UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2019
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-38771
DIAMOND S SHIPPING INC.
(Exact name of registrant as specified in its charter)
| Republic of the Marshall Islands | 98-1480128 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) | |
| 33 Benedict Place | ||
| Greenwich, CT | 06830 | |
| (Address of principal executive offices) | (Zip Code) |
(203) 413-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | DSSI | NYSE |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| Non-accelerated filer | x | Smaller reporting company | o |
| Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the issuer’s common stock as of November 11, 2019: common stock, par value $0.001 per share — 40,453,489 shares.
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
INDEX
| 2 |
Special Notice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements may appear throughout this report, including without limitation, Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are often identified by future or conditional words such as “will,” “plans,” “expects,” “intends,” “believes,” “seeks,” “estimates,” or “anticipates,” or by variations of such words or by similar expressions. There can be no assurance that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions, and other important factors that could cause our actual results or conditions to differ materially from those expressed or implied by such forward-looking statements.
The following important factors, and those important factors described elsewhere in this report, could affect (and in some cases have affected) our actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements:
| · | the cyclicality of the tanker industry; |
| · | changes in economic and competitive conditions affecting our business, including market fluctuations in charter rates; |
| · | risks related to an oversupply of tanker vessels; |
| · | changes in fuel prices, including as a result of the imposition of sulfur oxide emissions limits in 2020 under new regulations adopted by the IMO (for those vessels that are not retrofitted with scrubbers); |
| · | decreases in the market values of tanker vessels; |
| · | risks related to the management of our growth strategy, counterparty risks and customer relations with key customers; |
| · | our ability to meet obligations under time charter agreements; |
| · | dependence on third-party managers and a limited number of customers; |
| · | our liquidity, level of indebtedness, operating expenses, capital expenditures and financing; |
| · | our interest rate swap agreements and credit facilities; |
| · | risk of loss, including potential liability from future litigation and potential costs due to environmental damage, vessel collisions and business interruption; risks related to war, terrorism and piracy; |
| · | risks related to the acquisition, modification and operation of vessels; |
| · | future supply of, and demand for, refined products and crude oil, including relating to seasonality; |
| · | risks related to our insurance, including adequacy of coverage and increased premium payments; |
| · | risks related to tax rules applicable to us; |
| · | our ability to clear the oil majors’ risk assessment processes; |
| · | future refined product and crude oil prices and production; |
| · | the carrying values of our vessels and the potential for any asset impairments; |
| · | our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term time charter; |
| 3 |
| · | our continued ability to enter into long-term, fixed-rate time charters with our charterers and to re-charter our vessels as their existing charters expire at attractive rates; |
| · | failure to realize the anticipated benefits of the Merger (as defined herein), including as a result of integrating the businesses; |
| · | failure to maintain effective internal control over financial reporting; |
| · | our ability to implement our business strategy and manage planned growth; and |
| · | other risks and uncertainties disclosed in the Company’s reports filed from time to time with the Securities and Exchange Commission (“SEC”) under the Exchange Act. |
Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk. When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and in our other SEC filings. These forward-looking statements speak only as of the date on which such statements were made, and we undertake no obligation to update these statements, except as required by the federal securities laws. These forward-looking statements are not guarantees of our future performance, and actual results and future developments may vary materially from those projected in the forward-looking statements.
Except to the extent required by applicable law or regulation, we undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
| 4 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements (Unaudited)
| 5 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
as of September 30, 2019 and December 31, 2018
(In Thousands, except for share and per share data)
(Unaudited)
September 30, 2019 | December 31, 2018 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 75,559 | $ | 83,054 | ||||
| Due from charterers – Net of provision for doubtful accounts of $1,812 and $1,962, respectively | 55,284 | 42,637 | ||||||
| Inventories | 29,756 | 20,880 | ||||||
| Prepaid expenses and other current assets | 13,107 | 3,731 | ||||||
| Total current assets | 173,706 | 150,302 | ||||||
| Noncurrent assets: | ||||||||
| Vessels – Net of accumulated depreciation of $527,567 and $479,532, respectively | 1,890,392 | 1,454,286 | ||||||
| Other property – Net of accumulated depreciation of $671 and $458, respectively | 690 | 756 | ||||||
| Deferred drydocking costs – Net of accumulated amortization of $15,996 and $14,573, respectively | 37,112 | 33,287 | ||||||
| Deferred financing costs – Net | — | 169 | ||||||
| Restricted cash | 5,544 | 5,104 | ||||||
| Time charter contracts acquired – Net of accumulated amortization of $1,539 and $1,733, respectively | 5,761 | 93 | ||||||
| Other noncurrent assets | 4,218 | 5,858 | ||||||
| Total noncurrent assets | 1,943,717 | 1,499,553 | ||||||
| Total | $ | 2,117,423 | $ | 1,649,855 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 122,884 | $ | 97,315 | ||||
| Accounts payable and accrued expenses | 50,068 | 25,316 | ||||||
| Deferred charter hire revenue | 3,210 | 3,622 | ||||||
| Derivative liabilities | 1,746 | 630 | ||||||
| Total current liabilities | 177,908 | 126,883 | ||||||
| Long-term debt – Net of deferred financing costs of $11,063 and $7,147, respectively | 760,814 | 542,226 | ||||||
| Other noncurrent liabilities | 750 | — | ||||||
| Derivative liabilities | 1,235 | 900 | ||||||
| Total liabilities | 940,707 | 670,009 | ||||||
| Commitments and contingencies (Note 17) | ||||||||
| Shareholders’ Equity: | ||||||||
| Partners’ contributions | — | 994,771 | ||||||
| Common stock, par value $0.001; 100,000,000 shares authorized; issued and outstanding 39,890,698 shares at September 30, 2019 | 40 | — | ||||||
| Additional paid-in capital | 1,236,299 | 2,558 | ||||||
| Accumulated other comprehensive income | 891 | 4,387 | ||||||
| Accumulated deficit | (94,685 | ) | (56,477 | ) | ||||
| Total Diamond S Shipping Inc. shareholders’ equity | 1,142,545 | 945,239 | ||||||
| Noncontrolling interests | 34,171 | 34,607 | ||||||
| Total equity | 1,176,716 | 979,846 | ||||||
| Total | $ | 2,117,423 | $ | 1,649,855 | ||||
See notes to condensed consolidated financial statements.
| 6 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Operations
for the Three and Nine Months Ended September 30, 2019 and 2018
(In Thousands, except for share and
per share data)
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue: | ||||||||||||||||
| Spot revenue | $ | 120,954 | $ | 83,646 | $ | 348,747 | $ | 254,992 | ||||||||
| Time charter revenue | 20,572 | 4,476 | 44,730 | 13,248 | ||||||||||||
| Pool revenue | — | — | — | 2,846 | ||||||||||||
| Voyage revenue | 141,526 | 88,122 | 393,477 | 271,086 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Voyage expenses | 59,968 | 48,539 | 167,441 | 140,043 | ||||||||||||
| Vessel expenses | 41,799 | 26,982 | 108,976 | 83,124 | ||||||||||||
| Depreciation and amortization expense | 28,763 | 22,273 | 79,962 | 66,385 | ||||||||||||
| Loss on sale of vessels | 18,344 | — | 18,344 | — | ||||||||||||
| General and administrative expenses | 7,566 | 3,745 | 21,174 | 12,021 | ||||||||||||
| Total operating expenses | 156,440 | 101,539 | 395,897 | 301,573 | ||||||||||||
| Operating loss | (14,914 | ) | (13,417 | ) | (2,420 | ) | (30,487 | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | (13,021 | ) | (9,345 | ) | (35,813 | ) | (27,073 | ) | ||||||||
| Other income | 492 | 477 | 1,393 | 1,219 | ||||||||||||
| Total other expense – Net | (12,529 | ) | (8,868 | ) | (34,420 | ) | (25,854 | ) | ||||||||
| Net loss | (27,443 | ) | (22,285 | ) | (36,840 | ) | (56,341 | ) | ||||||||
| Less: Net loss attributable to noncontrolling interest | (1,548 | ) | (263 | ) | (1,416 | ) | (1,016 | ) | ||||||||
| Net loss attributable to Diamond S Shipping Inc. | $ | (25,895 | ) | $ | (22,022 | ) | $ | (35,424 | ) | $ | (55,325 | ) | ||||
| Net loss per share – basic | $ | (0.65 | ) | $ | (0.81 | ) | $ | (0.99 | ) | $ | (2.04 | ) | ||||
| Net loss per share – diluted | $ | (0.65 | ) | $ | (0.81 | ) | $ | (0.99 | ) | $ | (2.04 | ) | ||||
| Weighted average common shares outstanding – basic | 39,890,698 | 27,165,696 | 35,835,477 | 27,165,696 | ||||||||||||
| Weighted average common shares outstanding – diluted | 39,890,698 | 27,165,696 | 35,835,477 | 27,165,696 | ||||||||||||
See notes to condensed consolidated financial statements.
| 7 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Comprehensive Loss
for the Three and Nine Months Ended September 30, 2019 and 2018
(In Thousands)
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net loss | $ | (27,443 | ) | $ | (22,285 | ) | $ | (36,840 | ) | $ | (56,341 | ) | ||||
| Unrealized (loss) gain on cash flow hedges | (518 | ) | (67 | ) | (3,496 | ) | 1,608 | |||||||||
| Other comprehensive (loss) income | (518 | ) | (67 | ) | (3,496 | ) | 1,608 | |||||||||
| Comprehensive loss | (27,961 | ) | (22,352 | ) | (40,336 | ) | (54,733 | ) | ||||||||
| Less: comprehensive loss attributable to noncontrolling interest | (1,548 | ) | (263 | ) | (1,416 | ) | (1,016 | ) | ||||||||
| Comprehensive loss attributable to Diamond S Shipping Inc. | $ | (26,413 | ) | $ | (22,089 | ) | $ | (38,920 | ) | $ | (53,717 | ) | ||||
See notes to condensed consolidated financial statements.
| 8 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Changes in Shareholders’ Equity
for the Nine Months Ended September 30, 2019 and 2018
(In Thousands)
(Unaudited)
| Partners’ Contributions | Common Stock | Additional Paid- in Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Noncontrolling Interests | Total | ||||||||||||||||||||||
| Balance – January 1, 2019 | $ | 994,771 | $ | — | $ | 2,558 | $ | 4,387 | $ | (56,477 | ) | $ | 34,607 | $ | 979,846 | |||||||||||||
| Cumulative effect of accounting change (Note 14) | — | — | — | — | (2,784 | ) | — | (2,784 | ) | |||||||||||||||||||
| Merger transaction (Note 3) | (994,771 | ) | 40 | 1,231,579 | — | — | — | 236,848 | ||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | — | — | (1,096 | ) | — | — | (1,096 | ) | |||||||||||||||||||
| Net loss (income) | — | — | — | — | (1,026 | ) | 206 | (820 | ) | |||||||||||||||||||
| Balance – March 31, 2019 | — | 40 | 1,234,137 | 3,291 | (60,287 | ) | 34,813 | 1,211,994 | ||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | — | — | (1,882 | ) | — | — | (1,882 | ) | |||||||||||||||||||
| Capital contributions for NT Suez Holdco LLC | — | — | — | — | — | 980 | 980 | |||||||||||||||||||||
| Stock-based compensation | — | — | 861 | — | — | — | 861 | |||||||||||||||||||||
| Net loss | — | — | — | — | (8,503 | ) | (74 | ) | (8,577 | ) | ||||||||||||||||||
| Balance – June 30, 2019 | — | 40 | 1,234,998 | 1,409 | (68,790 | ) | 35,719 | 1,203,376 | ||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | — | — | (518 | ) | — | — | (518 | ) | |||||||||||||||||||
| Stock-based compensation | — | — | 1,301 | — | — | — | 1,301 | |||||||||||||||||||||
| Net loss | — | — | — | — | (25,895 | ) | (1,548 | ) | (27,443 | ) | ||||||||||||||||||
| Balance – September 30, 2019 | $ | — | $ | 40 | $ | 1,236,299 | $ | 891 | $ | (94,685 | ) | $ | 34,171 | $ | 1,176,716 | |||||||||||||
| Partners’ Contributions | Common Stock | Additional Paid- in Capital | Accumulated Other Comprehensive Income | Retained (Accumulated | Noncontrolling Interests | Total | ||||||||||||||||||||||
| Balance – January 1, 2018 | $ | 994,771 | $ | — | $ | 2,558 | $ | 4,773 | $ | 29,629 | $ | 35,029 | $ | 1,066,760 | ||||||||||||||
| Unrealized gain on cash flow hedges | — | — | — | 1,356 | — | — | 1,356 | |||||||||||||||||||||
| Net loss | — | — | — | — | (13,727 | ) | (336 | ) | (14,063 | ) | ||||||||||||||||||
| Balance – March 31, 2018 | 994,771 | — | 2,558 | 6,129 | 15,902 | 34,693 | 1,054,053 | |||||||||||||||||||||
| Unrealized gain on cash flow hedges | — | — | — | 319 | — | — | 319 | |||||||||||||||||||||
| Capital contributions for Diamond Anglo Ship Management PTE. LTD. | — | — | — | — | — | 49 | 49 | |||||||||||||||||||||
| Net loss | — | — | — | — | (19,576 | ) | (417 | ) | (19,993 | ) | ||||||||||||||||||
| Balance – June 30, 2018 | 994,771 | — | 2,558 | 6,448 | (3,674 | ) | 34,325 | 1,034,428 | ||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | — | — | (67 | ) | — | — | (67 | ) | |||||||||||||||||||
| Net loss | — | — | — | — | (22,022 | ) | (263 | ) | (22,285 | ) | ||||||||||||||||||
| Balance – September 30, 2018 | $ | 994,771 | $ | — | $ | 2,558 | $ | 6,381 | $ | (25,696 | ) | $ | 34,062 | $ | 1,012,076 | |||||||||||||
See notes to condensed consolidated financial statements.
| 9 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Condensed Consolidated Statements of
Cash Flows
for the Nine Months Ended September 30, 2019 and 2018
(In Thousands)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from Operating Activities: | ||||||||
| Net loss | $ | (36,840 | ) | $ | (56,341 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization expense | 79,962 | 66,385 | ||||||
| Loss on sale of vessels | 18,344 | — | ||||||
| Amortization of deferred financing costs | 3,106 | 2,197 | ||||||
| Amortization of time charter hire contracts acquired | 1,632 | 180 | ||||||
| Amortization of the realized gain from recouponing swaps | (2,045 | ) | (162 | ) | ||||
| Stock-based compensation expense | 2,162 | — | ||||||
| Changes in assets and liabilities | (11,723 | ) | 10,666 | |||||
| Cash paid for drydocking | (12,685 | ) | (17,403 | ) | ||||
| Net cash provided by operating activities | 41,913 | 5,522 | ||||||
| Cash flows from Investing Activities: | ||||||||
| Acquisition costs, net of cash acquired of $16,568 | (292,683 | ) | — | |||||
| Transaction costs | (18,930 | ) | (214 | ) | ||||
| Proceeds from sale of vessels | 31,800 | — | ||||||
| Payments for vessel additions and other property | (11,238 | ) | (4,666 | ) | ||||
| Net cash used in investing activities | (291,051 | ) | (4,880 | ) | ||||
| Cash flows from Financing Activities: | ||||||||
| Borrowings on long-term debt | 300,000 | — | ||||||
| Principal payments on long-term debt | (86,604 | ) | (55,779 | ) | ||||
| Borrowings on revolving credit facilities | 61,000 | 25,000 | ||||||
| Repayments on revolving credit facilities | (26,323 | ) | — | |||||
| Cash received from recouponing swaps | — | 6,813 | ||||||
| Proceeds from partners’ contributions in subsidiaries | 980 | 49 | ||||||
| Payments for deferred financing costs | (6,970 | ) | (496 | ) | ||||
| Net cash provided by (used in) financing activities | 242,083 | (24,413 | ) | |||||
| Net decrease in cash, cash equivalents and restricted cash | (7,055 | ) | (23,771 | ) | ||||
| Cash, cash equivalents and restricted cash – Beginning of period | 88,158 | 96,041 | ||||||
| Cash, cash equivalents and restricted cash – End of period | $ | 81,103 | $ | 72,270 | ||||
| Supplemental disclosures: | ||||||||
| Cash paid for interest | $ | 35,206 | $ | 24,346 | ||||
| Common stock issued to CPLP (Refer to Note 3 - Merger Transaction) | $ | 236,848 | $ | — | ||||
Unpaid transaction costs in Accounts payable and accrued expenses at the end of the period | $ | 154 | $ | — | ||||
Unpaid vessel additions in Accounts payable and accrued expenses at the end of the period | $ | 4,604 | $ | — | ||||
See notes to condensed consolidated financial statements.
| 10 |
DIAMOND S SHIPPING INC. AND SUBSIDIARIES
(In Thousands, except for share and per share data)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
| 1. | BUSINESS AND BASIS OF PRESENTATION |
Business — Diamond S Shipping Inc. (“DSSI”) was formed on November 14, 2018 under the laws of the Republic of the Marshall Islands for the purpose of receiving, via contribution from Capital Product Partners L.P. (“CPLP”), CPLP’s crude and product tanker business and combining that business with the business and operations of DSS Holdings L.P. (“DHLP”) pursuant to the Transaction Agreement, dated as of November 27, 2018 (as amended, the “Transaction Agreement”), by and among CPLP, DHLP, DSSI and the other parties named therein. DHLP was a Cayman Island limited partnership formed on October 1, 2007.
On March 27, 2019, DSSI, and DHLP and all of its directly-owned subsidiaries (the “DHLP Subsidiaries”) completed a merger pursuant to the Transaction Agreement. Pursuant to the terms of the Transaction Agreement, on March 27, 2019, the DHLP subsidiaries merged with and into DSSI, with DSSI being the surviving corporation in the merger (the “Merger”). DSSI and the DHLP Subsidiaries are hereinafter referred to collectively as the “Company.”
The Merger was accounted for as a reverse acquisition in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations” as the DHLP subsidiaries are the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of the DHLP subsidiaries for periods prior to the Merger are considered to be the predecessor financial statements of the Company. Refer to Note 3 — Merger Transaction for further information.
The Company is a seaborne transporter of crude oil and refined petroleum products, operating in the international shipping industry. As of September 30, 2019, through its wholly-owned subsidiaries, the Company owns and operates 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 50 medium range (“MR”) product carriers. The Company also controls and operates two Suezmax vessels through a joint venture (Refer to Note 5 — Joint Venture Investments).
| 2. | Summary of SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation — The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) which includes the accounts of the Company and its direct and indirect wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management of the Company, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and operating results have been included in the statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the nine months ended December 31, 2018 and notes thereto included in the Company’s Registration Statement on Form 10 (the “2018 Financial Statements”). The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2019.
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends to take advantage of the benefits of this extended transition period for as long as it is available. The Company’s condensed consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Section 107 of the JOBS Act provides that the decision not to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
| 11 |
Cash and Cash Equivalents, and Restricted Cash — The following table provides a reconciliation of Cash and cash equivalents and Restricted cash reported within the consolidated balance sheets that sum to the total of the amounts shown in the consolidated statements of cash flows:
September 30, 2019 | December 31, 2018 | September 30, 2018 | December 31, 2017 | |||||||||||||
| Cash and cash equivalents | $ | 75,559 | $ | 83,054 | $ | 67,270 | $ | 91,041 | ||||||||
| Restricted cash | 5,544 | 5,104 | 5,000 | 5,000 | ||||||||||||
| Total Cash and cash equivalents, and Restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 81,103 | $ | 88,158 | $ | 72,270 | $ | 96,041 | ||||||||
Amounts included in restricted cash represent those required to be set aside by the $66 Facility, as defined in Note 9 below. The restriction will lapse when the related long-term debt is retired.
Revenue and Voyage Expense Recognition — Pursuant to the new revenue recognition guidance as disclosed in Note 14 — Voyage Revenue, which was adopted as of January 1, 2019, revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port.
In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by the Company when engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters. Refer to Note 14 — Voyage Revenue for further discussion of the accounting for fuel expenses for spot market voyage charters as a result of the new revenue recognition guidance adopted as of January 1, 2019. There are certain other non-specified voyage expenses, such as commissions, which are typically borne by the Company.
Recent Accounting Pronouncements
New accounting standards adopted — In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. For the Company, this standard is effective for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASU, and shall be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption (the “modified retrospective transition method”). The Company early adopted ASU 2014-09 on January 1, 2019 using the modified retrospective transition method applied to those spot market voyage charter contracts which were not completed as of January 1, 2019. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to its Accumulated deficit as of January 1, 2019. Prior periods were not retrospectively adjusted. The adoption of ASU 2014-09 does not have an impact on the timing of recognition of revenue generated from time charter agreements. Refer to Note 14 for further discussion of the financial impact on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to provide guidance to entities when evaluating whether a transaction should be accounted for as an acquisition or disposal of a business. An entity first determines whether substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets. If this threshold is met, the assets acquired would not represent a business, and no further assessment is required. If the initial screen is not met, ASU 2017-01 requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to produce output and removes the evaluation of whether a market participant could replace the missing elements. For nonpublic entities, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASUs, and shall be applied prospectively. The Company early adopted ASU 2017-01, and concluded that the Merger should be accounted for as an asset acquisition. Refer to Note 3 — Merger Transaction for further discussion.
| 12 |
New accounting standards to be implemented — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about the Company’s leasing activities. The Company has analyzed its contracts and is in the process of calculating the right-of-use assets and lease liabilities as of January 1, 2021 based on the present value of the Company’s remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases. The Company does not believe the adoption of ASC 842 will have a material effect on its consolidated results of operations or cash flows. The Company will provide the required disclosures under the standard in its Form 10-K filing for the annual period ending December 31, 2021.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the potential impact of this pronouncement on the condensed consolidated financial statements.
| 3. | Merger Transaction |
As discussed in Note 1, the Company completed a Merger on March 27, 2019. Directly prior to the Merger, the following took place:
| • | DSSI formed four wholly-owned subsidiaries organized under the laws of the Republic of the Marshall Islands, referred to as “Products Merger Entity,” “Crude Merger Entity,” “Management Merger Entity” and “Surviving Merger Entity.” |
| • | CPLP separated its product and crude tanker businesses into separate lines of subsidiaries and contributed them to DSSI (the “Separation”). |
| • | DSSI issued 12,724,500 additional common shares in connection with the contribution by CPLP. |
| • | In the Separation, CPLP contributed to DSSI (1) CPLP’s crude and product tanker vessels, (2) an amount in cash equal to $10 million and (3) associated inventories. |
| • | On March 27, 2019, CPLP distributed on a pro rata basis all 12,725,000 then-outstanding common shares of DSSI to its unitholders of record as of March 19, 2019 (the “Distribution”). |
Immediately following the Distribution, the Merger took place, which is detailed as follows:
| • | The Pre-Mergers took place: |
| o | DSS Crude Transport Inc., a wholly-owned subsidiary of DHLP, merged with Crude Merger Entity, with DSS Crude Transport Inc. surviving the merger, |
| o | DSS Products Transport Inc., a wholly-owned subsidiary of DHLP, merged with Products Merger Entity, with DSS Products Transport Inc. surviving the merger, and |
| o | Diamond S Technical Management LLC, a wholly-owned subsidiary of DHLP, merged with Management Merger Entity, with Diamond S Technical Management LLC surviving the merger. |
| • | Following the Pre-Mergers and pursuant to the same plan each of DSS Crude Transport Inc., DSS Products Transport Inc. and Diamond S Technical Management LLC merged with the Surviving Merger Entity, with the Surviving Merger Entity surviving. The Surviving Merger Entity subsequently merged with DSSI, with DSSI surviving. |
Pursuant to the Transaction agreement, the CPLP unitholders received 12,725,000 common shares in DSSI, and the DHLP limited partners received common shares of DSSI that were determined by the factor to which DHLP’s net asset value is to the net asset value of DSSI immediately after the Distribution, multiplied by the number of shares distributed to CPLP unitholders after the March 27, 2019 effective date. This equated to the DHLP limited partners receiving 27,165,696 common shares.
| 13 |
The Merger completed on March 27, 2019, and the Company’s common shares commenced trading on the New York Stock Exchange on March 28, 2019.
The Merger was accounted for as a reverse acquisition in accordance with ASC 805, “Business Combinations.” Based on the structure of the Merger and other activities contemplated by the Transaction Agreement, relative outstanding share ownership, the composition of the Company's board of directors and the designation of certain senior management positions of the Company, the DHLP subsidiaries are the accounting acquirer for financial reporting purposes.
Further, in accordance with ASU 2017-01, the Merger was determined to be an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets.
The consideration transferred, assets acquired, and liabilities assumed are recognized as follows:
| Consideration paid and transferred | ||||
| Cash paid — net of cash received of $16,568 | $ | 292,683 | ||
| Common stock issued to CPLP | 236,848 | |||
| Transaction costs | 20,738 | |||
| Total consideration paid and transferred | $ | 550,269 |
| Net assets acquired | ||||
| Due from charterers | $ | 4,514 | ||
| Inventories | 6,969 | |||
| Prepaid expenses and other current assets | 1,152 | |||
| Vessels | 537,988 | |||
| Time charter contracts acquired — assets | 7,300 | |||
| Other noncurrent assets | 2,191 | |||
| Accounts payable and accrued expenses | (7,478 | ) | ||
| Deferred charter hire revenue | (2,367 | ) | ||
| Net assets acquired | $ | 550,269 |
Further, as the Merger was determined to be an asset acquisition, the Company recorded the acquired assets and liabilities at the cost of the acquisition, including transaction costs, on the basis of relative fair value. The carrying value of the vessels were recorded in accordance with the principles set forth under ASC Topic 820, “Fair Value Measurement” based upon current market values obtained from at least two independent ship brokers. The time charter contract assets acquired represent an estimate of the fair value of the time charters acquired as of the date of the Merger, and considers the differential between the stated time charter rate and the contracts’ fair value at the time of the Merger.
In connection with the Merger, the incentive units granted under the DHLP unit incentive plan expired with no value. Further, while the Company is now a public company, management believe that, pursuant to various treaties and Section 883 of the U.S. Internal Revenue Code of 1986, the income related to vessel operations will continue to be exempt from U.S. income tax.
| 4. | Net Loss Per Share |
The computation of basic net loss per share is based on the weighted-average number of common shares outstanding during the reporting period. The computation of diluted net loss per share assumes the vesting of nonvested stock awards (refer to Note 16 — Stock-Based Compensation), for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. For the three and nine months ended September 30, 2019, 23,439 and 9,128 shares, respectively, of restricted stock and restricted stock units were excluded from the computation of diluted net loss per share because all were anti-dilutive (refer to Note 16 — Stock-Based Compensation).
| 14 |
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Common shares outstanding, basic: | ||||||||||||||||
| Weighted-average common shares outstanding, basic | 39,890,698 | 27,165,696 | 35,835,477 | 27,165,696 | ||||||||||||
| Common shares outstanding, diluted: | ||||||||||||||||
| Weighted-average common shares outstanding, basic | 39,890,698 | 27,165,696 | 35,835,477 | 27,165,696 | ||||||||||||
| Dilutive effect of restricted stock awards | — | — | — | — | ||||||||||||
| Weighted-average common shares outstanding, diluted | 39,890,698 | 27,165,696 | 35,835,477 | 27,165,696 | ||||||||||||
| 5. | JOINT VENTURE INVESTMENTS |
NT Suez Holdco LLC — In September 2014, the Company formed a joint venture, NT Suez Holdco LLC (“NT Suez”), to purchase two Suezmax newbuildings. The two vessels were delivered in October and November 2016.
NT Suez is owned 51% by the Company and 49% by WLR/TRF Shipping S.a.r.l (“WLR/TRF”). WLR/TRF is indirectly owned by funds managed or jointly managed by WL Ross & Co, LLC (“WLR”), including WLR Recovery Fund V DSS AIV, L.P. and WLR V Parallel ESC, L.P., which are also shareholders of the Company. WLR is a fund manager that manages the Company’s largest shareholders.
As of September 30, 2019 and December 31, 2018, the investments NT Suez received from the Company and WLR/TRF aggregated $74,104 and $72,104, respectively, which was used for shipyard installment payments and working capital.
Management has determined that NT Suez qualifies as a variable interest entity, and, when aggregating the variable interests held by the related parties (i.e. the Company and WLR/TRF), the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts NT Suez’s economic performance. Accordingly, the Company consolidates NT Suez.
Diamond Anglo Ship Management Pte. Ltd. — In January 2018, the Company and Anglo Eastern Investment Holdings Ltd. (“AE Holdings”), a third party, formed a joint venture, Diamond Anglo Ship Management Pte. Ltd. (“DASM”). DASM is owned 51% by the Company and 49% by AE Holdings as of September 30, 2019 and December 31, 2018, and was formed to provide ship management services to the Company’s vessels.
As of September 30, 2019 and December 31, 2018, the investments DASM received from the Company and AE Holdings totaled $51 and $49, respectively, which were used for general and administrative expenses.
Management has determined that DASM qualifies as a variable interest entity, and, when aggregating the variable interests held by the Company and AE Holdings, the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts DASM’s economic performance. Accordingly, the Company consolidates DASM.
| 6. | Vessel Dispositions |
In August 2019, the Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. The Company reached an agreement to sell the Atlantic Aquarius and Atlantic Leo for $31.8 million in aggregate gross proceeds. In September 2019, the Company delivered the vessels to the buyer and repaid debt on the $460 Facility, as defined in Note 9 below, of $20.4 million. The loss on sale of the vessels was $18.3 million, which was recorded to the condensed consolidated statement of operations for the three and nine months ended September 30, 2019.
| 15 |
| 7. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following as of September 30, 2019 and December 31, 2018:
September 30, 2019 | December 31, 2018 | |||||||
| Advances to Capital Ship Management Corp. (“CSM”) (Refer to Note 15 — Related Party Transactions) | $ | 4,710 | $ | — | ||||
| Advances to technical managers | 135 | 578 | ||||||
| Insurance claims receivable | 614 | 697 | ||||||
| Prepaid insurance | 1,548 | 580 | ||||||
| Advances to agents | 1,740 | 549 | ||||||
| Deferred voyage costs | 2,178 | — | ||||||
| Other | 2,182 | 1,327 | ||||||
| Total prepaid expenses and other current assets | $ | 13,107 | $ | 3,731 | ||||
| 8. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consist of the following as of September 30, 2019 and December 31, 2018:
September
30, | December 31, 2018 | |||||||
| Trade accounts payable and accrued expenses | $ | 15,120 | $ | 11,071 | ||||
| Accrued vessel and voyage expenses | 33,228 | 13,845 | ||||||
| Accrued interest | 107 | 400 | ||||||
| Other current liabilities (Refer to Note 15 — Related Party Transactions) | 1,613 | — | ||||||
| Total accounts payable and accrued expenses | $ | 50,068 | $ | 25,316 | ||||
| 9. | LONG-TERM DEBT |
Long-term debt at September 30, 2019 and December 31, 2018 was comprised of the following:
September 30, 2019 | December 31, 2018 | |||||||
| $360 Facility | $ | 341,250 | $ | — | ||||
| $460 Facility | 262,248 | 315,368 | ||||||
| $235 Facility | 180,231 | 186,923 | ||||||
| $75 Facility | 58,125 | 61,875 | ||||||
| $66 Facility | 52,907 | 56,199 | ||||||
| $30 LOC | — | 20,323 | ||||||
| $20 LOC | — | 6,000 | ||||||
| Total | 894,761 | 646,688 | ||||||
| Less: Unamortized deferred financing costs | (11,063 | ) | (7,147 | ) | ||||
| Less: Current portion | (122,884 | ) | (97,315 | ) | ||||
| Long-term debt, net of deferred financing costs | $ | 760,814 | $ | 542,226 | ||||
$360 Facility — On March 27, 2019, in connection with the Merger, the Company entered into a $360,000 five-year Credit Agreement, as amended (the “$360 Facility”), for the purposes of financing the Merger and refinancing the $30 LOC (defined below). The $360 Facility consists of a term loan of $300,000 and a revolving loan of $60,000, and is collateralized by the 25 vessels acquired in the Merger and the three vessels that collateralized the $30 LOC, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $360 Facility are 1.06%. As of September 30, 2019, $55,000 of the revolving loan was drawn, while $5,000 was available and undrawn.
The $360 Facility contains certain restrictions on the payments of dividends. The $360 Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal year an amount that is equal to 50% of the adjusted consolidated net income of the Company.
| 16 |
$460 Facility — On June 6, 2016, the Company entered into a $460,000 five-year senior secured term loan facility, as amended (the “$460 Facility”), for the purposes of refinancing a previous facility. The $460 Facility is a term loan of $459,375, collateralized by 26 vessels, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. Interest is paid monthly, and the $460 Facility bears interest at the Eurodollar Rate for a one-month interest period, plus a 2.80% interest rate margin.
The $460 Facility contains certain restrictions on the payments of dividends. In connection with the Merger, the $460 Facility was amended whereby the Company is able to pay dividends in a manner that is consistent with the stipulations stated in the $360 Facility.
$235 Facility — On August 19, 2016, the Company entered into a $235,000 five-year senior secured financing facility, as amended (the “$235 Facility”), for the purposes of refinancing a previous facility. The $235 Facility consists of a term loan of $220,000 and a revolving loan of $15,000, and is collateralized by eight vessels, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $235 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.75% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $235 Facility are 1.10%. As of September 30, 2019, $11,000 of the revolving loan was drawn, while $538 was available and undrawn.
The $235 Facility contains certain restrictions on the payments of dividends. In connection with the Merger, the $235 Facility was amended whereby the Company is able to pay dividends in a manner that is consistent with the stipulations stated in the $360 Facility.
$75 Facility — On March 17, 2016, the Company entered into a seven-year senior secured term loan, as amended (the “$75 Facility”), consisting of a delayed draw term loan of up to $75,000. The $75 Facility financed and is collateralized by the two 2016-built Suezmax vessels, is payable on a quarterly basis, and bears interest on LIBOR plus a margin of 2.20%.
The $75 Facility contains certain restrictions on the payments of dividends. In connection with the Merger, the $75 Facility was amended whereby the Company is able to pay dividends in a manner that is consistent with the stipulations stated in the $360 Facility.
$66 Facility — On August 9, 2016, the Company entered into a $66,000 five-year senior secured term loan facility (the “$66 Facility”) for the purpose of financing two vessels controlled through the joint venture (refer to Note 5 — Joint Venture Investments). The $66 Facility, which is collateralized by the two vessels controlled through NT Suez, is a nonrecourse term loan with reductions that are based on a 15 year amortization schedule, and are payable on a quarterly basis. Interest is paid quarterly, and the $66 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 3.25% interest rate margin.
The $66 Facility contains certain restrictions on the payments of dividends. The $66 Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and does not exceed an amount equal to 75% of the consolidated net income, as determined in accordance with GAAP, of the borrower, which is the consolidated accounts of NT Suez.
$20 Line of Credit — On September 29, 2016, the Company extended its $20,000 revolving line of credit (the “$20 LOC”), initially entered into on October 1, 2013. The $20 LOC was paid off and cancelled in connection with the Merger.
$30 Line of Credit — On October 20, 2016, the Company entered into a $30,000 three-year revolving line of credit, as amended (the “$30 LOC”), for the purposes of refinancing a previous line of credit. The $30 LOC was paid off and cancelled in connection with the Merger.
Interest Rates – The following table sets forth the effective interest rate associated with the interest costs for the Company’s debt facilities, including the rate differential between the fixed pay rate and the variable receive rate on the interest rate swap agreements that were in effect (refer to Note 10 — Interest Rate Swaps), combined, as well as the cost associated with the commitment fees. Additionally, the table includes the range of interest rates on the debt, excluding the impact of swaps and commitment fees:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Effective interest rate | 4.87% | 4.82% | 4.94% | 4.63% | ||||||||||||
| Range of interest rates (excluding impact of swaps and unused commitment fees) | 4.53% to 5.58% | 4.53% to 5.64% | 4.53% to 6.06% | 3.89% to 5.64% | ||||||||||||
| 17 |
Restrictive Covenants — The Company’s credit facilities credit contain restrictive covenants and other non-financial restrictions. The $360 Facility, $235 Facility, $460 Facility and $75 Facility include, among other things, restrictions on the Company’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, leverage ratio requirements, minimum working capital requirements, and other customary restrictions. The $66 Facility includes restrictions and financial covenants including, among other things, the Company’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, and other customary restrictions. The Company was in compliance with its financial covenants as of September 30, 2019.
Maturities – The aggregate maturities of debt during the remaining three months of the year ending December 31, 2019, and annually for the years ending December 31 are as follows:
| 2019 (for the remaining three months of the year) | $ | 30,721 | ||
| 2020 | 122,884 | |||
| 2021 | 476,781 | |||
| 2022 | 60,000 | |||
| 2023 | 96,875 | |||
| Thereafter | 107,500 | |||
| Total | $ | 894,761 |
| 10. | INTEREST RATE SWAPS |
All derivatives are recognized on the Company’s Condensed Consolidated Balance Sheets at their fair values. For accounting hedges, on the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge) or (2) a hedge of a forecasted transaction (“cash flow” hedge).
The Company has entered into interest rate swap transactions, with multiple counterparties, which have been designated as cash flow hedges. The Company uses interest rate swaps for the management of interest rate risk exposure, as the interest rate swaps effectively convert a portion of the Company’s debt from a floating to a fixed rate. The interest rate swaps are agreements between the Company and counterparties to pay, in the future, a fixed-rate payment in exchange for the counterparties paying the Company a variable payment. The amount of the net payment obligation is based on the notional amount of the swap contract and the prevailing market interest rates. The Company may terminate the swap contracts prior to their expiration dates, at which point a realized gain or loss would be recognized. The value of the Company’s commitment would increase or decrease based primarily on the extent to which interest rates move against the rate fixed for each swap.
In September 2018, the Company re-couponed its swaps, receiving cash of $6,813, with the corresponding gain recognized ratably over the original term of the hedged instruments. The interest rate swaps designated as a cash flow hedge that were in place as of September 30, 2019 and December 31, 2018 are as follows:
| Interest Rate Swap Detail | September 30, 2019 | December 31, 2018 | ||||||||||||||
| Trade Date | Fixed Rate | Start Date of Swap | End Date of Swap | Notional Amount Outstanding | Notional Amount Outstanding | |||||||||||
| 25-Sep-18 | 2.906 | % | 31-Aug-18 | 04-Jun-21 | $ | 50,023 | $ | 56,030 | ||||||||
| 25-Sep-18 | 2.906 | % | 31-Aug-18 | 04-Jun-21 | 50,023 | 56,030 | ||||||||||
| 25-Sep-18 | 2.906 | % | 31-Aug-18 | 04-Jun-21 | 50,023 | 56,030 | ||||||||||
| $ | 150,069 | $ | 168,090 | |||||||||||||
The Company pays fixed-rate interest amounts and receives floating rate interest amounts based on one-month LIBOR settings.
| 18 |
The derivative asset and liability balances at September 30, 2019 and December 31, 2018 are as follows:
| Asset Derivatives | Liability Derivatives | |||||||||||||||||||
| Balance | Fair Value | Balance | Fair Value | |||||||||||||||||
| Sheet Location | September 30, 2019 | December 31, 2018 | Sheet Location | September 30, 2019 | December 31, 2018 | |||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||
| Interest rate contracts | Derivative asset (Current assets) | $ | — | $ | — | Derivative liability (Current liabilities) | $ | 1,746 | $ | 630 | ||||||||||
| Interest rate contracts | Derivative asset (Noncurrent assets) | — | — | Derivative liability (Noncurrent liabilities) | 1,235 | 900 | ||||||||||||||
| Total derivatives designated as hedging instruments | — | — | 2,981 | 1,530 | ||||||||||||||||
| Total Derivatives | $ | — | $ | — | $ | 2,981 | $ | 1,530 | ||||||||||||
The components of Accumulated other comprehensive income included in the Condensed Consolidated Balance Sheets consist of net unrealized (loss) gain on cash flow hedges as of September 30, 2019 and December 31, 2018.
The following table presents the gross amounts of these liabilities with any offsets to arrive at the net amounts recognized in the Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018:
| Gross | Gross Amounts Offset in the Condensed | Net Amounts of Liabilities Presented in the Condensed | Gross Amounts not Offset in the Condensed Consolidated Balance Sheets | |||||||||||||||||||||
| Amounts of Recognized Liabilities | Consolidated Balance Sheets | Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
| September 30, 2019 Derivatives | $ | 2,981 | $ | — | $ | 2,981 | $ | — | $ | — | $ | 2,981 | ||||||||||||
| December 31, 2018 Derivatives | 1,530 | — | 1,530 | — | — | 1,530 | ||||||||||||||||||
| 11. | ACCUMULATED OTHER COMPREHENSIVE INCOME |
The components of Accumulated other comprehensive income included in the Condensed Consolidated Balance Sheets consist of net unrealized gain on cash flow hedges as of September 30, 2019 and December 31, 2018.
The changes in Accumulated other comprehensive income by component for the nine months ended September 30, 2019 and 2018 are as follows:
| 2019 | 2018 | |||||||
| Accumulated other comprehensive income – January 1, | $ | 4,387 | $ | 4,773 | ||||
| Other comprehensive (loss) income before reclassifications | (4,931 | ) | 643 | |||||
| Amounts reclassified from Accumulated other comprehensive income | 1,435 | 965 | ||||||
| Other comprehensive (loss) income for the period | (3,496 | ) | 1,608 | |||||
| Accumulated other comprehensive income – September 30, | $ | 891 | $ | 6,381 | ||||
The realized gain for the nine months ended September 30, 2019 reclassified from Accumulated other comprehensive income consists of a realized loss of ($610) related to interest rate swap contracts and $2,045 related to the amortization of the gain on re-couponed swaps, as discussed in Note 10. The realized gain for the nine months ended September 30, 2018 reclassified from Accumulated other comprehensive income consists of a realized gain of $803 related to interest rate swap contracts and $162 related to the amortization of the gain on re-couponed swaps, as discussed in Note 10. The realized (loss) gain reclassified from Accumulated other comprehensive income are presented in Interest expense in the Condensed Consolidated Statements of Operations.
| 19 |
| 12. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The fair values and carrying amounts of the Company’s financial instruments at September 30, 2019 and December 31, 2018 that are required to be disclosed at fair value, but not recorded at fair value, are as follows:
| September 30, 2019 | December 31, 2018 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Cash and cash equivalents | $ | 75,559 | $ | 75,559 | $ | 83,054 | $ | 83,054 | ||||||||
| Restricted cash | 5,544 | 5,544 | 5,104 | 5,104 | ||||||||||||
| Variable rate debt | 894,761 | 894,761 | 646,688 | 646,688 | ||||||||||||
The following methods and assumptions are used in estimating the fair value of disclosures for financial instruments:
Cash and cash equivalents, and Restricted cash: The carrying amounts reported in the consolidated balance sheets for Cash and cash equivalents, and Restricted cash approximate fair value. Cash and cash equivalents, and Restricted cash are considered Level 1 items as they represent liquid assets with short-term maturities.
Variable Rate Debt: The fair value of variable rate debt is based on management’s estimate of rates the Company could obtain for similar debt of the same remaining maturities. Additionally, the Company considers its creditworthiness in determining the fair value of variable rate debt under the credit facilities. The carrying amounts in the above table, which exclude the impact of deferred financing costs, approximate the fair market value for the variable rate debt. Variable rate debt is considered to be a Level 2 item as the Company considers the estimate of rates it could obtain for similar debt.
The fair value of an asset or liability is based on assumptions that market participants would use in pricing the asset or liability. The hierarchies of inputs used when determining fair value are described below:
Level 1: Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2: Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and the placement of financial instruments within the fair value hierarchy.
The table below provides the financial instruments carried at fair value based on the levels of hierarchy as of the valuation date listed:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| September 30, 2019 | ||||||||||||||||
| Derivative liabilities | $ | — | $ | 2,981 | $ | — | $ | 2,981 | ||||||||
| December 31, 2018 | ||||||||||||||||
| Derivative liabilities | — | 1,530 | — | 1,530 | ||||||||||||
Derivative Liabilities: The fair value of the derivative liabilities, which relate to the interest rate swaps used for hedging purposes, is the estimated amount the Company would pay for the liability to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Interest rate swaps are considered to be a Level 2 item as the Company, using the income approach to value the derivatives, uses observable Level 2 market inputs at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets in active markets (specifically, futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset (specifically, LIBOR, cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Refer to Note 10 — Interest Rate Swaps for further information regarding the Company’s interest rate swap agreements.
| 20 |
The Company does not currently have any Level 3 financial assets or liabilities and there have been no transfers in and/or out of Level 3 during the nine months ended September 30, 2019 and 2018.
| 13. | REVENUE FROM TIME CHARTERS |
The future minimum revenues, before inclusion of profit-sharing revenue, if any, expected to be received on irrevocable time charters for which revenues can be reasonably estimated and the related revenue days that the vessels are available for employment, and not including charterers’ renewal options, for the remaining three months of the year ending December 31, 2019, and annually for the years ending December 31 are as follows:
| 2019 (for the remaining three months of the year) | $ | 22,127 | ||
| 2020 | 60,409 | |||
| 2021 | 21,758 | |||
| 2022 | 13,457 | |||
| Total future committed revenue | $ | 117,751 |
| 14. | Voyage Revenue |
Total voyage revenue includes revenue earned on fixed rate time charters, spot market voyage charters, spot market-related time charters and vessel pools. On January 1, 2019 the Company adopted the revenue recognition guidance under ASU 2014-09 (refer to Note 2 — Summary of Significant Accounting Policies) using the modified retrospective method applied to contracts that were not completed as of January 1, 2019. The financial results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and will be continued to be reported under previous guidance.
As a result of the adoption of the new revenue recognition guidance on January 1, 2019, the Company recorded a net increase to the opening accumulated deficit of $2,784 for the cumulative impact of adopting the new guidance. The impact related primarily to the change in accounting for spot market voyage charters. Prior to the adoption of the new guidance, revenue for spot market voyage charters was recognized ratably over the total transit time of the voyage, which previously commenced the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. As a result of the adoption of the new guidance, revenue for spot market voyage charters is now being recognized ratably over the total transit time of the voyage which now begins when the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Additionally, the Company has identified that the contract fulfillment costs of spot market voyage charters consist primarily of the fuel consumption that is incurred by the Company from the end of the previous vessel employment until the arrival at the loading port. The fuel consumption during this period is deferred and recorded as deferred voyage costs included in Prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet and is amortized ratably over the total transit time of the voyage from arrival at the loading port until the vessel departs from the discharge port and recognized as part of Voyage expenses. Refer also to Note 7 — Prepaid Expenses and Other Current Assets.
The following table illustrates the impact of the adoption of the new revenue recognition guidance on the Condensed Consolidated Balance Sheet:
| As of September 30, 2019 | ||||||||||||
| Balance | ||||||||||||
| without Adoption | ||||||||||||
| of New Revenue | Effect of | |||||||||||
| As Reported | Standard | Change | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Due from charterers | $ | 55,284 | $ | 61,038 | $ | 5,754 | ||||||
| Prepaid expenses and other current assets | 13,107 | 10,929 | (2,178 | ) | ||||||||
| Equity: | ||||||||||||
| Accumulated deficit | $ | (94,685 | ) | $ | (91,109 | ) | $ | 3,576 | ||||
| 21 |
The following table illustrates the impact of the adoption of the new revenue recognition guidance on the Condensed Consolidated Statement of Operations:
| For the Three Months Ended September 30, 2019 | ||||||||||||
| Balance | ||||||||||||
| without Adoption | ||||||||||||
| of New Revenue | Effect of | |||||||||||
| As Reported | Standard | Change | ||||||||||
| Revenue | $ | 141,526 | $ | 141,870 | $ | (344 | ) | |||||
| Voyage expenses | 59,968 | 60,104 | 136 | |||||||||
| Net loss attributable to Diamond S Shipping Inc. | (25,895 | ) | (25,687 | ) | (208 | ) | ||||||
| Net loss per share — basic | $ | (0.65 | ) | $ | (0.64 | ) | $ | 0.01 | ||||
| Net loss per share — diluted | $ | (0.65 | ) | $ | (0.64 | ) | $ | 0.01 | ||||
| For the Nine Months Ended September 30, 2019 | ||||||||||||
| Balance | ||||||||||||
| without Adoption | ||||||||||||
| of New Revenue | Effect of | |||||||||||
| As Reported | Standard | Change | ||||||||||
| Revenue | $ | 393,477 | $ | 394,756 | $ | (1,279 | ) | |||||
| Voyage expenses | 167,441 | 167,928 | 487 | |||||||||
| Net loss attributable to Diamond S Shipping Inc. | (35,424 | ) | (34,632 | ) | (792 | ) | ||||||
| Net loss per share — basic | $ | (0.99 | ) | $ | (0.97 | ) | $ | (0.02 | ) | |||
| Net loss per share — diluted | $ | (0.99 | ) | $ | (0.97 | ) | $ | (0.02 | ) | |||
The adoption of the new revenue recognition guidance does not have an impact on the operating, investing or financing activities in the Condensed Consolidated Statements of Cash Flows.
The following table illustrates the cumulative effect of the adoption of the new revenue recognition guidance on the opening Condensed Consolidated Balance Sheet:
| New | ||||||||||||
| Balance at | Revenue | Balance at | ||||||||||
| December 31, | Standard | January 1, | ||||||||||
| 2018 | Adjustment | 2019 | ||||||||||
| Assets | ||||||||||||
| Current assets: | ||||||||||||
| Due from charterers | $ | 42,637 | $ | (4,475 | ) | $ | 38,162 | |||||
| Prepaid expenses and other current assets | 3,731 | 1,691 | 5,422 | |||||||||
| Equity: | ||||||||||||
| Accumulated deficit | $ | (56,477 | ) | $ | (2,784 | ) | $ | (59,261 | ) | |||
| 15. | Related Party Transactions |
During the three and nine months ended September 30, 2019 and 2018, the Company had the following related party transactions.
| 22 |
Capital Ship Management Corp. (“CSM”) — Pursuant to the Transaction Agreement, for a period of five years, CSM will provide commercial and technical management services for the 25 vessels acquired in the Merger. For the three and nine months ended September 30, 2019, the following transactions were recorded for these services:
| · | $1,955 and $3,974, respectively, were incurred for technical management services, which are included in Vessel expenses in the Condensed Consolidated Statements of Operations and have been paid as of September 30, 2019. |
| · | $548 and $1,130, respectively, were incurred for commercial management services, which are included in Voyage expenses in the Condensed Consolidated Statements of Operations. As of September 30, 2019, $719 remains unpaid, and is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet. |
| · | $503 and $1,022, respectively, were incurred for general management services, which are included in General and administrative expenses in the Condensed Consolidated Statements of Operations. As of September 30, 2019, $164 remains unpaid, and is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet. |
During the nine months ended September 30, 2019, working capital is advanced to CSM to procure both voyage and vessel costs. At September 30, 2019, funds advanced totaled $4,710 and is included in Prepaid Expense and Other Current Assets in the Condensed Consolidated Balance Sheet. Refer to Note 7 — Prepaid Expenses and Other Current Assets.
As part of the Transaction Agreement, certain bank accounts associated with the acquired subsidiaries are now controlled by the Company. At September 30, 2019, amounts received in these accounts for activity that occurred prior to the Merger that are due to CSM total $1,613 and are included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet.
Capital Product Partners, L.P. (“CPLP”) — Pursuant to the Transaction Agreement, the Company is to reimburse CPLP for certain transaction expenses. The Company determined the reimbursement to CPLP totals $11,080, which was included in transaction costs and capitalized as part of the Merger as this is accounted for as an asset acquisition. As of September 30, 2019, all amounts have been paid.
| 16. | Stock-Based Compensation |
2019 Equity Incentive Plan — Under the 2019 Equity Incentive Plan (“2019 Plan”), the Company’s Board of Directors, the Compensation Committee, or their designees may grant a variety of stock-based incentive awards representing an aggregate of 3,989,000 shares of common stock to the Company’s officers, directors, employees, and consultants. Such awards include stock options, stock appreciation rights, restricted (nonvested) stock, restricted stock units, and unrestricted stock.
Restricted Stock Units — The Company has issued restricted stock units (“RSUs”) under the 2019 Plan to certain members of the Board of Directors and certain employees of the Company, which represent the right to receive a share of common stock, or in the sole discretion of the Company’s Compensation Committee, the value of a share of common stock on the date that the RSU vests. Such shares of common stock will only be issued to certain directors and employees when their RSUs vest under the terms of their grant agreements and 2019 Plan described above.
The RSUs that have been issued to certain members of the Board of Directors vest one year from the date of grant. The RSUs that have been issued to other individuals vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes the Company’s unvested RSUs for the nine months ended September 30, 2019:
| Weighted | ||||||||
| Number of | Average Grant | |||||||
| RSUs | Date Price | |||||||
| Outstanding at January 1, 2019 | — | $ | — | |||||
| Granted | 52,735 | 13.37 | ||||||
| Vested | — | — | ||||||
| Forfeited | — | — | ||||||
| Outstanding at September 30, 2019 | 52,735 | $ | 13.37 | |||||
| 23 |
The following table summarizes certain information of the RSUs unvested and vested as of September 30, 2019:
| Unvested RSUs | Vested RSUs | |||||||||||||||||
| September 30, 2019 | September 30, 2019 | |||||||||||||||||
| Weighted | ||||||||||||||||||
| Weighted | Average | Weighted | ||||||||||||||||
| Average | Remaining | Average | ||||||||||||||||
| Number of | Grant Date | Contractual | Number of | Grant Date | ||||||||||||||
| RSUs | Price | Life | RSUs | Price | ||||||||||||||
| 52,735 | $ | 13.37 | 1.5 | — | $ | — | ||||||||||||
The Company is amortizing these grants over the applicable graded vesting periods. Forfeitures will be taken into account if they occur. As of September 30, 2019, unrecognized compensation cost of $436 related to RSUs will be recognized over a weighted-average period of 1.5 years.
For the three and nine months ended September 30, 2019 and 2018, the Company recognized nonvested stock amortization expense for the RSUs, which is included in General and administrative expenses as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| General and administrative expenses | $ | 148 | $ | — | $ | 269 | $ | — | ||||||||
Restricted Stock — Under the 2019 Plan, grants of restricted common stock were issued to certain members of the Board of Directors, executives and employees. The restricted common stock issued to certain members of the Board of Directors vest one year from the date of grant. The restricted common stock issued to certain executives and employees ordinarily vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes the Company’s nonvested stock awards for the nine months ended September 30, 2019 which were issued under the 2019 Plan:
| Weighted | ||||||||
| Number of | Average Grant | |||||||
| Shares | Date Price | |||||||
| Outstanding at January 1, 2019 | — | $ | — | |||||
| Granted | 664,869 | 13.05 | ||||||
| Vested | — | — | ||||||
| Forfeited | — | — | ||||||
| Outstanding at September 30, 2019 | 664,869 | $ | 13.05 | |||||
There were no shares that vested under the 2019 Plan during the nine months ended September 30, 2019.
For the three and nine months ended September 30, 2019 and 2018, the Company recognized nonvested stock amortization expense for the 2019 Plan restricted shares, which is included in General and administrative expenses, as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| General and administrative expenses | $ | 1,153 | $ | — | $ | 1,893 | $ | — | ||||||||
The Company is amortizing these grants over the applicable graded vesting periods. Forfeitures will be taken into account if they occur. As of September 30, 2019, unrecognized compensation cost of $5,669 related to nonvested stock will be recognized over a weighted-average period of 2.5 years.
The future compensation to be recognized for the aforementioned RSUs and restricted stock for the remaining three months of the year ending December 31, 2019, and annually for the years ending December 31 are as follows:
| 2019 (for the remaining three months of the year) | $ | 1,331 | ||
| 2020 | 3,190 | |||
| 2021 | 1,291 | |||
| 2022 | 293 | |||
| Total | $ | 6,105 |
| 24 |
| 17. | COMMITMENTS AND CONTINGENCIES |
From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of its business. Such claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources. The Company is not aware of any legal proceedings or claims that is believes will have, individually or in the aggregate, a material effect on the Company, its financial condition, results of operations or cash flows.
| 18. | SEGMENT REPORTING |
The Company is engaged primarily in the ocean transportation of crude oil and petroleum products in the international market through the ownership and operation of a diversified fleet of vessels. The international shipping industry has many distinct market segments based, in large part, on the size and design configuration of vessels required. Rates in each market segment are determined by a variety of factors affecting the supply and demand for vessels to move cargoes in the trades for which they are suited. Tankers are not bound to specific ports or schedules and therefore can respond to market opportunities by moving between trades and geographical areas. The Company’s vessels regularly navigate in international waters, over hundreds of trade routes, to hundreds of ports and, as a result, the disclosure of geographic information is impracticable. The Company charters its vessels primarily on voyage charters and on time charters.
The Company has two reportable segments, Crude Tankers and Product Carriers. Segment results are evaluated based on income (loss) from operations. The accounting policies applied to the reportable segments are the same as those used in the preparation of the Company’s consolidated financial statements.
Results for the Company’s revenue and loss from operations by segment for the three and nine months ended September 30, 2019 and 2018 are as follows:
| Crude Tankers | Product Carriers | Total | ||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||
| Voyage revenue | $ | 46,222 | $ | 95,304 | $ | 141,526 | ||||||
| Voyage expenses | (22,919 | ) | (37,049 | ) | (59,968 | ) | ||||||
| Vessel expenses | (10,554 | ) | (31,245 | ) | (41,799 | ) | ||||||
| Depreciation and amortization | (9,898 | ) | (18,865 | ) | (28,763 | ) | ||||||
| Loss on sale of vessels | — | (18,344 | ) | (18,344 | ) | |||||||
| General and administrative expenses | (1,781 | ) | (5,785 | ) | (7,566 | ) | ||||||
| Income (loss) from operations | $ | 1,070 | $ | (15,984 | ) | $ | (14,914 | ) | ||||
| Three Months Ended September 30, 2018 | ||||||||||||
| Voyage revenue | $ | 29,547 | $ | 58,575 | $ | 88,122 | ||||||
| Voyage expenses | (14,845 | ) | (33,694 | ) | (48,539 | ) | ||||||
| Vessel expenses | (7,615 | ) | (19,367 | ) | (26,982 | ) | ||||||
| Depreciation and amortization | (7,937 | ) | (14,336 | ) | (22,273 | ) | ||||||
| General and administrative expenses | (999 | ) | (2,746 | ) | (3,745 | ) | ||||||
| Loss from operations | $ | (1,849 | ) | $ | (11,568 | ) | $ | (13,417 | ) | |||
| Crude Tankers | Product Carriers | Total | ||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||
| Voyage revenue | $ | 133,105 | $ | 260,372 | $ | 393,477 | ||||||
| Voyage expenses | (64,383 | ) | (103,058 | ) | (167,441 | ) | ||||||
| Vessel expenses | (27,729 | ) | (81,247 | ) | (108,976 | ) | ||||||
| Depreciation and amortization | (27,806 | ) | (52,156 | ) | (79,962 | ) | ||||||
| Loss on sale of vessels | — | (18,344 | ) | (18,344 | ) | |||||||
| General and administrative expenses | (4,982 | ) | (16,192 | ) | (21,174 | ) | ||||||
| Income (loss) from operations | $ | 8,205 | $ | (10,625 | ) | $ | (2,420 | ) | ||||
| Nine Months Ended September 30, 2018 | ||||||||||||
| Voyage revenue | $ | 90,196 | $ | 180,890 | $ | 271,086 | ||||||
| Voyage expenses | (49,272 | ) | (90,771 | ) | (140,043 | ) | ||||||
| Vessel expenses | (23,746 | ) | (59,378 | ) | (83,124 | ) | ||||||
| Depreciation and amortization | (23,812 | ) | (42,573 | ) | (66,385 | ) | ||||||
| General and administrative expenses | (3,197 | ) | (8,824 | ) | (12,021 | ) | ||||||
| Loss from operations | $ | (9,831 | ) | $ | (20,656 | ) | $ | (30,487 | ) | |||
| 25 |
The reconciliations of total assets of the segments to amounts included in the Condensed Consolidated Balance Sheets are as follows:
| September 30, 2019 | December 31, 2018 | |||||||
| Crude Tankers | $ | 903,175 | $ | 758,372 | ||||
| Product Carriers | 1,206,214 | 885,220 | ||||||
| Corporate unrestricted cash and cash equivalents | 5,178 | 2,508 | ||||||
| Other unallocated amounts | 2,856 | 3,755 | ||||||
| Consolidated total assets | $ | 2,117,423 | $ | 1,649,855 | ||||
| 26 |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition of Diamond S Shipping Inc. (“we,” “us,” “our” or the “Company”). This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Information Statement (the “Information Statement”) included as an exhibit to our Registration Statement on Form 10, which was declared effective on March 14, 2019 and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under “Cautionary Note on Forward-Looking Statements”.
Business Overview
Diamond S Shipping Inc. (“DSSI”) was formed on November 14, 2018 under the laws of the Republic of the Marshall Islands for the purpose of receiving, via contribution from Capital Product Partners L.P. (“CPLP”), CPLP’s crude and product tanker business and combining that business with the business and operations of DSS Holdings L.P. (“DHLP”) pursuant to the Transaction Agreement, dated as of November 27, 2018 (as amended, the “Transaction Agreement”), by and among CPLP, DHLP, DSSI and the other parties named therein. DHLP was a Cayman Island limited partnership formed on October 1, 2007.
On March 27, 2019, DSSI, and DHLP and all of its directly-owned subsidiaries (the “DHLP Subsidiaries”) completed a merger pursuant to the Transaction Agreement. Pursuant to the terms of the Transaction Agreement, on March 27, 2019, the DHLP subsidiaries merged with and into DSSI, with DSSI being the surviving corporation in the merger (the “Merger”). DSSI and the DHLP Subsidiaries, which are the consolidated accounts of Diamond S Shipping Inc., are hereinafter referred to collectively as “we,” “us,” “our” or the “Company.”
The Merger was accounted for as a reverse acquisition in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations” as the DHLP subsidiaries are the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of the DHLP subsidiaries for periods prior to the Merger are considered to be the predecessor financial statements of the Company. Refer to Note 3 — Merger Transaction to our condensed consolidated financial statements.
The Company is a seaborne transporter of crude oil and refined petroleum products, operating in the international shipping industry. As of September 20, 2019, through its wholly-owned subsidiaries, the Company owns and operates 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 50 medium range (“MR”) product carriers. The Company also controls and operates two Suezmax vessels through a joint venture.
Factors to Consider When Evaluating the Company’s Results
The Merger
The Merger, as described above, closed on March 27, 2019. Our consolidated financial statements include operating results for 25 acquired vessels for 187 days during the nine months ended September 30, 2019, in addition to the 43 vessels historically owned by the Company for the full period.
Credit Facility
In connection with the Merger, the Company entered into a $360 million five-year Credit Agreement (the “$360 Facility”), for the purposes of financing the Merger and refinancing a $30 million Line of Credit. The $360 Facility consists of a term loan of $300 million and a revolving loan of $60 million, and is collateralized by the 25 vessels acquired in the Merger and three vessels that collateralized the $30 million Line of Credit, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin.
Vessel Dispositions
In November 2018, the DHLP board of directors approved selling the Alpine Minute and Alpine Magic, both 2009-built MR vessels. The Company reached an agreement to sell the Alpine Minute for $17.8 million less a 1% broker commission payable to a third party, and the Company reached a separate agreement to sell the Alpine Magic for $17.0 million less a 1% broker commission payable to a third party. In December 2018, the Company completed the sale of the Alpine Minute and Alpine Magic.
| 27 |
In August 2019, the Company’s Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. The Company reached an agreement to sell the Atlantic Aquarius and Atlantic Leo, each for $16.0 million less a 1% broker commission payable to a third party. In September 2019, the Company completed the sale of the Atlantic Aquarius and Atlantic Leo.
Other Trends and Factors Affecting the Company’s Future Results of Operations
The principal factors that have affected the Company’s results of operations, and may in the future affect results of operations, are the economic, regulatory, financial, credit, political and governmental conditions prevailing in the tanker market and shipping industry generally and in the countries and markets in which the Company’s vessels are chartered.
The world economy has experienced significant economic and political upheavals in recent history. In addition, credit supply has been constrained, and financial markets have been particularly turbulent. Protectionist trends, global growth and demand for the seaborne transportation of goods, including oil and oil products and overcapacity and deliveries of newly-built vessels have affected, and may further affect, the tanker market and shipping industry in general and the business, financial condition, results of operations and cash flows of the Company.
Some of the key factors that have affected the Company’s business, financial condition, results of operations and cash flows, and may in the future affect the Company’s business, financial condition, results of operations and cash flows, include the following:
| · | levels of oil product demand and inventories; |
| · | supply and demand for crude oil and oil products; |
| · | charter hire levels (under time and bareboat charters) and the ability to re-charter vessels at competitive rates as their current charters expire; |
| · | developments in vessel values, which may affect compliance with covenants under credit facilities and/or debt refinancing; |
| · | compliance with covenants in credit facilities, including covenants relating to the maintenance of vessel value ratios; |
| · | the level of debt and the related interest expense and amortization of principal; |
| · | access to debt and equity and the cost of capital required to acquire additional vessels; |
| · | supply and order-book of tanker vessels; |
| · | the ability to increase the size of the fleet and make additional acquisitions that are accretive to earnings; |
| · | the ability of the commercial and chartering operations to successfully employ vessels at economically attractive rates, particularly as charters expire and the fleet expands; |
| · | the continuing demand for crude oil and oil products from China, India, Brazil and Russia and other emerging markets; |
| · | the ability to comply with new maritime regulations, the more restrictive regulations for the transport of certain products and cargoes and the increased costs associated therewith; |
| · | changes in fuel prices, including as a result of the imposition of sulfur oxide emissions limits in 2020 under new regulations adopted by the IMO (for those vessels that are not retrofitted with scrubbers); |
| · | the ability to respond to developments related to economic and other sanctions driven by the geopolitical environment, including enforcement activity and changes in industry practice; |
| · | the effective and efficient technical management of the vessels; |
| 28 |
| · | the costs associated with upcoming drydocking of vessels; |
| · | the ability to obtain and maintain major international oil company approvals and to satisfy technical, health, safety and compliance standards; |
| · | the strength of and growth in the number of the customer relationships, especially with major international oil companies and major commodity traders; |
| · | the prevailing spot market rates and the number of vessels operating in the spot market; and |
| · | the ability to acquire and sell vessels at satisfactory prices. |
Operating Data
The following tables represent the operating data for the three and nine and months ended September 30, 2019 and 2018 on a consolidated basis.
| For the Three Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Change | % Change | |||||||||||||
| (In Thousands, Except Per Share and Share Data) | ||||||||||||||||
| Revenue: | ||||||||||||||||
| Spot revenue | $ | 120,954 | $ | 83,646 | $ | 37,308 | 44.6 | % | ||||||||
| Time charter revenue | 20,572 | 4,476 | 16,096 | 359.6 | % | |||||||||||
| Voyage revenue | 141,526 | 88,122 | 53,404 | 60.6 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Voyage expenses | 59,968 | 48,539 | 11,429 | 23.5 | % | |||||||||||
| Vessel expenses | 41,799 | 26,982 | 14,817 | 54.9 | % | |||||||||||
| Depreciation and amortization expense | 28,763 | 22,273 | 6,490 | 29.1 | % | |||||||||||
| Loss on sale of vessels | 18,344 | — | 18,344 | — | ||||||||||||
| General and administrative expenses | 7,566 | 3,745 | 3,821 | 102.0 | % | |||||||||||
| Total operating expenses | 156,440 | 101,539 | 54,901 | 54.1 | % | |||||||||||
| Operating loss | (14,914 | ) | (13,417 | ) | (1,497 | ) | 11.2 | % | ||||||||
| Other (expense) income: | ||||||||||||||||
| Total other expense — Net | (12,529 | ) | (8,868 | ) | (3,661 | ) | 41.3 | % | ||||||||
| Net loss | (27,443 | ) | (22,285 | ) | (5,158 | ) | 23.1 | % | ||||||||
| Less: Net loss attributable to noncontrolling interest | (1,548 | ) | (263 | ) | (1,285 | ) | 488.6 | % | ||||||||
| Net loss attributable to Diamond S Shipping Inc. | $ | (25,895 | ) | $ | (22,022 | ) | $ | (3,873 | ) | 17.6 | % | |||||
| Net loss per share – basic | $ | (0.65 | ) | $ | (0.81 | ) | $ | 0.16 | (19.8 | )% | ||||||
| Net loss per share –diluted | $ | (0.65 | ) | $ | (0.81 | ) | $ | 0.16 | (19.8 | )% | ||||||
| Weighted average common shares outstanding – basic | 39,890,698 | 27,165,696 | 12,725,002 | 46.8 | % | |||||||||||
| Weighted average common shares outstanding – diluted | 39,890,698 | 27,165,696 | 12,725,002 | 46.8 | % | |||||||||||
| 29 |
| For the Nine Months Ended September 30, | ||||||||||||||||
| 2019 | 2018 | Change | % Change | |||||||||||||
| (In Thousands, Except Per Share and Share Data) | ||||||||||||||||
| Revenue: | ||||||||||||||||
| Spot revenue | $ | 348,747 | $ | 254,992 | $ | 93,755 | 36.8 | % | ||||||||
| Time charter revenue | 44,730 | 13,248 | 31,482 | 237.6 | % | |||||||||||
| Pool revenue | — | 2,846 | (2,846 | ) | (100.0 | )% | ||||||||||
| Voyage revenue | 393,477 | 271,086 | 122,391 | 45.1 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Voyage expenses | 167,441 | 140,043 | 27,398 | 19.6 | % | |||||||||||
| Vessel expenses | 108,976 | 83,124 | 25,852 | 31.1 | % | |||||||||||
| Depreciation and amortization expense | 79,962 | 66,385 | 13,577 | 20.5 | % | |||||||||||
| Loss on sale of vessels | 18,344 | — | 18,344 | — | ||||||||||||
| General and administrative expenses | 21,174 | 12,021 | 9,153 | 76.1 | % | |||||||||||
| Total operating expenses | 395,897 | 301,573 | 94,324 | 31.3 | % | |||||||||||
| Operating loss | (2,420 | ) | (30,487 | ) | 28,067 | (92.1 | )% | |||||||||
| Other (expense) income: | ||||||||||||||||
| Total other expense — Net | (34,420 | ) | (25,854 | ) | (8,566 | ) | 33.1 | % | ||||||||
| Net loss | (36,840 | ) | (56,341 | ) | 19,501 | (34.6 | )% | |||||||||
| Less: Net loss attributable to noncontrolling interest | (1,416 | ) | (1,016 | ) | (400 | ) | 39.4 | % | ||||||||
| Net loss attributable to Diamond S Shipping Inc. | $ | (35,424 | ) | $ | (55,325 | ) | $ | 19,901 | (36.0 | )% | ||||||
| Net loss per share – basic | $ | (0.99 | ) | $ | (2.04 | ) | $ | 1.05 | (51.5 | )% | ||||||
| Net loss per share –diluted | $ | (0.99 | ) | $ | (2.04 | ) | $ | 1.05 | (51.5 | )% | ||||||
| Weighted average common shares outstanding – basic | 35,835,477 | 27,165,696 | 8,669,781 | 31.9 | % | |||||||||||
| Weighted average common shares outstanding – diluted | 35,835,477 | 27,165,696 | 8,669,781 | 31.9 | % | |||||||||||
Results of Operations
Three months ended September 30, 2019 compared to the three months ended September 30, 2018
Voyage revenue
Voyage revenue increased by $53.4 million to $141.5 million during the three months ended September 30, 2019 as compared to $88.1 million for the three months ended September 30, 2018. The $53.4 million increase was principally driven by a 42.4% increase in revenue days due to an additional 1,723 revenue days from the vessels acquired in the Merger, which is net of a reduction in days due to vessel sales, during the three months ended September 30, 2019.
Voyage Expenses
Voyage expenses primarily consist of bunkers, port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements on the Company’s behalf. Voyage expenses incurred during time and pools are paid for by the charterer or pool manager, except for commissions, which are paid for by the Company. Voyage expenses incurred during voyage charters are paid for by the Company.
Voyage expenses increased by $11.5 million to $60.0 million during the three months ended September 30, 2019 as compared to $48.5 million for the three months ended September 30, 2018. The $11.5 million increase in voyage expenses was driven by a 20.0% increase in spot revenue days due to the Merger.
| 30 |
Vessel Expenses
Vessel expenses include crew wages and associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses.
Vessel expenses increased by $14.8 million to $41.8 million during the three months ended September 30, 2019 as compared to $27.0 million for the three months ended September 30, 2019. The $14.8 million increase in vessel expenses was driven by a 50.3% increase in vessel operating days, which consists of an increase of 2,300 vessel operating days due to the Merger, net of a decrease of 217 days as a result of the sale of vessel sales.
Vessel Depreciation and Amortization Expense
We depreciate the cost of our vessels on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 25 years, and we estimate the residual value by taking the estimated scrap value of $300 per lightweight ton multiplied by the weight of the ship in lightweight tons.
Depreciation and amortization expense increased by $6.5 million to $28.8 million during the three months ended September 30, 2019 as compared to $22.3 million during the three months ended September 30, 2018. The increase in depreciation and amortization expense is due to the added depreciation expense for the 25 vessels acquired in the Merger, offset by the decrease in the depreciation and amortization expense related to the sale of the Alpine Minute and Alpine Magic in December 2018, and the Atlantic Aquarius and Atlantic Leo in September 2019.
Loss on Sale of Vessels
The $18.3 million loss on sale of vessels during the three months ended September 30, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo in September 2019.
General and Administrative Expenses
For the three months ended September 30, 2019 and 2018, general and administrative expenses were $7.5 million and $3.7 million, respectively. The $3.8 million increase was primarily due to $1.3 million in stock-based compensation expense incurred during the three months ended September 30, 2019 due to the granting of restricted stock and restricted stock units during the first nine months of 2019, $0.4 million of costs incurred during the three months ended September 30, 2019 related to legal and audit fees in connection with SEC filings, and $0.5 million in management fees incurred during the three months ended September 30, 2019 on the 25 vessels acquired in the Merger.
Total Other Expense, net
Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $12.5 million for the three months ended September 30, 2019 compared to $8.9 million for the three months ended September 30, 2018. The increase of $3.6 million was primarily driven by an increase in the weighted average debt balance during the two periods, coupled with an increase in interest rates.
Net Loss Attributable to Noncontrolling Interest
The net loss attributable to noncontrolling interest was a net loss of $1.5 million for the three months ended September 30, 2019 compared to a net loss of $0.3 million for the three months ended September 30, 2018. The net loss attributable to noncontrolling interest primarily represents a 49% interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net loss of $1.2 million was mainly attributable to a 71.6% reduction in voyage revenue days, as the two Suezmax vessels owned by NT Suez Holdco LLC had scrubbers installed during the three months ended September 30, 2019.
Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
Voyage revenue
Voyage revenue increased by $122.4 million to $393.5 million during the nine months ended September 30, 2019 as compared to $271.1 million for the nine months ended September 30, 2018. The $122.4 million increase was principally driven by a 30.5% increase in revenue days due to an additional 3,633 revenue days during the nine months ended September 30, 2019, primarily driven by the impact of the vessels acquired in the Merger. Further, freight rates in the crude oil transportation market improved driven by an increase in long haul voyages primarily from U.S. crude oil exports and steady demand growth in global crude oil consumption.
| 31 |
Voyage Expenses
Voyage expenses increased by $27.4 million to $167.4 million during the nine months ended September 30, 2019 as compared to $140.0 million for the nine months ended September 30, 2018. The $27.4 million increase in voyage expenses was driven by a 14.9% increase in spot revenue days due to the Merger, offset by an increase in short-term time charter activity in the Suezmax fleet during the nine months ended September 30, 2019, as the bunker and port costs were borne by the charterer.
Vessel Expenses
Vessel expenses increased by $25.8 million to $109.0 million during the nine months ended September 30, 2019 as compared to $83.2 million for the nine months ended September 30, 2018. The $25.8 million increase in vessel expenses was driven by a 33.3% increase in vessel operating days, which consists of an increase of 4,675 vessel operating days due to the Merger, offset by a decrease of 579 days as a result of the four vessel sales that occurred in December 2018 and September 2019.
Vessel Depreciation and Amortization Expense
Depreciation and amortization expense increased by $13.6 million to $80.0 million during the nine months ended September 30, 2019 as compared to $66.4 million during the nine months ended September 30, 2018. The increase in depreciation and amortization expense is due to the added depreciation expense for the 25 vessels acquired in the Merger, which added 4,675 vessel operating days during the nine months ended September 30, 2019, offset by the decrease in the depreciation and amortization expense related to the four vessel sales that occurred in December 2018 and September 2019.
Loss on Sale of Vessels
The $18.3 million loss on sale of vessels during the three months ended September 30, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo in September 2019.
General and Administrative Expenses
For the nine months ended September 30, 2019 and 2018, general and administrative expenses were $21.2 million and $12.0 million, respectively. The $9.2 million increase was primarily due to $3.2 million of costs incurred during the nine months ended September 30, 2019 related to legal and audit fees in connection with SEC filings, $2.2 million in stock-based compensation expense incurred during the nine months ended September 30, 2019 due to the granting of restricted stock and restricted stock units during the first nine months of 2019, $1.2 million of costs incurred for Directors and Officers insurance and board costs during the nine months ended September 30, 2019, and $1.0 million in management fees incurred during the nine months ended September 30, 2019 on the 25 vessels acquired in the Merger.
Total Other Expense, net
Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $34.4 million for the nine months ended September 30, 2019 compared to $25.9 million for the nine months ended September 30, 2018. The increase of $8.5 million was primarily driven by an increase in the weighted average debt balance during the two periods, coupled with an increase in interest rates.
Net Income (Loss) Attributable to Noncontrolling Interest
The net income (loss) attributable to noncontrolling interest was net loss of $1.4 million for the nine months ended September 30, 2019 compared to a net loss of $1.0 million for the nine months ended September 30, 2018. The net loss attributable to noncontrolling interest primarily represents a 49% interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net loss of $0.4 million was mainly due to a 24.1% reduction in voyage revenue days, as the two Suezmax vessels owned by NT Suez Holdco LLC had scrubbers installed during the nine months ended September 30, 2019, offset by higher charter rates achieved as a result of better fuel efficiencies from long haul voyages in 2019, prior to entering the yard to have the scrubbers installed.
| 32 |
Liquidity and Capital Resources
As of September 30, 2019 and December 31, 2018, total cash, cash equivalents and restricted cash were $81.1 million and $88.2 million, including restricted cash of $5.5 million and $5.1 million, respectively. As of September 30, 2019 and December 31, 2018, the Company had $5.5 million and $19.3 million available and undrawn under its credit facilities, respectively.
Generally, the primary sources of funds have been cash from operations and undrawn amounts under credit facilities.
The Company incurred indebtedness under a new term loan and revolving credit facility in connection with the Merger and indebtedness under previously existing credit facilities of the Company. Refer to Note 9 — Long-Term Debt of our condensed consolidated financial statements. In connection with the Merger, we amended our debt covenants whereby consolidated cash is subject to a $50 million minimum above the restricted cash balance. The Company may refinance certain of its credit facilities which may result in the extension of maturity dates and/or the increase of overall indebtedness. Any such refinancing will be subject to market conditions and based on other factors within management’s judgment.
At September 30, 2019, we were in compliance with all financial covenants under each of the Company’s credit facilities.
Passage of environmental legislation or other regulatory initiatives have in the past, and may in the future, have a significant impact on the operations of the Company. Regulatory measures can increase the costs related to operating and maintaining the Company’s vessels and may require us to retrofit our vessels with new equipment.
Among other capital expenditures, in connection with the IMO 2020 Regulations, the Company contracted for the purchase and installation of scrubbers on five of its Suezmax vessels. Two of these scrubbers have been installed and the remaining three are expected to be installed during the first half of 2020. The total aggregate capital expenditures for these five scrubbers is approximately $15.7 million. The Company may, in the future, determine to purchase additional scrubbers for installation on other vessels owned or operated by the Company. In addition, with respect to vessels that we have not contracted for the installation of scrubbers, we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel, which are not expected to be significant or which have not yet been determined.
The Company entered into contracts to install ballast water treatment systems for 12 vessels, the compliance date of which require such installation in 2019 and 2020 at a total estimated cost of $13.1 million, of which $8.1 million has been paid as of September 30, 2019. The Company plans drydocking of 10 vessels in 2019, with seven completed as of September 30, 2019. Total estimated cost of drydocking in 2019 is $16 million, of which $12.7 million was paid during the nine months ended September 30, 2019.
The Company sold two of its 2008-built medium-range product carriers, the Atlantic Aquarius and Atlantic Leo, as part of its fleet renewal initiatives in September 2019. The vessels were delivered in September 2019, generating gross cash proceeds of $31.8 million before repaying the related debt of $20.4 million on the two vessels.
We believe that we have sufficient capital resources to fund operations and anticipated capital requirements. However, should market conditions deteriorate beyond third party forecasts, the Company would consider a number of liquidity enhancing measures, which could include refinancing a portion of its senior debt, exploring unsecured debt instruments, asset sales and sale-leaseback transactions on certain of its assets.
Cash Flows
The following table summarizes the Company’s cash and cash equivalents provided by or used in operating, investing and financing activities for the periods presented below (presented in millions):
| For the Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net Cash Provided by Operating Activities | $ | 41.9 | $ | 5.5 | ||||
| Net Cash Used in Investing Activities | (291.1 | ) | (4.9 | ) | ||||
| Net Cash Provided by (Used in) Financing Activities | 242.1 | (24.4 | ) | |||||
| 33 |
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2019 and 2018 was $41.9 million and $5.5 million, respectively. The increase of $36.7 million was mainly attributable to, among other factors, higher charter rates increasing our revenues offset by the negative effect of the changes in the Company’s operating assets and liabilities of $22.4 million. The changes in operating assets and liabilities were driven mainly by increases in trade accounts receivable during the nine months ended September 30, 2019.
Net Cash Used in Investing Activities
Net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements, and the Merger, offset by cash provided by vessel sales. Net cash used in investing activities during the nine months ended September 30, 2019 and 2018 was $291.1 million and $4.9 million, respectively. The increase in cash used in investing activities was primarily driven by the consideration paid in connection with the Merger, with $292.7 million paid to CPLP to acquire the vessels, and $18.9 million paid in transaction costs during the nine months ended September 30, 2019, offset by cash proceeds of $31.8 million provided by the sale of the Atlantic Aquarius and Atlantic Leo in September 2019.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by (used in) financing activities during the nine months ended September 30, 2019 and 2018 was $242.1 million and ($24.4) million, respectively. The increase in cash provided by financing activities was primarily driven by the following occurring during the nine months ended September 30, 2019: borrowings under the $360 Facility, consisting of $300 million in the term loan drawn and $50 million in the revolver drawn, and borrowings under the $235 Facility, consisting of $11 million in the revolver drawn, which were offset by $26.3 million repaid on lines of credit that were cancelled in connection with the Merger, and $6.6 million in deferred financing costs paid in connection with the $360 Facility.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations and Contingencies
The following table summarizes the Company’s long-term contractual obligations as of September 30, 2019 (in thousands of U.S. dollars).
| Payment due by period (i.e. calendar year) | ||||||||||||||||||||
| Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | ||||||||||||||||
| Long-term Debt Obligations (1) | $ | 894,761 | $ | 30,721 | $ | 599,665 | $ | 156,875 | $ | 107,500 | ||||||||||
| Interest Obligations (1) (2) | 88,740 | 10,556 | 60,741 | 16,317 | 1,126 | |||||||||||||||
| Capital Commitments | 16,717 | 4,588 | 12,129 | — | — | |||||||||||||||
| Office Lease | 7,473 | 271 | 1,826 | 2,229 | 3,147 | |||||||||||||||
| Total: | $ | 1,007,691 | $ | 46,136 | $ | 674,361 | $ | 175,421 | $ | 111,773 | ||||||||||
| (1) | In connection with the Merger, the Company entered into the $360,000,000 Facility which included refinancing a $30 million Line of Credit. The $360,000,000 Facility consists of a term loan of $300 million and a revolving loan of $60 million. As a result, as of September 30, 2019, long-term debt obligations increased as shown in Note 9 — Long-Term Debt of our condensed consolidated financial statements. Interest obligations increased proportionately with the increase in debt. |
| (2) | Interest has been estimated based on the LIBOR Bloomberg forward rates and the prescribed margin for each of the Company’s facilities. Refer to Note 9 — Long-Term Debt of our condensed consolidated financial statements. |
| 34 |
Critical Accounting Policies
The Company’s condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company has described below what its management believes are its most critical accounting policies. For a description of all of the Company’s significant accounting policies, see Note 2 (Significant Accounting Policies) to the audited consolidated financial statements of DSS Holdings L.P., which are included in the Company’s Registration Statement on Form 10, and in Note 2 — Summary of Significant Accounting Policies in our condensed consolidated financial statements, for further information.
Revenue Recognition
During the nine months ended September 30, 2019 and 2018, revenues are generated from time charters, pool arrangements and voyage charters.
The Company recognizes revenues over the term of the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection of the related revenue is reasonably assured. The Company does not recognize revenue during days the vessel is off-hire.
Revenues from pool arrangements are recognized based on its portion of the net distributions reported by the relevant pool, which represents the net voyage revenue of the pool after voyage expenses and pool manager fees.
For the nine months ended September 30, 2018, under a voyage charter agreement, the revenues are recognized on a pro rata basis based on the relative transit time in each period. The period over which voyage revenues are recognized commences at the time the vessel departs from its last discharge port and ends at the time the discharge of cargo at the next discharge port is completed. The Company does not begin recognizing revenue until a charter has been agreed to by the customer and the Company, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its next voyage. The Company does not recognize revenue when a vessel is off-hire. Estimated losses on voyages are provided for in full at the time such losses become evident.
For the nine months ended September 30, 2019, pursuant to the new revenue recognition guidance, which was early adopted as of January 1, 2019, and is disclosed in Note 14 — Voyage Revenue of our condensed consolidated financial statements, revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Previously, revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by the Company when engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters.
Vessel Lives and Impairment
The carrying value of each of the Company’s vessels represents its original cost either at the time of delivery (contract price plus initial expenditures), or when purchased, less accumulated depreciation or impairment charges. The carrying values of vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. In recent years changing market conditions resulted in a decrease in charter rates and values of assets. We consider these market developments as indicators of potential impairment of the carrying amount of its assets.
| 35 |
In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels’ future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels’ operating expenses, vessels’ capital expenditures and drydocking requirements, vessels’ residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where the vessels are not fixed on time charters, we utilize an estimated daily time charter equivalent for its vessels’ unfixed days based on the most recent ten year historical one-year time charter average.
Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions are highly subjective and likely to change, possibly materially, in the future. There can be no assurance as to how long charter rates and vessel values will remain at their current low levels or whether they will improve by a significant degree. If charter rates were to remain at depressed levels, future assessments of vessel impairment would be adversely affected.
In recent years, the market values of vessels have experienced particular volatility, with substantial declines in many of the charter-free market value of various vessel classes. As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their carrying values under our impairment accounting policy. This is due to management’s projection that future undiscounted cash flows expected to be earned by such vessels over their operating lives will exceed such vessels’ carrying amounts.
Recent Accounting Pronouncements
New Accounting Standards Adopted
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. For the Company, this standard is effective for annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASU, and shall be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption (the “modified retrospective transition method”). The Company early adopted ASU 2014-09 on January 1, 2019 using the modified retrospective transition method applied to those spot market voyage charter contracts which were not completed as of January 1, 2019. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to its Accumulated deficit as of January 1, 2019. Prior periods were not retrospectively adjusted. The adoption of ASU 2014-09 does not have an impact on the timing of recognition of revenue generated from time charter agreements. Refer to Note 14 — Voyage Revenue of our condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The objective of ASU 2017-01 is to provide guidance to entities when evaluating whether a transaction should be accounted for as an acquisition or disposal of a business. An entity first determines whether substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset, or a group of similar identifiable assets. If this threshold is met, the assets acquired would not represent a business, and no further assessment is required. If the initial screen is not met, ASU 2017-01 requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to produce output and removes the evaluation of whether a market participant could replace the missing elements. For nonpublic entities, ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019, allowing for earlier adoption as permitted in the ASUs, and shall be applied prospectively. The Company early adopted ASU 2017-01, and concluded that the Merger should be accounted for an asset acquisition. Refer to Note 3 — Merger Transaction of our condensed consolidated financial statements.
| 36 |
New Accounting Standards to be Implemented
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020, with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about the Company’s leasing activities. The Company has analyzed its contracts and is in the process of calculating the right-of-use assets and lease liabilities as of January 1, 2020 based on the present value of the Company’s remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases. The Company does not believe the adoption of ASC 842 will have a material effect on its consolidated results of operations or cash flows. The Company will provide the required disclosures under the standard in its Form 10-K filing for the annual period ending December 31, 2020.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the potential impact of this pronouncement on the condensed consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company is exposed to the impact of interest rate changes primarily through floating-rate borrowings that require it to make interest payments based on the Eurodollar Rate. Significant increases in interest rates could adversely affect operating margins, results of operations and our ability to service debt. The Company uses interest rate swaps to reduce its exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with floating-rate debt.
The Company is exposed to the risk of credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Company only entered into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s Financial Services LLC or A3 or better by Moody’s Investors Service, Inc. at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.
From time to time, the Company has considered entering into interest rate swap agreements to modify its exposure to interest rate movements and to manage its interest expense. As of September 30, 2019, 16.8% of the debt was fixed due to the interest rate swap agreements, and 83.2% was variable. Based on the Company’s September 30, 2019 outstanding variable rate debt balance, a one percentage point increase in annual Eurodollar Rates would increase its annual interest expense by approximately $7.2 million.
Inflation
Inflation has only a moderate effect on the Company’s expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase the Company’s operating, voyage, general and administrative and financing costs.
Foreign Exchange Risk
The shipping industry’s functional currency is the U.S. dollar. All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurred certain operating expenses, such as vessel and general and administrative expenses, in currencies other than the U.S. dollar, and the foreign exchange risk associated with these operating expenses has historically been immaterial. If foreign exchange risk becomes material in the future, the Company may seek to reduce its exposure to fluctuations in foreign exchange rates through the use of short-term currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable. For contracts which qualify as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes in foreign exchange spot rates with the change in fair value of the effective portions being recorded in accumulated other comprehensive loss.
| 37 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 3 is set forth in Item 2 under the caption “Quantitative and Qualitative Disclosures About Market Risk” and is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management conducted an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2019. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended September 30, 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business, and currently certain claims are pending against us. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows.
In addition to the other information set forth in this report, you should carefully consider the factors described below and the other information discussed in “Risk Factors” in the Company’s Information Statement, which could materially affect our business, financial condition or future results. The risks described in our Information Statement are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.
We may experience constraints in our liquidity and may be unable to access capital when necessary or desirable, either of which could adversely affect our financial condition.
Although we believe we have a sufficient level of cash and cash equivalents to cover our working capital needs in the ordinary course of business, we may, from time to time, explore additional financing sources and means to improve our liquidity and lower our cost of capital, which could include equity, equity-linked and debt financing activities. In addition, from time to time, we review acquisition and investment opportunities to further implement our business strategy and may fund these investments with bank financing, the issuance of debt or equity or a combination thereof.
The availability of financing depends in significant measure on capital markets and liquidity factors over which we exert no control. In light of periodic uncertainty in the capital and credit markets, we can provide no assurance that sufficient financing will be available on desirable or even any terms to improve our liquidity, fund investments, acquisitions or extraordinary actions or that our counterparties in any such financings would honor their contractual commitments, which in turn could negatively affect our business, results of operations and financial condition.
| 38 |
| 39 |
| * | The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q are “furnished” to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
| 40 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DIAMOND S SHIPPING INC. | ||||
| Date: | November 14, 2019 |
By: | /s/ Craig H. Stevenson, Jr. | |
| Craig H. Stevenson, Jr. | ||||
| Chief Executive Officer and President | ||||
| (Principal Executive Officer) | ||||