pro rata share (based on all of our stock held by the United States Holder, directly or under applicable attribution rules, on the termination date) of our post-1986 earnings and profits as of the close of the taxable year that includes the termination date (taking only earnings and profits accumulated in taxable years in which we were a PFIC into account). The deemed dividend described in the preceding sentence is treated as an excess distribution for purposes of the rules described above under the heading “Taxation of United States Holders Not making a Timely QEF or Mark-to-Market Election”. The United States Holder would increase his, her or its basis in our stock by the amount of the deemed dividend. Following a deemed dividend election, the United States Holder would not be treated, for purposes of the PFIC rules, as having owned the stock during a period prior to the termination date when we qualified as a PFIC. For purposes of determining whether the deemed dividend election is available, we generally will be treated as a controlled foreign corporation for a taxable year when, at any time during that year, United States persons, each of whom owns, directly or under applicable attribution rules, shares having 10% or more of the total voting power of our stock, in the aggregate own, directly or under applicable attribution rules, shares representing more than 50% of the voting power or value of our stock.

A deemed sale or deemed dividend election must be made on the United States Holder’s original or amended return for the shareholder’s taxable year that includes the termination date and, if made on an amended return, such amended return must be filed not later than the date that is three years after the due date of the original return for such taxable year. Special rules apply where a person is treated, for purposes of the PFIC rules, as indirectly owning our common stock.

United States Federal Income Taxation of “Non-United States Holders”

A beneficial owner of common stock that is not a United States Holder and is not treated as a partnership for United States federal income tax purposes is referred to herein as a “Non-United States Holder.”

 

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Dividends on Common Stock

Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on dividends received from us with respect to our common stock, unless that income is effectively connected with the Non-United States Holder’s conduct of a trade or business in the United States. If the Non-United States Holder is entitled to the benefits of a United States income tax treaty with respect to those dividends, that income generally is taxable only if it is attributable to a permanent establishment maintained by the Non-United States Holder in the United States.

Sale, Exchange or Other Disposition of Common Stock

Non-United States Holders generally will not be subject to United States federal income tax or withholding tax on any gain realized upon the sale, exchange or other disposition of our common stock, unless:

 

   

the gain is effectively connected with the Non-United States Holder’s conduct of a trade or business in the United States. If the Non-United States Holder is entitled to the benefits of an income tax treaty with respect to that gain, that gain generally is taxable only if it is attributable to a permanent establishment maintained by the Non-United States Holder in the United States; or

 

   

the Non-United States Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition and other conditions are met.

If the Non-United States Holder is engaged in a United States trade or business for United States federal income tax purposes, the income from the common stock, including dividends and the gain from the sale, exchange or other disposition of the stock that is effectively connected with the conduct of that trade or business will generally be subject to regular United States federal income tax in the same manner as discussed in the previous section relating to the taxation of United States Holders. In addition, in the case of a corporate Non-United States Holder, such holder’s earnings and profits that are attributable to the effectively connected income, which are subject to certain adjustments, may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty.

Backup Withholding and Information Reporting

In general, dividend payments, or other taxable distributions, made within the United States to a non-corporate United States Holder will be subject to information reporting requirements and backup withholding tax if such holder:

 

   

fails to provide an accurate taxpayer identification number;

 

   

is notified by the Internal Revenue Service that you have failed to report all interest or dividends required to be shown on your federal income tax returns; or

 

   

in certain circumstances, fails to comply with applicable certification requirements.

Non-United States Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable.

If a holder sells our common stock to or through a United States office or broker, the payment of the proceeds is subject to both United States backup withholding and information reporting unless the holder certifies that it is a non-United States person, under penalties of perjury, or the holder otherwise establishes an exemption. If a holder sells our common stock through a non-United States office of a non-United States broker and the sales proceeds are paid outside the United States then information reporting and backup withholding generally will not apply to that payment. However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United States, if a holder sells our common stock through a non-United States office of a broker that is a United States person or has some other contacts with the United States.

 

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Backup withholding tax is not an additional tax. Rather, a holder generally may obtain a refund of any amounts withheld under backup withholding rules that exceed such stockholder’s income tax liability by filing a refund claim with the Internal Revenue Service.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we file reports and other information as a foreign private issuer with the SEC. You may inspect and copy our public filings without charge at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates from the Public Reference Section of the SEC at its principal office at 100 F Street, N.E., Washington, D.C. 20549. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.

I. Subsidiary Information

Not applicable.

 

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Our risk management policy

Our primary market risks relate to adverse movements in freight rates for small LPG carriers and any declines that may occur in the value of our assets which are made up primarily of small LPG carriers. Our policy is to also continuously monitor our exposure to other business risks, including the impact of changes in interest rates, currency rates, and bunker prices on earnings and cash flows. We assess these risks and, when appropriate, enter into derivative contracts with credit-worthy counter parties to minimize our exposure to the risks. In regard to bunker prices, as our employment policy for our vessels has continued to be and is expected to continue with a high percentage of our fleet on period employment, we are not directly exposed for the majority of our fleet to increases in bunker fuel prices as these are the responsibility of the charterer under period charter arrangements. For the remainder of the fleet operating in the spot market we do not intend to enter into bunker hedging arrangements.

 

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Interest rate risk

We are subject to market risks relating to changes in interest rates, because we have floating rate debt outstanding under our loan agreements on which we pay interest based on LIBOR plus a margin. In order to manage our exposure to changes in interest rates due to this floating rate indebtedness, we enter into interest rate swap agreements. Set forth below is a table of our interest rate swap arrangements converting floating interest rate exposure into fixed as of December 31, 2015 and 2016.

 

    Effective
Date
  Termination
Date
  Notional
Amount
on Effective
Date
(in millions)
    Fixed Rate
(StealthGas
pays)
    Floating Rate
(StealthGas
Receives)
    Fair Value
December 31,
2015
(in millions)
    Notional
Amount
December 31,
2015
(in millions)
    Estimated
Notional
Amount
December 31,
2016
(in millions)
 

Swap 1

  March 9, 2006   March 9, 2016   $ 22.5        4.52 %(1)      6 month U.S.      $ 0.09      $ 4.4      $ —     
            dollar LIBOR         

Swap 2

  September 9, 2009   March 9, 2016   $ 53.3        4.73     3 month U.S.      $ 0.21      $ 19.5      $ —     
            dollar LIBOR         

Swap 3

  September 30, 2015   September 30, 2020   $ 17.6        2.60     3 month U.S.      $ 0.58      $ 16.9      $ 14.4   
            dollar LIBOR         

Swap 4

  September 30, 2015   September 30, 2020   $ 17.6        1.69     3 month U.S.      $ 0.10      $ 16.9      $ 14.4   
            dollar LIBOR         

Swap 5

  October 2, 2015   October 2, 2020   $ 12.1        1.54     3 month U.S.      $ 0.0      $ 12.1      $ 11.2   
            dollar LIBOR         

Swap 6

  November 4, 2015   August 4, 2021   $ 11.2        1.52     3 month U.S.      $ (0.06   $ 11.2      $ 10.4   
            dollar LIBOR         

Swap 7

  December 3, 2015   September 3, 2021   $ 11.2        1.55     3 month U.S.      $ (0.06   $ 11.2      $ 10.4   
            dollar LIBOR         

Total

            $ 0.86      $ 92.2      $ 60.8   

 

(1) If the United States dollar six month LIBOR is less than or equal to 5.75%, the fixed rate is 4.52%. If the United States dollar six month LIBOR is higher than 5.75%, then the fixed rate would be the United States dollar six month LIBOR less 123 basis points.

As of December 31, 2015, total bank indebtedness of the Company was $422.2 million, of which $92.2 million was covered by the interest rate swap agreements described above. As set forth in the above table, as of December 31, 2015, we paid fixed rates ranging from 1.52% to 4.73% and received floating rates based on LIBOR of approximately 0.38% under our seven floating-to-fixed rate interest rate swap agreements. We have not and do not intend to enter into interest rate swaps for speculative purposes. Based on the amount of our outstanding indebtedness as of December 31, 2015, and our interest swap arrangements as of December 31, 2015, a hypothetical one percentage point increase in relevant interest rates (three and six month U.S. dollar LIBOR) would increase our interest expense, on an annualized basis, by approximately $2.7 million (2014: $2.5 million) for the year ended December 31, 2015.

Foreign exchange rate fluctuation

We generate all of our revenues in U.S. dollars and incurred about 15% of our expenses in currencies other than U.S. dollars in 2015 (2014: 16%). For accounting purposes, expenses incurred in other currencies are converted into U.S. dollars at the exchange rate prevailing on the date of each transaction. Due to our relatively low percentage exposure of any particular currency other than our base currency, which is the U.S. dollar we believe that such currency movements will not otherwise have a material effect on us. As such, we do not hedge these exposures as the amounts involved do not make hedging economic. As of April 1, 2016 we have no payment obligations related to the building of vessels in currencies other than U.S. dollars.

We have not and do not intend to enter into foreign currency contracts for speculative purposes. Please read Note 2 (Significant Accounting Policies), Note 11 (Long Term Debt) and Note 12 (Derivative and Fair Value Disclosures) to our Financial Statements included herein, which provide additional information with respect to our derivative financial instruments and existing debt agreements.

 

Item 12. Description of Securities Other than Equity Securities

Not Applicable.

 

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PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable.

 

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

 

Item 15. Controls and Procedures

a. Disclosure Controls and Procedures

StealthGas’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2015. Disclosure controls and procedures are defined under SEC rules as controls and other procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on the Company’s evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015.

b. Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States (“GAAP”).

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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In making its assessment of the Company’s internal control over financial reporting as of December 31, 2015, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and evaluated the internal control over financial reporting.

Management concluded that, as of December 31, 2015 the Company’s internal control over financial reporting was effective.

c. Attestation Report of the Registered Public Accounting Firm

The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Deloitte Hadjipavlou Sofianos & Cambanis S.A., an independent registered public accounting firm, as stated in their report which appears herein.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of StealthGas Inc.

We have audited the internal control over financial reporting of StealthGas Inc. and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated April 22, 2016 expressed an unqualified opinion on those financial statements.

/s/ Deloitte Hadjipavlou Sofianos & Cambanis S.A.

Athens, Greece

April 22, 2016

 

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d. Changes in Internal Control Over Financial Reporting

During the period covered by this Annual Report on Form 20-F, we have made no changes to our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

Item 16A. Audit Committee Financial Expert

The Board has determined that Markos Drakos is an Audit Committee financial expert as defined by the U.S. Securities and Exchange Commission and meets the applicable independence requirements of the U.S. Securities and Exchange Commission and the Nasdaq Stock Market.

 

Item 16B. Code of Ethics

We have adopted a Code of Business Conduct and Ethics, a copy of which is posted on our website, and may be viewed at http://www.stealthgas.com. We will also provide a paper copy free of charge upon written request by our stockholders. Stockholders may direct their requests to the attention of: Investment Relations, 331 Kifissias Avenue, Erithrea 14561 Athens, Greece. No waivers of the Code of Business Conduct and Ethics were granted to any person during the fiscal year ended December 31, 2015.

 

Item 16C. Principal Accountant Fees and Services

Remuneration of Deloitte Hadjipavlou Sofianos & Cambanis S.A.(“Deloitte”), an Independent Registered Public Accounting Firm (in thousands):

 

     2015      2014  

Audit fees

   $ 343       $ 621   

Assurance/audit related fees

     —           —     

Tax fees

     —           —     

All other fees

     —           —     

Total

   $ 343       $ 621   

(1) Audit fees

Audit fees represent compensation for professional services rendered for (i) the audit of our financial statements included herein; (ii) the review of our quarterly financial information; and (iii) services provided in connection with public or private offerings and any other services performed for SEC or other regulatory filings by us or our subsidiaries.

(2) Assurance / Audit Related Fees

Deloitte did not provide any services that would be classified in this category in 2015 and 2014.

(3) Tax Fees

Deloitte did not provide any tax services in 2015 and 2014.

(4) All Other Fees

Deloitte did not provide any other services that would be classified in this category in 2015 and 2014.

 

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Non-audit services

The Audit Committee of our Board of Directors has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees.

Engagements for proposed services either may be separately pre-approved by the audit committee or entered into pursuant to detailed pre-approval policies and procedures established by the audit committee, as long as the audit committee is informed on a timely basis of any engagement entered into on that basis.

Approval for other permitted non-audit services has to be sought on an ad hoc basis.

Where no Audit Committee meeting is scheduled within an appropriate time frame, the approval is sought from the Chairman of the Audit Committee subject to confirmation at the next meeting.

 

Item 16D. Exemptions from the Listing Standards for Audit Committees

None.

 

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On November 26, 2014, we publicly announced that our Board of Directors had authorized the repurchase of up to $10,000,000 of shares of our common stock and on February 26, 2015 we publicly announced that our Board of Directors had approved an additional $20,000,000 of common stock repurchases. Shares may be purchased from time to time in open market or privately negotiated transactions, which may include derivative transactions, at times and prices that are considered to be appropriate by the Company and the program may be discontinued at any time. The below table presents information about our stock repurchases through March 31, 2016. All purchases have been made on the open market within the safe harbor provisions of Regulation 10b-18 under the Exchange Act.

 

Period

   Total
Number of
Shares
Purchased
(a)
     Average
Price
Paid Per
Share
(b)
     Total
Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
(c)
     Maximum
Approximate
Dollar Value
of Shares
that May Yet Be
Purchased
Under the
Plans or
Programs
(d)
 

December 1 to 31, 2014

     843,022       $ 6.30         843,022       $ 4,688,961   

January 2 to 21, 2015

     607,226         6.07         1,450,248       $ 1,003,100   

February 26, 2015

     137,013         6.03         1,587,261       $ 20,176,911   

March 9 to 18, 2015

     172,833         6.15         1,760,094       $ 19,113,988   

April 15 to 30, 2015

     51,133         6.61         1,811,227       $ 18,775,999   

May 1 to 27, 2015

     320,909         6.61         2,132,136       $ 16,654,791   

June 9 to 22, 2015

     47,039         6.63         2,179,175       $ 16,342,922   

July 13 to 24, 2015

     31,198         5.71         2,210,373       $ 16,164,781   

August 3 to 31, 2015

     139,900         5.01         2,350,273       $ 15,463,882   

September 1 to 29, 2015

     437,771         4.53         2,787,044       $ 13,485,310   

October 1 to 30, 2015

     226,949         4.46         3,013,993       $ 12,473,117   

November 1 to 30, 2015

     60,491         4.28         3,074,484       $ 12,214,216   

December 1 to 31, 2015

     140,635         3.36         3,215,119       $ 11,741,682   

January 1 to 31, 2016

     329,501         2.89         3,544,620       $ 10,789,424   

February 1 to 29, 2016

     71,894         2.77         3,616,514       $ 10,590,278   

March 1 to 31, 2016

     242,783         3.45         3,859,297       $ 9,752,677   

We did not repurchase any shares of our common stock in 2013.

 

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