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EX-32.2 - EXHIBIT 32.2 - Diamond S Shipping Inc.tm2032969d1_ex32-2.htm
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EX-31.2 - EXHIBIT 31.2 - Diamond S Shipping Inc.tm2032969d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Diamond S Shipping Inc.tm2032969d1_ex31-1.htm

 

 

 

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, 2020

or

 

o 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, par value $0.001 per share DSSI New York Stock Exchange

 

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 o

 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 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. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 12, 2020: 40,440,593 shares of common stock, par value $0.001 per share.

 

 

 

 

DIAMOND S SHIPPING INC. AND SUBSIDIARIES

 

INDEX

 

PART I. FINANCIAL INFORMATION   PAGE
      
Item 1Financial Statements    
      
  Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2020 and December 31, 2019  6
    
  Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2020 and 2019  7
    
  Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019  8
    
  Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 30, 2020 and 2019  9
    
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019  10
      
  Notes to Condensed Consolidated Financial Statements (Unaudited)  11
      
Item 2Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
      
Item 3 Quantitative and Qualitative Disclosures About Market Risk  35
      
Item 4 Controls and Procedures  35

 

PART II. OTHER INFORMATION  PAGE
      
Item 1 Legal Proceedings  36
      
Item 1A Risk Factors  36
      
Item 6 Exhibits  37

 

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;

 

·the length and severity of the ongoing novel coronavirus (“COVID-19”) pandemic, including its impact on the demand for seaborne transportation of petroleum products;

 

·risks related to an oversupply of tanker vessels;

 

·changes in fuel prices;

 

·decreases in the market values of tanker vessels;

 

·risks related to the management of our growth strategy, counterparty risks and customer relations with key customers;

 

·our ability to meet obligations under time charter agreements;

 

·dependence on third-party managers and a limited number of customers;

 

·our liquidity, level of indebtedness, operating expenses, capital expenditures and financing;

 

·our interest rate swap agreements and credit facilities;

 

·risk of loss, including potential liability from future litigation and potential costs due to environmental damage, vessel collisions and business interruption; risks related to war, terrorism and piracy;

 

·risks related to the acquisition, modification and operation of vessels;

 

·future supply of, and demand for, refined products and crude oil, including relating to seasonality;

 

·risks related to our insurance, including adequacy of coverage and increased premium payments;

 

·risks related to tax rules applicable to us;

 

·our ability to clear the oil majors’ risk assessment processes;

 

·future refined product and crude oil prices and production;

 

·the carrying values of our vessels and the potential for any asset impairments;

 

3

 

 

·our ability to maximize the use of our vessels, including the redeployment or disposition of vessels no longer under long-term time charter;

 

·our continued ability to enter into long-term, fixed-rate time charters with our charterers and to re-charter our vessels as their existing charters expire at attractive rates;

 

·failure to realize the anticipated benefits of the Merger (as defined herein), including as a result of integrating the businesses;

 

·failure to maintain effective internal control over financial reporting;

 

·our ability to implement our business strategy and manage planned growth;

 

·changes in laws, treaties or regulations applicable to the Company, including regulations relating to environmental compliance; and

 

·other risks and uncertainties disclosed in the Company’s reports filed from time to time with the Securities and Exchange Commission (“SEC”) under the Exchange Act.

 

Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk. When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and in our other SEC filings. These forward-looking statements speak only as of the date on which such statements were made, and we undertake no obligation to update these statements, except as required by the federal securities laws. These forward-looking statements are not guarantees of our future performance, and actual results and future developments may vary materially from those projected in the forward-looking statements.

 

Except to the extent required by applicable law or regulation, we undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

4

 

 

Part 1. Financial Information

 

Item 1. Financial Statements

 

DIAMOND S SHIPPING INC. AND SUBSIDIARIES
Index to Condensed Consolidated Financial Statements (Unaudited)

 

  Page
   
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 6
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 7
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2020 and 2019 8
Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019 9
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 10
Notes to Condensed Consolidated Financial Statements 11

 

5

 

 

DIAMOND S SHIPPING INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
as of September 30, 2020 and December 31, 2019

(In Thousands, except for share and per share data)

(Unaudited)

 

   September 30,
2020
   December 31,
2019
 
Assets          
Current assets:          
Cash and cash equivalents  $114,335   $83,609 
Due from charterers – Net of provision for doubtful accounts of $2,037 and $1,415, respectively   56,948    80,691 
Inventories   20,518    32,071 
Prepaid expenses and other current assets   14,611    13,179 
Total current assets   206,412    209,550 
           
Noncurrent assets:          
Vessels – Net of accumulated depreciation of $631,438 and $553,483, respectively   1,799,835    1,865,738 
Other property – Net of accumulated depreciation of $813 and $584, respectively   433    642 
Deferred drydocking costs – Net of accumulated amortization of $24,406 and $17,975, respectively   34,016    37,256 
Restricted cash   6,014    5,610 
Advances to Norient pool   8,001     
Time charter contracts acquired – Net of accumulated amortization of $4,290 and $2,296, respectively   2,809    5,004 
Other noncurrent assets   2,593    4,582 
Total noncurrent assets   1,853,701    1,918,832 
Total  $2,060,113   $2,128,382 
           
Liabilities and Equity          
Current liabilities:          
Current portion of long-term debt  $134,389   $134,389 
Accounts payable and accrued expenses   35,336    44,062 
Deferred charter hire revenue   3,245    1,934 
Derivative liability   557     
Total current liabilities   173,527    180,385 
           
Long-term debt – Net of deferred financing costs of $13,426 and $15,866, respectively   600,703    744,055 
Derivative liability   620     
Total liabilities   774,850    924,440 
           
Commitments and contingencies (Note 16)          
           
Equity:          
Common stock, par value $0.001; 100,000,000 shares authorized; issued and outstanding 39,924,892 and 39,890,699 shares at September 30, 2020 and December 31, 2019, respectively   40    40 
Treasury stock – at cost; 137,289 shares at September 30, 2020   (1,418)    
Additional paid-in capital   1,240,521    1,237,658 
Accumulated other comprehensive loss   (1,177)    
Retained earnings (accumulated deficit)   12,525    (68,567)
Total Diamond S Shipping Inc. equity   1,250,491    1,169,131 
Noncontrolling interests   34,772    34,811 
Total equity   1,285,263    1,203,942 
Total  $2,060,113   $2,128,382 

 

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, 2020 and 2019

(In Thousands, except for share and per share data)
(Unaudited)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Revenue:                    
Voyage revenue  $69,098   $120,954   $419,169   $348,747 
Time charter revenue   20,408    20,572    63,296    44,730 
Pool revenue   23,091        23,410     
Total revenue   112,597    141,526    505,875    393,477 
                     
Operating expenses:                    
Voyage expenses   32,896    59,968    156,926    167,441 
Vessel expenses   44,758    41,799    128,032    108,976 
Depreciation and amortization expense   29,067    28,763    86,598    79,962 
Loss on sale of vessels       18,344        18,344 
General and administrative expenses   7,685    7,566    23,294    21,174 
Total operating expenses   114,406    156,440    394,850    395,897 
Operating (loss) income   (1,809)   (14,914)   111,025    (2,420)
Other (expense) income:                    
Interest expense   (7,019)   (13,021)   (28,106)   (35,813)
Other income   3    492    339    1,393 
Total other expense – Net   (7,016)   (12,529)   (27,767)   (34,420)
Net (loss) income   (8,825)   (27,443)   83,258    (36,840)
Less: Net income (loss) attributable to noncontrolling interest   839    (1,548)   2,166    (1,416)
Net (loss) income attributable to Diamond S Shipping Inc.  $(9,664)  $(25,895)  $81,092   $(35,424)
                     
Net (loss) earnings per share – basic  $(0.24)  $(0.65)  $2.03   $(0.99)
Net (loss) earnings per share – diluted  $(0.24)  $(0.65)  $2.02   $(0.99)
                     
Weighted average common shares outstanding – basic   39,918,427    39,890,698    39,879,976    35,835,477 
Weighted average common shares outstanding – diluted   39,918,427    39,890,698    40,106,157    35,835,477 

 

See notes to condensed consolidated financial statements.

 

7

 

 

DIAMOND S SHIPPING INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income
for the Three and Nine Months Ended September 30, 2020 and 2019
(In Thousands)

(Unaudited)

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Net (loss) income  $(8,825)  $(27,443)  $83,258   $(36,840)
Unrealized loss on cash flow hedges   (281)   (518)   (1,177)   (3,496)
Other comprehensive loss   (281)   (518)   (1,177)   (3,496)
Comprehensive (loss) income   (9,106)   (27,961)   82,081    (40,336)
Less: comprehensive income (loss) attributable to noncontrolling interest   839    (1,548)   2,166    (1,416)
Comprehensive (loss) income attributable to Diamond S Shipping Inc.  $(9,945)  $(26,413)  $79,915   $(38,920)

 

See notes to condensed consolidated financial statements.

 

8

 

 

DIAMOND S SHIPPING INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Equity
for the Three and Nine Months Ended September 30, 2020 and 2019
(In Thousands)

(Unaudited)

 

   Common
Stock
   Treasury
Stock
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Loss
   (Accumulated
Deficit)
Retained
Earnings
   Noncontrolling
Interests
   Total 
Balance – January 1, 2020  $40   $   $1,237,658   $   $(68,567)  $34,811   $1,203,942 
Stock-based compensation           1,334                1,334 
NT Suez Holdco LLC distribution                       (1,568)   (1,568)
Shares repurchased       (1,418)                   (1,418)
Net income                   45,044    537    45,581 
Balance – March 31, 2020   40    (1,418)   1,238,992        (23,523)   33,780    1,247,871 
Stock-based compensation           1,109                1,109 
NT Suez Holdco LLC distribution                       (343)   (343)
Unrealized loss on cash flow hedges               (896)           (896)
Equity awards net settled to cover employee withholding taxes           (693)                (693)
Net income                   45,712    790    46,502 
Balance – June 30, 2020   40    (1,418)   1,239,408    (896)   22,189    34,227    1,293,550 
Stock-based compensation           1,164                1,164 
NT Suez Holdco LLC distribution                       (294)   (294)
Unrealized loss on cash flow hedges               (281)           (281)
Equity awards net settled to cover employee withholding taxes           (51)                (51)
Net (loss) income                   (9,664)   839    (8,825)
Balance – September 30, 2020  $40   $(1,418)  $1,240,521   $(1,177)  $12,525   $34,772   $1,285,263 

 

   Partners’
Contributions
   Common
Stock
   Additional
Paid-in
Capital
   Accumulated
Other
Comprehensive
Income
   Accumulated
Deficit
   Noncontrolling
Interests
   Total 
Balance – January 1, 2019  $994,771   $   $2,558   $4,387   $(56,477)  $34,607   $979,846 
Cumulative effect of accounting change                   (2,784)       (2,784)
Merger transaction (Note 3)   (994,771)   40    1,231,579                236,848 
Unrealized loss on cash flow hedges               (1,096)           (1,096)
Net loss (income)                   (1,026)   206    (820)
Balance – March 31, 2019       40    1,234,137    3,291    (60,287)   34,813    1,211,994 
Unrealized loss on cash flow hedges               (1,882)           (1,882)
Capital contributions for
NT Suez Holdco LLC
                       980    980 
Stock-based compensation           861                861 
Net loss                   (8,503)   (74)   (8,577)
Balance – June 30, 2019       40    1,234,998    1,409    (68,790)   35,719    1,203,376 
Unrealized loss on cash flow hedges               (518)           (518)
Stock-based compensation           1,301                1,301 
Net loss                   (25,895)   (1,548)   (27,443)
Balance – September 30, 2019  $   $40   $1,236,299   $891   $(94,685)  $34,171   $1,176,716 

 

See notes to condensed consolidated financial statements.

 

9

 

 

DIAMOND S SHIPPING INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2020 and 2019
(In Thousands)

(Unaudited)

 

   For the Nine Months Ended
September 30,
 
   2020   2019 
Cash flows from Operating Activities:          
Net income (loss)  $83,258   $(36,840)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization expense   86,598    79,962 
Loss on sale of vessels       18,344 
Amortization of deferred financing costs   2,663    3,106 
Amortization of time charter hire contracts acquired   2,194    1,632 
Amortization of the realized gain from recouponing swaps       (2,045)
Stock-based compensation expense   3,607    2,162 
Changes in assets and liabilities   20,692    (11,723)
Payments for drydocking   (5,120)   (12,685)
Net cash provided by operating activities   193,892    41,913 
           
Cash flows from Investing Activities:          
Acquisition costs, net of cash acquired of $16,568       (292,683)
Transaction costs       (18,930)
Proceeds from sale of vessels       31,800 
Payments for vessel additions and other property   (11,958)   (11,238)
Net cash used in investing activities   (11,958)   (291,051)
           
Cash flows from Financing Activities:          
Borrowings on long-term debt       300,000 
Principal payments on long-term debt   (100,792)   (86,604)
Borrowings on revolving credit facilities       61,000 
Repayments on revolving credit facilities   (45,000)   (26,323)
NT Suez Holdco LLC distribution   (2,205)    
Shares repurchased   (1,418)    
Cash paid to net settle employee withholding taxes on equity awards   (745)    
Proceeds from partners’ contributions in subsidiaries        980 
Payments for deferred financing costs   (644)   (6,970)
Net cash (used in) provided by financing activities   (150,804)   242,083 
Net increase (decrease) in cash, cash equivalents and restricted cash   31,130    (7,055)
Cash, cash equivalents and restricted cash – Beginning of period   89,219    88,158 
Cash, cash equivalents and restricted cash – End of period  $120,349   $81,103 
           
Supplemental disclosures:          
Cash paid for interest  $26,480   $35,206 
Common stock issued to CPLP (Refer to Note 3 — Merger Transaction)  $   $236,848 

Unpaid transaction costs in Accounts payable and accrued expenses at the end of the period

  $   $154 

Unpaid vessel additions in Accounts payable and accrued expenses at the end of the period

  $1,326   $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. (“DSS LP”) pursuant to the Transaction Agreement, dated as of November 27, 2018 (as amended, the “Transaction Agreement”), by and among CPLP, DSS LP, DSSI and the other parties named therein. DSS LP was a Cayman Islands limited partnership formed on October 1, 2007.

 

On March 27, 2019, DSSI and DSS LP and all of its directly-owned subsidiaries (the “DSS LP Subsidiaries”) completed a merger pursuant to the Transaction Agreement. Pursuant to the terms of the Transaction Agreement, on March 27, 2019, the DSS LP Subsidiaries merged with and into DSSI, with DSSI being the surviving corporation in the merger (the “Merger”). DSSI and the DSS LP Subsidiaries are hereinafter referred to collectively as the “Company.”

 

The Merger was accounted for as a reverse acquisition in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations” as the DSS LP Subsidiaries are the accounting acquirer for financial reporting purposes. Accordingly, the historical consolidated financial statements of the DSS LP Subsidiaries for periods prior to the Merger are considered to be the predecessor financial statements of the Company. Refer to Note 3 — Merger Transaction for further information.

 

The Company is a seaborne transporter of crude oil and refined petroleum products, operating in the international shipping industry. As of September 30, 2020, 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 year ended December 31, 2019 and notes thereto included in the Company’s annual report on Form 10-K (the “2019 Financial Statements”). The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2020.

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company intends to take advantage of the benefits of this extended transition period for as long as it is available. The Company’s condensed consolidated financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Section 107 of the JOBS Act provides that the decision not to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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 condensed consolidated statements of cash flows:

 

  

September 30,
2020

   December 31,
2019
  

September 30,
2019

   December 31,
2018
 
Cash and cash equivalents  $114,335   $83,609   $75,559   $83,054 
Restricted cash   6,014    5,610    5,544    5,104 
Total Cash and cash equivalents, and Restricted cash shown in the condensed consolidated statements of cash flows  $120,349   $89,219   $81,103   $88,158 

 

Amounts included in restricted cash represent those required to be set aside by the $66 Million Facility, as defined in Note 9 below. The restriction will lapse when the related long-term debt is retired.

 

Revenue and Voyage Expense Recognition — Total revenue includes revenue earned on fixed rate time charters, spot market voyage charters, spot market-related time charters and pools. Pursuant to the new revenue recognition guidance, 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.

 

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.

 

In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by the Company when engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters. There are certain other non-specified voyage expenses, such as commissions, which are typically borne by the Company.

 

The Company recognizes revenue from pool arrangements based on its portion of the net distributions reported by the pool, which represents the net voyage revenue of the pool after voyage expenses and certain pool manager fees.

 

Recent Accounting Pronouncements

 

New accounting standards to be implemented — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about the Company’s leasing activities. The Company is currently analyzing its contracts and will then calculate the right-of-use assets and lease liabilities as of January 1, 2021 based on the present value of the Company’s remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases.

 

12

 

 

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:
oDSS Crude Transport Inc., a wholly-owned subsidiary of DSS LP, merged with Crude Merger Entity, with DSS Crude Transport Inc. surviving the merger,
oDSS Products Transport Inc., a wholly-owned subsidiary of DSS LP, merged with Products Merger Entity, with DSS Products Transport Inc. surviving the merger, and
oDiamond S Technical Management LLC, a wholly-owned subsidiary of DSS LP, merged with Management Merger Entity, with Diamond S Technical Management LLC surviving the merger.
·Following the Pre-Mergers and pursuant to the same plan, each of DSS Crude Transport Inc., DSS Products Transport Inc. and Diamond S Technical Management LLC merged with the Surviving Merger Entity, with the Surviving Merger Entity surviving. The Surviving Merger Entity subsequently merged with DSSI, with DSSI surviving.

 

Pursuant to the Transaction agreement, the CPLP unitholders received 12,725,000 common shares in DSSI, and the DSS LP limited partners received common shares of DSSI that were determined by the factor to which DSS LP’s net asset value is to the net asset value of DSSI immediately after the Distribution, multiplied by the number of shares distributed to CPLP unitholders after the March 27, 2019 effective date. This equated to the DSS LP limited partners receiving 27,165,696 common shares.

 

The Merger completed on March 27, 2019, and the Company’s common shares commenced trading on the New York Stock Exchange on March 28, 2019.

 

The Merger was accounted for as a reverse acquisition in accordance with ASC 805, “Business Combinations.” Based on the structure of the Merger and other activities contemplated by the Transaction Agreement, relative outstanding share ownership, the composition of the Company's board of directors and the designation of certain senior management positions of the Company, the DSS LP Subsidiaries are the accounting acquirer for financial reporting purposes.

 

Further, in accordance with ASU 2017-01, the Merger was determined to be an asset acquisition as substantially all of the fair value of the gross assets acquired is concentrated in a group of similar identifiable assets.

 

The consideration transferred, assets acquired, and liabilities assumed are recognized as follows:

 

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Consideration paid and transferred     
Cash paid — net of cash received of $16,568  $292,683 
Common stock issued to CPLP   236,848 
Transaction costs   20,738 
Total consideration paid and transferred  $550,269 
      
Net assets acquired     
Due from charterers  $4,514 
Inventories   6,969 
Prepaid expenses and other current assets   1,152 
Vessels   537,988 
Time charter contracts acquired — assets   7,300 
Other noncurrent assets   2,191 
Accounts payable and accrued expenses   (7,478)
Deferred charter hire revenue   (2,367)
Net assets acquired  $550,269 

 

Further, as the Merger was determined to be an asset acquisition, the Company recorded the acquired assets and liabilities at the cost of the acquisition, including transaction costs, on the basis of relative fair value. The carrying value of the vessels were recorded in accordance with the principles set forth under ASC Topic 820, “Fair Value Measurement” based upon current market values obtained from at least two independent ship brokers. The time charter contract assets acquired represent an estimate of the fair value of the time charters acquired as of the date of the Merger, and considers the differential between the stated time charter rate and the contracts’ fair value at the time of the Merger.

 

In connection with the Merger, the incentive units granted under the DSS LP unit incentive plan expired with no value. Further, while the Company is now a public company, management believe that, pursuant to Section 883 of the U.S. Internal Revenue Code of 1986, the income related to vessel operations will continue to be exempt from U.S. federal income tax, although no assurance can be given that the Company will continue to satisfy this statutory exemption from U.S. federal income taxation.

 

4.Net (Loss) earnings Per Share

 

The computation of basic net (loss) earnings per share is based on the weighted-average number of common shares outstanding during the reporting period. The computation of diluted net earnings (loss) per share assumes the vesting of nonvested stock awards (refer to Note 15 — Stock-Based Compensation), for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost attributable to future services and are not yet recognized using the treasury stock method, to the extent dilutive. Of the 591,773 and 615,525 nonvested shares and RSUs outstanding as of September 30, 2020 and 2019, 238,421 and 615,525, respectively, were excluded from the computation of diluted net earnings per share because these were anti-dilutive (refer to Note 15 — Stock-Based Compensation).

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2020   2019   2020   2019 
Common shares outstanding, basic:                    
Weighted-average common shares outstanding, basic   39,918,427    39,890,698    39,879,976    35,835,477 
                     
Common shares outstanding, diluted:                    
Weighted-average common shares outstanding, basic   39,918,427    39,890,698    39,879,976    35,835,477 
Dilutive effect of restricted stock awards           226,181     
Weighted-average common shares outstanding, diluted   39,918,427    39,890,698    40,106,157    35,835,477 

 

14

 

 

5.JOINT VENTURE INVESTMENTS

 

NT Suez Holdco LLC — In September 2014, the Company formed a joint venture, NT Suez Holdco LLC (“NT Suez”), to purchase two Suezmax newbuildings. The two vessels were delivered in October and November 2016.

 

NT Suez is owned 51% by the Company and 49% by WLR/TRF Shipping S.a.r.l (“WLR/TRF”). WLR/TRF is indirectly owned by funds managed or jointly managed by WL Ross & Co, LLC (“WLR”), including WLR Recovery Fund V DSS AIV, L.P. and WLR V Parallel ESC, L.P., which are also shareholders of the Company. WLR is a fund manager that manages the Company’s largest shareholders.

 

As of September 30, 2020 and December 31, 2019, the investments NT Suez received from the Company and WLR/TRF aggregated $74,104, which was used for shipyard installment payments and working capital. In February 2020, NT Suez distributed $1,632 and $1,568 to the Company and WLR/TRF, respectively. In June 2020, NT Suez distributed $357 and $343 to the Company and WLR/TRF, respectively.

 

Management has determined that NT Suez qualifies as a variable interest entity, and, when aggregating the variable interests held by the related parties (i.e. the Company and WLR/TRF), the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impact NT Suez’s economic performance. Accordingly, the Company consolidates NT Suez.

 

Diamond Anglo Ship Management Pte. Ltd. — In January 2018, the Company and Anglo Eastern Investment Holdings Ltd. (“AE Holdings”), a third party, formed a joint venture, Diamond Anglo Ship Management Pte. Ltd. (“DASM”). DASM is owned 51% by the Company and 49% by AE Holdings as of September 30, 2020 and December 31, 2019, and was formed to provide ship management services to the Company’s vessels.

 

As of September 30, 2020 and December 31, 2019, the investments DASM received from the Company and AE Holdings totaled $51 and $49, respectively, which were used for general and administrative expenses.

 

Management has determined that DASM qualifies as a variable interest entity, and, when aggregating the variable interests held by the Company and AE Holdings, the Company is the primary beneficiary as the Company has the ability to direct the activities that most significantly impacts DASM’s economic performance. Accordingly, the Company consolidates DASM.

 

6.Vessel Dispositions

 

In August 2019, the Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. The Company reached an agreement to sell the Atlantic Aquarius and Atlantic Leo for $32 million in aggregate gross proceeds. In September 2019, the Company delivered the vessels to the buyer and repaid debt on the $460 Million Facility, as defined in Note 9 below, of $20.4 million. The loss on sale of the vessels was $18.3 million, which was recorded to the condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

7.Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following as of September 30, 2020 and December 31, 2019:

 

  

September 30,
2020

   December 31,
2019
 
Advances to Capital Ship Management Corp. (“CSM”) (Refer to Note 14 — Related Party Transactions)  $6,288   $5,757 
Advances to technical managers   23    26 
Insurance claims receivable   1,066    511 
Prepaid insurance   1,527    1,093 
Advances to agents   2,199    1,421 
Deferred voyage costs   2,003    3,132 
Other   1,505    1,239 
Total prepaid expenses and other current assets  $14,611   $13,179 

 

15

 

 

8.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following as of September 30, 2020 and December 31, 2019:

 

  

September 30,
2020

   December 31,
2019
 
Trade accounts payable and accrued expenses  $8,306   $9,716 
Accrued vessel and voyage expenses   23,903    32,201 
Accrued interest   35    1,090 
Accrued vessel and voyage expenses and Other current liabilities (Refer to Note 14 — Related Party Transactions)   3,092    1,055 
Total accounts payable and accrued expenses  $35,336   $44,062 

 

9.LONG-TERM DEBT

 

Long-term debt at September 30, 2020 and December 31, 2019 was comprised of the following:

 

   September 30,
2020
   December 31,
2019
 
$360 Million Facility  $241,250   $327,500 
$525 Million Facility   458,750    515,000 
$66 Million Facility   48,518    51,810 
Total   748,518    894,310 
Less: Unamortized deferred financing costs   (13,426)   (15,866)
Less: Current portion   (134,389)   (134,389)
Long-term debt, net of deferred financing costs  $600,703   $744,055 

 

$360 Million Facility — On March 27, 2019, in connection with the Merger, the Company entered into a $360,000 five-year Credit Agreement, as amended (the “$360 Million Facility”), for the purposes of financing the Merger and refinancing the $30 Million Line of Credit (defined below). The $360 Million Facility consists of a term loan of $300,000 and a revolving loan of $60,000, and is collateralized by the 25 vessels acquired in the Merger and the three vessels that collateralized the $30 Million Line of Credit, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $360 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.65% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $360 Million Facility are 1.06%. As of September 30, 2020, $10,000 of the revolving loan was drawn, while $50,000 was available and undrawn.

 

The $360 Million Facility contains certain restrictions on the payments of dividends. The $360 Million Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal quarter an amount that is equal to 50% of the adjusted consolidated net income of the Company in such fiscal quarter.

 

$525 Million Facility — On December 23, 2019, the Company entered into a $525,000 five-year Credit Agreement (the “$525 Million Facility”), for the purposes of refinancing the $460 Million Facility, the $235 Million Facility and the $75 Million Facility (defined below). The $525 Million Facility consists of a term loan of $375,000 and a revolving loan of $150,000, and is collateralized by the 36 vessels that collateralized the $460 Million Facility, the $235 Million Facility and the $75 Million Facility, with reductions based on a 17 year age-adjusted amortization schedule, payable on a quarterly basis. The term loan component of the $525 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 2.50% interest rate margin, and the interest is paid quarterly. Commitment fees on undrawn amounts related to the revolving loan component of the $525 Million Facility are 0.875%. As of September 30, 2020, $140,000 of the revolving loan was drawn, while $10,000 was available and undrawn.

 

The $525 Million Facility contains certain restrictions on the payments of dividends. The $525 Million Facility permits the Company to pay dividends so long as the payment of dividends does not cause an event of default, and limits dividends payable so that they do not exceed in any fiscal quarter an amount that is equal to 50% of the adjusted consolidated net income of the Company in the preceding fiscal quarter.

 

Prior to the December 2019 refinancing, the Company financed 26 MR vessels, which were acquired in September 2011, with a $460,000 five-year senior secured term loan facility, as amended (the “$460 Million Facility”). Interest was paid monthly, and the $460 Million Facility bore interest at the Eurodollar Rate for a one-month interest period, plus a 2.80% interest rate margin.

 

16

 

 

Also, prior to the December 2019 refinancing, the Company financed eight 2012-built Suezmaxes with a $235,000 five-year senior secured financing facility, as amended (the “$235 Million Facility”), which consisted of a term loan of $220 million and a revolving loan of $15,000. Interest on the term loan component was paid quarterly and the $235 Million Facility bore interest at the Eurodollar Rate for a three-month interest period, plus a 2.75% interest rate margin. Commitment fees on undrawn amounts related to the revolving loan component of the $235 Million Facility were 1.10%.

 

Lastly, prior to the December 2019 refinancing, the Company financed two 2016-built Suezmaxes vessels with a $75,000 seven-year senior secured term loan facility, as amended (the “$75 Million Facility”). Interest was paid quarterly, and the $75 Million Facility bore interest at the Eurodollar Rate for a three-month interest period, plus a 2.20% interest rate margin.

 

$66 Million Facility — On August 9, 2016, the Company entered into a $66,000 five-year senior secured term loan facility (the “$66 Million Facility”) for the purpose of financing two vessels controlled through the joint venture NT Suez (refer to Note 5 — Joint Venture Investments). The $66 Million Facility, which is collateralized by the two vessels controlled through NT Suez, is a nonrecourse term loan with reductions that are based on a 15-year amortization schedule, and are payable on a quarterly basis. Interest is paid quarterly, and the $66 Million Facility bears interest at the Eurodollar Rate for a three-month interest period, plus a 3.25% interest rate margin.

 

The $66 Million Facility contains certain restrictions on the payments of dividends by the NT Suez joint venture. The $66 Million Facility permits the NT Suez joint venture to pay dividends so long as the payment of dividends does not cause an event of default, and does not exceed an amount equal to 75% of the consolidated net income, as determined in accordance with GAAP, of the borrower, which is the consolidated accounts of NT Suez.

 

Interest Rates – The following table 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,
 
   2020   2019   2020   2019 
Effective interest rate   3.05%   4.87%   3.95%   4.94%
Range of interest rates (excluding impact of swaps and unused commitment fees)   2.81% to 4.04%   4.53% to 5.58%   2.81% to 5.32%   4.53% to 6.06%

 

 

Restrictive Covenants — The Company’s credit facilities credit contain restrictive covenants and other non-financial restrictions. The $360 Million Facility and $525 Million Facility include, among other things, restrictions on the 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 Million Facility includes restrictions and financial covenants including, among other things, the Company’s ability to incur indebtedness, limitations on dividends, minimum cash balance, collateral maintenance, and other customary restrictions. The Company was in compliance with its financial covenants as of September 30, 2020.

 

Maturities – The aggregate maturities of debt during the remaining three months of the year ending December 31, 2020, and annually for the years ending December 31 are as follows:

 

2020 (for the remaining three months of the year)   $33,597 
2021    177,421 
2022    130,000 
2023    130,000 
2024    277,500 
Total   $748,518 

 

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10.INTEREST RATE SWAPS

 

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. All derivatives are recognized on the Company’s Consolidated Balance Sheets at their fair values. For accounting hedges, on the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge) or (2) a hedge of a forecasted transaction (“cash flow” hedge).

 

The Company previously entered into interest rate swap transactions, with multiple counterparties, which were designated as cash flow hedges. In September 2018, the Company re-couponed its swaps, receiving cash of $6,813, with the corresponding gain recognized ratably over the original term of the hedged instruments. The re-couponed swaps were terminated in December 2019 when the related $460 Million Facility was extinguished. Upon the swaps’ termination, the Company made a payment of $2,486 and recognized the remaining gain that resulted from the re-couponing in September 2018, which are recognized in Interest expense in the condensed consolidated statements of operations.

 

On April 29, 2020, the Company entered into interest rate swap transactions, with multiple counterparties, which were designated as cash flow hedges. In accordance with these transactions, the Company will pay an average fixed-rate interest amount of 0.54% and will receive floating rate interest amounts based on three-month LIBOR settings. These interest rate swaps are designated as cash flow hedges with a start date of June 30, 2020 and an end date of December 23, 2024, with an aggregate notional amount outstanding of $197,129 at September 30, 2020.

 

The derivative asset and liability balances at September 30, 2020 and December 31, 2019 are as follows:

 

   Asset Derivatives  Liability Derivatives
   Balance  Fair Value   Balance  Fair Value 
   Sheet
Location
  September 30,
2020
   December 31,
2019
   Sheet
Location
  September 30,
2020
   December 31,
2019
 
Derivatives designated as hedging instruments               
Interest rate contracts  Derivative asset (Current assets)  $      —   $      —   Derivative liability (Current liabilities)  $557   $       — 
Interest rate contracts  Derivative asset (Noncurrent assets)          Derivative liability (Noncurrent liabilities)   620     
Total derivatives designated as hedging instruments                 1,177     
Total Derivatives     $   $      $1,177   $ 

 

The components of Accumulated other comprehensive loss included in the Condensed Consolidated Balance Sheets consist of net unrealized loss on cash flow hedges as of September 30, 2020 and December 31, 2019.

 

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The following table presents the gross amounts of these liabilities with any offsets to arrive at the net amounts recognized in the Condensed Consolidated Balance Sheets at September 30, 2020 and December 31, 2019:

 

   Gross   Gross
Amounts
Offset in the
Condensed
   Net Amounts
of Liabilities
Presented in
the
Condensed
   Gross Amounts not Offset
in the Condensed
Consolidated
Balance Sheets
     
   Amounts of
Recognized
Liabilities
   Consolidated
Balance
Sheets
   Consolidated
Balance
Sheets
   Financial
Instruments
   Cash
Collateral
Received
   Net
Amount
 
September 30, 2020 Derivatives  $1,177   $   $1,177   $   $   $1,177 
December 31, 2019 Derivatives                        

 

11.ACCUMULATED OTHER COMPREHENSIVE (Loss) Income

 

The components of Accumulated other comprehensive (loss) income included in the Condensed Consolidated Balance Sheets consist of net unrealized loss on cash flow hedges as of September 30, 2020 and December 31, 2019.

 

The changes in Accumulated other comprehensive (loss) income by component are as follows:

 

   For the Nine Months Ended
September 30,
 
   2020   2019 
Accumulated other comprehensive income – January 1,  $   $4,387 
Other comprehensive loss before reclassifications   (1,053)   (4,931)
Amounts reclassified from Accumulated other comprehensive (loss) income   (124)   1,435 
Other comprehensive loss for the period   (1,177)   (3,496)
Accumulated other comprehensive (loss) income – September 30,  $(1,177)  $891 

 

The realized loss for the nine months ended September 30, 2020 reclassified from Accumulated other comprehensive loss consists of a realized loss of $124 related to interest rate swap contracts. The realized gain for the nine months ended September 30, 2019 reclassified from Accumulated other comprehensive income consists of a realized loss of ($610) related to interest rate swap contracts and $2,045 related to the amortization of the gain on re-couponed swaps, as discussed in Note 10. The realized gain reclassified from Accumulated other comprehensive loss are presented in Interest expense in the Condensed Consolidated Statements of Operations. 

 

12.FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair values and carrying amounts of the Company’s financial instruments at September 30, 2020 and December 31, 2019 that are required to be disclosed at fair value, but not recorded at fair value, are as follows:

 

   September 30, 2020   December 31, 2019 
   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
 
Cash and cash equivalents  $114,335   $114,335   $83,609   $83,609 
Restricted cash   6,014    6,014    5,610    5,610 
Variable rate debt   748,518    748,518    894,310    894,310 

 

The following 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 condensed 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.

 

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Variable Rate Debt: The fair value of variable rate debt is based on management’s estimate of rates the Company could obtain for similar debt of the same remaining maturities. Additionally, the Company considers its creditworthiness in determining the fair value of variable rate debt under the credit facilities. The carrying amounts in the above table, which exclude the impact of deferred financing costs, approximate the fair market value for the variable rate debt. Variable rate debt is considered to be a Level 2 item as the Company considers the estimate of rates it could obtain for similar debt.

 

The fair value of an asset or liability is based on assumptions that market participants would use in pricing the asset or liability. The hierarchies of inputs used when determining fair value are described below:

 

Level 1: Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.

 

Level 2: Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3: Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial instruments and the placement of financial instruments within the fair value hierarchy.

 

The table below provides the financial instruments carried at fair value based on the levels of hierarchy as of the valuation date listed:

 

   Level 1   Level 2   Level 3   Total 
September 30, 2020                    
Derivative liabilities  $   $1,177   $   $1,177 

 

Derivative Liabilities: The fair value of the derivative liabilities, which relate to the interest rate swaps used for hedging purposes, is the estimated amount the Company would pay for the liability to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Interest rate swaps are considered to be a Level 2 item as the Company, using the income approach to value the derivatives, uses observable Level 2 market inputs at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets in active markets (specifically, futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset (specifically, LIBOR, cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Refer to Note 10 — Interest Rate Swaps for further information regarding the Company’s interest rate swap agreements.

 

The Company does not currently have any Level 3 financial assets or liabilities and there have been no transfers in and/or out of Level 3 during the nine months ended September 30, 2020 and 2019.

 

13.REVENUE FROM TIME CHARTERS

 

The future minimum revenues, before inclusion of profit-sharing revenue, if any, expected to be received on irrevocable time charters for which revenues can be reasonably estimated and the related revenue days that the vessels are available for employment, and not including charterers’ renewal options for the remaining three months of the year ending December 31, 2020, and annually for the years ending December 31 are as follows:

 

2020 (for the remaining three months of the year)   $15,885 
2021    40,558 
2022    13,511 
Total future committed revenue   $69,954 

 

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14.Related Party Transactions

 

During the three and nine months ended September 30, 2020 and 2019, the Company had the following related party transactions.

 

Capital Ship Management Corp. (“CSM”) — Pursuant to the Transaction Agreement, for a period of five years, CSM will provide commercial and technical management services for the 25 vessels acquired in the Merger. For the three and nine months ended September 30, 2020 and 2019, the following transactions were recorded for these services:

 

·For the three and nine months ended September 30, 2020, $1,955 and $5,823, respectively, and for the three and nine months ended September 30, 2019, $1,955 and $3,794, respectively, was incurred for technical management services, which is included in Vessel expenses in the condensed consolidated statements of operations and have been paid as of September 30, 2020.

 

·For the three and nine months ended September 30, 2020, $499 and $1,866, respectively, and for the three and nine months ended September 30, 2019, $548 and $1,130, respectively, was incurred for commercial management services, which is included in Voyage expenses in the condensed consolidated statements of operations. As of September 30, 2020, $714 remains unpaid, and is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet.

 

·For the three and nine months ended September 30, 2020, $504 and $1,500, respectively, and for the three and nine months ended September 30, 2019, $503 and $1,022, respectively, was incurred for general management services, which is included in General and administrative expenses in the condensed consolidated statements of operations. As of September 30, 2020, $165 remains unpaid, and is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet.

 

Working capital is advanced to CSM to procure both voyage and vessel costs. At September 30, 2020, the net funds advanced totaled $3,196, of which $6,288 is included in Prepaid Expense and Other Current Assets in the condensed consolidated balance sheet (refer to Note 7 — Prepaid Expenses and Other Current Assets), and the $3,092 liability is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet (refer to Note 8 — Accounts Payable and Accrued Expenses). At December 31, 2019, the net funds advanced totaled $4,748, of which $5,757 is included in Prepaid Expense and Other Current Assets in the condensed consolidated balance sheet and the $1,009 liability is included in Accounts payable and accrued expenses in the condensed consolidated balance sheet.

 

At December 31, 2019, amounts received for activity that occurred prior to the Merger that are due to CSM total $46 and are included in Accounts payable and accrued expenses in the condensed consolidated balance sheet. These amounts were settled during the nine months ended September 30, 2020.

 

15.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, an executive and certain employees of the Company, which represent the right to receive a share of common stock, or in the sole discretion of the Company’s Compensation Committee, the value of a share of common stock on the date that the RSU vests. Such shares of common stock will only be issued to certain directors, an executive and employees when their RSUs vest under the terms of their grant agreements and 2019 Plan described above.

 

The RSUs that have been issued to certain members of the Board of Directors vest one year from the date of grant. The RSUs that have been issued to other individuals vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes the Company’s unvested RSUs for the nine months ended September 30, 2020:

 

       Weighted 
   Number of   Average Grant 
   RSUs   Date Price 
Outstanding at January 1, 2020   74,716   $14.03 
Granted   47,156    12.08 
Vested   (46,525)   13.58 
Forfeited   (1,887)   13.70 
Outstanding at September 30, 2020   73,460   $13.07 

 

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The following table summarizes certain information of the RSUs unvested and vested as of September 30, 2020:

 

Unvested RSUs   Vested RSUs 
September 30, 2020   September 30, 2020 
        Weighted         
    Weighted   Average       Weighted 
    Average   Remaining       Average 
Number of   Grant Date   Contractual   Number of   Grant Date 
RSUs   Price   Life   RSUs   Price 
 73,460   $13.07    1.6    46,525   $13.58 

 

The Company is amortizing these grants over the applicable graded vesting periods. Forfeitures are taken into account when they occur. As of September 30, 2020, unrecognized compensation cost of $591 related to RSUs will be recognized over a weighted-average period of 1.6 years. For the three and nine months ended September 30, 2020, the Company recognized $186 and $556, respectively, of nonvested stock amortization expense for the RSUs, which is included in General and administrative expenses.

 

Restricted Stock — Under the 2019 Plan, grants of restricted common stock were issued to certain members of the Board of Directors, executives and employees. The restricted common stock issued to certain members of the Board of Directors vest one year from the date of grant. The restricted common stock issued to certain executives and employees ordinarily vest ratably on each of the three anniversaries of the determined vesting date. The table below summarizes the Company’s nonvested stock awards for the nine months ended September 30, 2020 which were issued under the 2019 Plan:

 

       Weighted 
   Number of   Average Grant 
   Shares   Date Price 
Outstanding at January 1, 2020   562,790   $13.44 
Granted   175,151    12.41 
Vested   (198,116)   13.51 
Forfeited   (21,512)   13.70 
Outstanding at September 30, 2020   518,313   $13.05 

 

For the nine months ended September 30, 2020, 198,116 shares vested under the 2019 Plan. There were no shares that vested under the 2019 Plan during the year ended December 31, 2019. For the three and nine months ended September 30, 2020, the Company recognized $838 and $2,818, respectively, in nonvested stock amortization expense for the 2019 Plan restricted stock, which is included in General and administrative expenses.

 

The Company is amortizing these grants over the applicable graded vesting periods. Forfeitures are taken into account when they occur. As of September 30, 2020, unrecognized compensation cost of $3,525 related to nonvested stock will be recognized over a weighted-average period of 2.0 years.

 

Performance Awards — The Company granted performance awards that contain service, performance-based and/or market-based vesting criteria. Vesting occurs if the recipient remains employed and depends on the degree to which performance goals are achieved during the three-year performance period (as defined in the award agreements). The table below summarizes the Company’s nonvested performance awards for the nine months ended September 30, 2020 which were issued under the 2019 Plan:

 

       Weighted 
   Number of   Average Grant 
   Shares   Date Price 
Outstanding at January 1, 2020      $ 
Granted   133,305    12.60 
Vested        
Forfeited        
Outstanding at September 30, 2020   133,305   $12.60 

 

For the three and nine months ended September 30, 2020, the Company recognized $140 and $233, respectively, in nonvested stock amortization expense for the 2019 Plan performance awards, which is included in General and administrative expenses. As of September 30, 2020, unrecognized compensation cost of $1,446 related to nonvested stock will be recognized over a weighted-average period of 2.6 years.

 

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The future compensation to be recognized for the aforementioned RSUs, restricted stock and performance awards as of September 30, 2020 is as follows:

 

2020 (for the remaining three months of the year)   $1,128 
2021    2,939 
2022    1,240 
2023    255 
Total   $5,562 

 

16.COMMITMENTS AND CONTINGENCIES

 

Commitments — In August and September 2020, the Company entered into contracts to install ballast water treatment systems on seven vessels with installation scheduled to occur in 2021. These contracts have a total estimated cost of $6,575, of which $6,097 remains unpaid as of September 30, 2020, with payments due as follows as:

 

2020 (for the remaining three months of the year)   $990 
2021    5,107 
Total   $6,097 

 

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 it believes will have, individually or in the aggregate, a material effect on the Company, its financial condition, results of operations or cash flows.

 

17.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 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, 2020 and 2019 are as follows:

 

   Crude Tankers   Product Carriers   Total 
Three Months Ended September 30, 2020               
Total revenue  $42,293   $70,304   $112,597 
Voyage expenses   (12,891)   (20,005)   (32,896)
Vessel expenses   (11,606)   (33,152)   (44,758)
Depreciation and amortization   (10,121)   (18,946)   (29,067)
General, administrative and management fees(1)   (1,873)   (5,812)   (7,685)
Income (loss) from operations  $5,802   $(7,611)  $(1,809)
                
Three Months Ended September 30, 2019               
Voyage revenue  $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)

 

    

Crude Tankers

    

Product Carriers

    

Total

 
Nine Months Ended September 30, 2020               
Total revenue  $202,795   $303,080   $505,875 
Voyage expenses   (55,900)   (101,026)   (156,926)
Vessel expenses   (35,490)   (92,542)   (128,032)
Depreciation and amortization   (30,041)   (56,557)   (86,598)
General, administrative and management fees(1)   (5,679)   (17,615)   (23,294)
Income from operations  $75,685   $35,340   $111,025 
                
Nine Months Ended September 30, 2019               
Voyage revenue  $133,105   $260,372   $393,477 
Voyage expenses   (64,383)   (103,058)   (167,441)
Vessel expenses   (27,729)   (81,247)   (108,976)
Depreciation and amortization   (27,806)   (52,156)   (79,962)
Loss on sale of vessels       (18,344)   (18,344)
General and administrative expenses   (4,982)   (16,192)   (21,174)
Income (loss) from operations  $8,205   $(10,625)  $(2,420)

 

 

(1)Includes direct general and administrative expenses and indirect general and administrative expenses (allocated to each segment based on a formula).

 

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The reconciliations of total assets of the segments to amounts included in the condensed consolidated balance sheets are as follows:

 

   September 30,
2020
   December 31,
2019
 
Crude Tankers  $868,142   $896,897 
Product Carriers   1,187,453    1,225,235 
Corporate unrestricted cash and cash equivalents   2,789    2,609 
Other unallocated amounts   1,729    3,641 
Consolidated total assets  $2,060,113   $2,128,382 

 

18.SUBSEQUENT EVENTS

 

The Company has evaluated all subsequent events to ensure that these condensed consolidated financial statements include appropriate recognition and disclosure of recognized events as of September 30, 2020.

 

In October 2020, the Board of Directors approved selling the Atlantic Mirage, a 2009-built MR vessel. The Company reached an agreement to sell the Atlantic Mirage for $16.4 million in aggregate gross proceeds. Delivery of the Atlantic Mirage is expected to take place in the latter half of the fourth quarter of 2020, and the Company expects to record a loss of approximately $9.7 million on the sale of this vessel.

 

Other than as disclosed in this note and elsewhere in these condensed consolidated financial statements, there were no subsequent events that the Company believes require recognition or disclosure.

 

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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 Annual Report on Form 10-K (the “2019 Annual Report”) for the year ended December 31, 2019, filed with the SEC on March 27, 2020, and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under “Cautionary Note on Forward-Looking Statements”.

 

Business Overview

 

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 CPLP, CPLP’s crude and product tanker business and combining that business with the business and operations of DSS LP pursuant to the Transaction Agreement. For a description of the Transaction Agreement and related Merger, please see Note 1 — Business and Basis of Presentation and Note 3 — Merger Transaction in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

We provide seaborne transportation of crude oil, refined petroleum, and other products in the international shipping industry. As of September 30, 2020, through our wholly owned subsidiaries, we owned and operated 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 50 MR product carriers. As of the same date, we also controlled and operated two Suezmax vessels through a joint venture.

 

Factors to Consider When Evaluating the Company’s Results

 

The COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) outbreak a pandemic. In response to the ongoing outbreak, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have, and will likely continue to, negatively affect the global economy. In addition, the COVID-19 pandemic has resulted in increased vessel expenses, primarily due to crewing related matters and logistical challenges for delivery of services and materials to vessels. The extent to which COVID-19 will materially impact the Company’s results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the outbreak, it may have a material adverse effect on the Company’s future results of operation and financial condition.

 

Strategic Product Tanker Partnership

 

On June 15, 2020, the Company entered into an agreement with Dampskibsselskabet Norden A/S (“Norden”). During the term of this agreement, the Company and Norden have agreed to use commercially reasonable efforts to identify new projects in the product tanker industry that they may jointly pursue and develop. Pursuant to this agreement, Company has agreed to initially contribute 28 of its MR vessels to the Norient Product Pool (the “Pool”). This agreement will terminate upon the occurrence of certain events, including when the Company no longer has vessels operating in the Pool. As of September 30, 2020, 28 of the Company’s vessels are operating in the Pool.

 

The Merger

 

The Merger, as described in Note 3 — Merger Transaction in the unaudited condensed consolidated financial statements included herein, closed on March 27, 2019. Our condensed consolidated financial statements include operating results for the 25 vessels acquired for 187 days and 274 days during the nine months ended September 30, 2019 and 2020, respectively, in addition to the 41 vessels historically owned by us for the full period and the two vessels sold in September 2019.

 

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New Credit Facilities and Refinancings

 

For a description of the Company’s credit agreements and refinancings, please see Note 9 — Long-Term Debt in the unaudited condensed consolidated financial statements included herein.

 

Vessel Dispositions

 

In August 2019, our Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. We 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, we completed the sale of the Atlantic Aquarius and Atlantic Leo.

 

Share Repurchase Program

 

On March 4, 2020, our Board of Directors approved a share repurchase program, providing authorization to repurchase up to $50 million of our common shares, effective for a period of one year. We may repurchase these shares in the open market or in privately negotiated transactions, at times and prices that we consider to be appropriate. As of September 30, 2020, we repurchased 137,289 shares for a total of $1.4 million under the share repurchase program, with all repurchases having been effected in the three months ended March 31, 2020.

 

Other Trends and Factors Affecting the Company’s Future Results of Operations

 

The principal factors that have affected our 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 our 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 our business, financial condition, results of operations and cash flows, and may in the future affect our business, financial condition, results of operations and cash flows, include the following:

 

·levels of oil product demand and inventories;

 

·supply and demand for crude oil and oil products;

 

·charter hire levels (under time and bareboat charters) and the ability to re-charter vessels at competitive rates as their current charters expire;

 

·developments in vessel values, which may affect compliance with covenants under credit facilities and/or debt refinancing;

 

·compliance with covenants in credit facilities, including covenants relating to the maintenance of vessel value ratios;

 

·the level of debt and the related interest expense and amortization of principal;

 

·access to debt and equity and the cost of capital required to acquire additional vessels;

 

·supply and order-book of tanker vessels;

 

·the ability to increase the size of the fleet and make additional acquisitions that are accretive to earnings;

 

·the ability of the commercial and chartering operations to successfully employ vessels at economically attractive rates, particularly as charters expire and the fleet expands;

 

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·the continuing demand for crude oil and oil products from China, India, Brazil and Russia and other emerging markets;

 

·the ability to comply with new maritime regulations, the more restrictive regulations for the transport of certain products and cargoes and the increased costs associated therewith;

 

·changes in fuel prices, including as a result of the imposition of sulfur oxide emissions limits in 2020 under new regulations adopted by the IMO (for those vessels that are not retrofitted with scrubbers);

 

·the effective and efficient technical management of the vessels;

 

·the costs associated with upcoming drydocking of vessels;

 

·the ability to obtain and maintain major international oil company approvals and to satisfy technical, health, safety and compliance standards;

 

·the strength of and growth in the number of the customer relationships, especially with major international oil companies and major commodity traders;

 

·the prevailing spot market rates and the number of vessels operating in the spot market;

 

·changes in laws, treaties or regulations applicable to the Company, including regulations relating to environmental compliance; and

 

·the ability to acquire and sell vessels at satisfactory prices.

 

Operating Data

 

The following tables represent the operating data for the three and nine months ended September 30, 2020 and 2019 on a consolidated basis.

 

   For the Three Months Ended
September 30,
         
   2020   2019   Change   % Change 
   (In Thousands, Except Per Share and Share Data) 
Revenue:                
Voyage revenue  $69,098   $120,954   $(51,856)   (42.9)%
Time charter revenue   20,408    20,572    (164)   (0.8)%
Pool revenue   23,091        23,091     
Total revenue   112,597    141,526    (28,929)   (20.4)%
                     
Operating expenses:                    
Voyage expenses   32,896    59,968    (27,072)   (45.1)%
Vessel expenses   44,758    41,799    2,959    7.1%
Depreciation and amortization expense   29,067    28,763    304    1.1%
Loss on sale of vessels       18,344    (18,344)   (100.0)%
General and administrative expenses   7,685    7,566    119    1.6%
Total operating expenses   114,406    156,440    (42,034)   (26.9)%
Operating income   (1,809)   (14,914)   13,105    (87.9)%
Other (expense) income:                    
Total other expense — Net   (7,016)   (12,529)   5,513    (44.0)%
Net loss   (8,825)   (27,443)   18,618    (67.8)%
Less: Net income (loss) attributable to noncontrolling interest   839    (1,548)   2,387    (154.2)%
Net loss attributable to Diamond S Shipping Inc.  $(9,664)  $(25,895)  $16,231    (62.7)%
                     
Net loss per share – basic  $(0.24)  $(0.65)  $0.41    (63.1)%
Net loss per share – diluted  $(0.24)  $(0.65)  $0.41    (63.1)%
Weighted average common shares outstanding – basic   39,918,427    39,890,698    27,729    0.1%
Weighted average common shares outstanding – diluted   39,918,427    39,890,698    27,729    0.1%

 

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   For the Nine Months Ended
September 30,
         
   2020   2019   Change   % Change 
   (In Thousands, Except Per Share and Share Data) 
Revenue:                
Voyage revenue  $419,169   $348,747   $70,422    20.2%
Time charter revenue   63,296    44,730    18,566    41.5%
Pool revenue   23,410        23,410     
Total revenue   505,875    393,477    112,398    28.6%
                     
Operating expenses:                    
Voyage expenses   156,926    167,441    (10,515)   (6.3)%
Vessel expenses   128,032    108,976    19,056    17.5%
Depreciation and amortization expense   86,598    79,962    6,636    8.3%
Loss on sale of vessels       18,344    (18,344)   (100.0)%
General and administrative expenses   23,294    21,174    2,120    10.0%
Total operating expenses   394,850    395,897    (1,047)   (0.3)%
Operating income   111,025    (2,420)   113,445    (4,687.8)%
Other (expense) income:                    
Total other expense — Net   (27,767)   (34,420)   6,653    (19.3)%
Net income (loss)   83,258    (36,840)   120,098    (326.0)%
Less: Net income attributable to noncontrolling interest   2,166    (1,416)   3,582    (253.0)%
Net income (loss) attributable to Diamond S Shipping Inc.  $81,092   $(35,424)  $116,516    (328.9)%
                     
Net earnings (loss) per share – basic  $2.03   $(0.99)  $3.02    (305.1)%
Net earnings (loss) per share – diluted  $2.02   $(0.99)  $3.01    (304.0)%
                     
Weighted average common shares outstanding – basic   39,879,976    35,835,477    4,044,499    11.3%
Weighted average common shares outstanding – diluted   40,106,157    35,835,477    4,270,680    11.9%

 

Results of Operations

 

Three months ended September 30, 2020 compared to the three months ended September 30, 2019

 

Total revenue

 

Total revenue decreased by $28.9 million to $112.6 million during the three months ended September 30, 2020 as compared to $141.5 million for the three months ended September 30, 2019. The $28.9 million decrease was principally due to weaker market conditions in the product tanker segment. The global consumption of petroleum products has experienced considerable demand destruction as a result of the global pandemic. In addition, the unwinding of the floating storage cycle effectively increased the supply of available ships. These negative trends were partially offset by a solid start to the quarter in the crude carrier segment as a result of a carryover of strong rates from the first half of 2020.

 

Voyage Expenses

 

Voyage expenses primarily consist of bunkers, port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements on the Company’s behalf. Voyage expenses incurred during time charters and while vessels are operating in pools are paid for by the charterer and pool, respectively, except for commissions to the initial brokers, which were paid for by the Company. Voyage expenses incurred during voyage charters were paid for by the Company.

 

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Voyage expenses decreased by $27.1 million to $32.9 million during the three months ended September 30, 2020 as compared to $60.0 million for the three months ended September 30, 2019. The $27.1 million decrease in voyage expenses was driven by a reduction in bunker and port costs incurred as a result of entering 28 vessels in the Pool as of September 30, 2020, with 23 of the vessels having entered the Pool during the three months ended September 30, 2020.

 

Vessel Expenses

 

Vessel expenses include crew wages and associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses.

 

Vessel expenses increased by $3.0 million to $44.8 million during the three months ended September 30, 2020 as compared to $41.8 million for the three months ended September 30, 2019. The $3.0 million increase in vessel expenses is primarily due to additional expenses incurred for crew bonuses, increased costs of crew reliefs, testing, quarantine and logistics for delivery of services and materials to the vessels as a result of the global pandemic.

 

Loss on Sale of Vessels

 

The $18.3 million loss on sale of vessels during the three months ended September 30, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo in September 2019.

 

Vessel Depreciation and Amortization Expense

 

We depreciate the cost of our vessels on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 25 years, and we estimate the residual value by taking the estimated scrap value of $300 per lightweight ton times the weight of the ship in lightweight tons. We continue to monitor changes in the oil and petroleum product supply chain that might have an impact on the useful operating life of our assets.

 

Depreciation and amortization expense increased by $0.3 million to $29.1 million during the nine months ended September 30, 2020 as compared to $28.8 million during the three months ended September 30, 2019. This increase is due to vessel additions primarily related the scrubber and ballast water treatment projects, offset by the sale of the Atlantic Aquarius and Atlantic Leo in September 2019.

 

General and Administrative Expenses

 

For the three months ended September 30, 2020 and 2019, general and administrative expenses were $7.7 million and $7.6 million, respectively. The general and administrative expenses remained relatively flat as the Company has had similar onshore infrastructure in place during both quarters.

 

Total Other Expense, net

 

Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $7.0 million for the three months ended September 30, 2020 compared to $12.5 million for the three months ended September 30, 2019. The decrease of $5.5 million was primarily driven by a $160 million decrease in the average debt balance in the two comparative periods, coupled with a decrease in the effective interest rate.

 

Net Income (Loss) Attributable to Noncontrolling Interest

 

The net income (loss) attributable to noncontrolling interest was net income of $0.8 million for the three months ended September 30, 2020 compared to a net loss of $1.5 million for the three months ended September 30, 2019. The net income attributable to noncontrolling interest primarily represents a 49% interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net income of $2.3 million was mainly attributable to fixing these two Suezmax vessels on three-year time charter contracts, which began in the latter half of 2019, coupled with these two vessels having 132 off-hire days during the three months ended September 30, 2019 for the installation of their scrubbers.

 

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Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019

 

Total revenue

 

Total revenue increased by $112.4 million to $505.9 million during the nine months ended September 30, 2020 as compared to $393.5 million for the nine months ended September 30, 2019. The $112.4 million increase was principally driven by a 13.4% increase in total revenue days due to an additional 2,092 revenue days during the nine months ended September 30, 2020, primarily due to the Merger coupled with stronger prevailing market conditions in both the crude tanker and product carrier segments during that period, when compared with the market conditions during the nine months ended September 30, 2019.

 

Voyage Expenses

 

Voyage expenses decreased by $10.5 million to $156.9 million during the nine months ended September 30, 2020 as compared to $167.4 million for the nine months ended September 30, 2019. The $10.5 million decrease in voyage expenses was predominantly driven by a reduction in bunker and port costs incurred as a result of operating 28 vessels in the Pool as of September 30, 2020, with 23 of the vessels entered into the Pool during the three months ended September 30, 2020.

 

Vessel Expenses

 

Vessel expenses increased by $19.0 million to $128.0 million during the nine months ended September 30, 2020 as compared to $108.0 million for the nine months ended September 30, 2019. The $19.0 million increase in vessel expenses was driven by a 10.4% increase in vessel operating days, which consists of an increase in 2,175 vessel operating days due to the Merger and a decrease in 513 days as a result of the sale of the Atlantic Aquarius and Atlantic Leo, and additional expenses incurred for crew bonuses, increased costs of crew reliefs, testing, quarantine and logistics for delivery of services and materials to the vessels as a result of the global pandemic.

 

Vessel Depreciation and Amortization Expense

 

Depreciation and amortization expense increased by $6.6 million to $86.6 million during the nine months ended September 30, 2020 as compared to $80.0 million during the nine months ended September 30, 2019. The increase in depreciation and amortization expense is due to the added depreciation expense for the 25 vessels acquired in the Merger for 2,175 vessel operating days in the nine months ended September 30, 2020 coupled with vessel additions primarily related to the scrubber and ballast water treatment projects, and offset by the decrease in the depreciation and amortization expense related to the sale of the Atlantic Aquarius and Atlantic Leo in September 2019.

 

Loss on Sale of Vessels

 

The $18.3 million loss on sale of vessels during the nine months ended September 30, 2019 is due to selling the Atlantic Aquarius and Atlantic Leo in September 2019.

 

General and Administrative Expenses

 

For the nine months ended September 30, 2020 and 2019, general and administrative expenses were $23.3 million and $21.2 million, respectively. The $2.1 million increase was primarily due to costs incurred in the first quarter of 2020 when compared to the first quarter of 2019 that were attributable to stock-based compensation costs, legal fees in connection with the annual filings and an increase in headcount to maintain the infrastructure of a public company and to manage a larger fleet employed in the spot market.

 

Total Other Expense, net

 

Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was $27.8 million for the nine months ended September 30, 2020 compared to $34.4 million for the nine months ended September 30, 2019. The decrease of $6.6 million was primarily driven by a $28 million decrease in the average debt balance in the two comparative periods, coupled with a decrease in the effective interest rate.

 

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Net Income Attributable to Noncontrolling Interest

 

The net income attributable to noncontrolling interest was net income of $2.2 million for the nine months ended September 30, 2020 compared to a net loss of $1.4 million for the nine months ended September 30, 2019. The net income attributable to noncontrolling interest primarily represents a 49% interest in NT Suez Holdco LLC, which owns and operates two Suezmax vessels and is 51% owned by the Company. The increase in the net income of $3.6 million was mainly attributable to fixing these two Suezmax vessels on three-year time charter contracts, which began in the latter half of 2019, coupled with these two vessels having 132 off-hire days during the three months ended September 30, 2019 for the installation of their scrubbers.

 

Liquidity and Capital Resources

 

As of September 30, 2020 and December 31, 2019, total cash, cash equivalents and restricted cash were $120.3 million and $89.2 million, including restricted cash of $6.0 million and $5.6 million, respectively. As of September 30, 2020 and December 31, 2019, the Company had $60.0 million and $15.0 million available and undrawn under its credit facilities, respectively.

 

Generally, the primary sources of funds have been cash from operations and undrawn amounts under credit facilities.

 

On December 27, 2019, we refinanced (i) the $460 Million Facility, (ii) the $235 Million Facility, and (iii) the $75 Million Facility with the proceeds of the $525 Million Facility.

 

At September 30, 2020, the Company was in compliance with all financial covenants under each of its credit facilities.

 

Passage of environmental legislation or other regulatory initiatives have in the past had, and may in the future may have, a significant impact on our operations. Regulatory measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels with new equipment to comply with new or existing regulations.

 

Among other capital expenditures, in connection with the International Maritime Organization’s new limits for sulfur oxide emissions effective January 1, 2020, we contracted for the purchase and installation of scrubbers on five of our Suezmax vessels. As of September 30, 2020, four of these scrubbers have been installed, with one remaining to be installed. The total aggregate capital expenditures for these five scrubbers is approximately $16.8 million, of which $14.9 million has been paid as of September 30, 2020. We may, in the future, determine to purchase additional scrubbers for installation on other vessels that we own or operate. In addition, with respect to vessels that are not retrofitted with scrubbers, we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel, which expenditures are not expected to be significant or which have not yet been determined.

 

We entered into contracts to install ballast water treatment systems on 22 of our vessels for a total estimated cost of $23.5 million, of which 12 systems have been installed and $14.0 million has been paid as of September 30, 2020. Seven of these contracts were signed during the third quarter of 2020.

 

We believe that we have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months. However, should market conditions deteriorate beyond third-party forecasts, we would consider a number of liquidity enhancing measures, which could include refinancing a portion of our senior debt, exploring unsecured debt instruments, asset sales and sale-leaseback transactions on certain of our assets.

 

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Cash Flows

 

The following table summarizes the Company’s cash and cash equivalents provided by or used in operating, financing and investing activities for the periods presented below (presented in millions):

 

   For the Nine Months Ended
September 30,
 
   2020   2019 
Net Cash Provided by Operating Activities  $193.9   $41.9 
Net Cash Used in Investing Activities   (12.0)   (291.1)
Net Cash (Used in) Provided by Financing Activities   (150.8)   242.1 

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities during the nine months ended September 30, 2020 and 2019 was $193.9 million and $41.9 million, respectively. The increase of $152.0 million was mainly attributable to more revenue days and higher charter rates that increased our revenues and overall net income by $120.1 million for the nine months ended September 30, 2020, when compared to the nine months ended September 30, 2019, and an increase of $40.0 million in cash provided by the changes in assets and liabilities for the comparative periods.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements, and the Merger. Net cash used by investing activities during the nine months ended September 30, 2020 and 2019 was $12.0 million and $291.1 million, respectively. The $12.0 million net cash used by investing activities during the nine months ended September 30, 2020 was for additions to vessels and other property, while the $291.1 million net cash used by investing activities during the nine months ended September 30, 2019 included the consideration paid in connection with the Merger, with $292.7 million paid to CPLP to acquire the vessels, $18.9 million paid in transaction costs, and $11.2 million paid for additions to vessels and other property, offset by cash proceeds of $31.8 million provided by the sale of the Atlantic Aquarius and Atlantic Leo in September 2019.

 

Net Cash (Used in) Provided by Financing Activities

 

Net cash (used in) provided by financing activities during the nine months ended September 30, 2020 and 2019 was ($150.8) million and $242.1 million, respectively. The change in cash (used in) provided by financing activities was due to the financing activities that we engaged in during the two comparable periods. During the nine months ended September 30, 2020, the main outflows of cash for financing activities consisted of debt payments of $145.8 million, a $2.2 million distribution to the noncontrolling interest in the NT Suez Holdco LLC entity, and paying $1.4 million to repurchase shares under the share repurchase program. During the nine months ended September 30, 2019 we had borrowings under the $360 Million Facility, consisting of $300 million of the term loan and $55 million of the revolver drawn, which were offset by $26.4 million repaid on lines of credit that were cancelled in connection with the Merger, $86.6 million in term loan repayments and $7.1 million in deferred financing costs paid in connection with the $360 Million Facility.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Contractual Obligations and Contingencies

 

The following table summarizes the Company’s long-term contractual obligations as of September 30, 2020 (in thousands of U.S. dollars).

 

   Payment due by period 
   Total   Less than 1 year   1 – 3 years   3 – 5 years   More than 5 years 
Long-term Debt Obligations  $748,518   $33,597   $307,421   $407,500   $ 
Interest Obligations(1)   53,059    5,290    32,136    15,633     
Capital Obligations (scrubbers and ballast water treatment systems)   13,559    1,740    11,819         
Lease Obligations   6,387    137    1,909    2,401    1,940 
Total:  $821,523   $40,764   $353,285   $425,534   $1,940 

 

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(1) Interest has been estimated based on the LIBOR forward rates and the prescribed margin for each of our facilities. Refer to Note 9 — Long-Term Debt of our unaudited condensed consolidated financial statements contained herein.

 

Critical Accounting Policies

 

The Company’s condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

 

Critical accounting policies are those that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company has described below what its management believes are its most critical accounting policies. For a description of all of the Company’s significant accounting policies, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — B. Liquidity and Capital Resources — Critical Accounting Policies and Note 2 — Summary of Significant Accounting Policies, each contained in our 2019 Annual Report, and in Note 2 — Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements included herein, for further information.

 

Revenue Recognition

 

During the three and nine months ended September 30, 2020 and 2019, revenues were generated from fixed rate time charters, spot market voyage charters, spot market-related time charters and pools.

 

We recognize revenues over the term of the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection of the related revenue is reasonably assured. We do not recognize revenue during days the vessel is off-hire. Where the time charter contains a profit or loss sharing arrangement, the profit or loss is recognized based on amounts earned or incurred as of the reporting date.

 

For the three and nine months ended September 30, 2020 and 2019, pursuant to the new revenue recognition guidance, 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. Previously, revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by us when the vessels are engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters.

 

Vessel Lives and Impairment

 

The carrying value of each of the Company’s vessels represents its original cost (contract price plus initial expenditures) at the time of delivery or purchase less accumulated depreciation or impairment charges. The carrying values of vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. In recent years changing market conditions resulted in a decrease in charter rates and values of assets. We consider these market developments as indicators of potential impairment of the carrying amount of its assets.

 

In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels’ future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels’ operating expenses, vessels’ capital expenditures and drydocking requirements, vessels’ residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where the vessels are not fixed on time charters, we utilize an estimated daily time charter equivalent for its vessels’ unfixed days based on the most recent ten year historical one-year time charter average.

 

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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. In recent years, the market values of vessels have experienced particular volatility, with substantial declines in many of the charter-free market value, or basic market value, of various vessel classes. As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their carrying values under our impairment accounting policy. This is due to management’s projection that future undiscounted cash flows expected to be earned by such vessels over their operating lives will exceed such vessels’ carrying amounts.

 

Deferred Drydocking Costs and Amortization

 

We use the deferral method of accounting for drydocking costs. Under the deferral method, drydocking costs are deferred and amortized on a straight-line basis over the useful life of the drydock, which is estimated to be approximately 30 to 60 months. Management uses judgment when estimating the period between drydocks performed, which can result in adjustments to the estimated amortization of drydock expense if drydocks occur earlier or later than originally estimated. We update our estimate of a vessel’s next scheduled drydock as necessary. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off as a component of the gain or loss upon disposal of vessels. We defer the costs associated with drydocking as they occur and amortize these costs on a straight-line basis over the period between drydocking. Deferred drydocking costs include actual costs incurred at the drydock yard, cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise, and the cost of hiring a third party to oversee the drydocking. Expenditures for normal maintenance and repairs, whether incurred as part of the drydock or not, are expensed as incurred. If the vessel is drydocked earlier than originally anticipated, any remaining deferred drydock costs that have not been amortized are expensed at the beginning of the next drydock.

 

Recent Accounting Pronouncements

 

New Accounting Standards 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 our leasing activities. We are currently analyzing our contracts and will then calculate the right-of-use assets and lease liabilities as of January 1, 2021 based on the present value of our remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326)” (“ASU 2016-13”), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning after December 15, 2020, and interim reporting periods within annual reporting periods beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the potential impact of this pronouncement 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.

 

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The Company is exposed to the risk of credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Company only entered into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s Financial Services LLC or A3 or better by Moody’s Investors Service, Inc. at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.

 

From time to time, the Company enters into interest rate swap agreements to modify its exposure to interest rate movements and to manage its interest expense. As of September 30, 2020, 26.3% of the debt was fixed due to the interest rate swap agreements, and 73.7% was variable. Based on the Company’s September 30, 2020 outstanding variable rate debt balance, a one percentage point increase in annual Eurodollar Rates would increase its annual interest expense by approximately $5.2 million.

 

Inflation

 

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

 

Foreign Exchange Risk

 

The shipping industry’s functional currency is the U.S. dollar. All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurred certain operating expenses, such as vessel and general and administrative expenses, in currencies other than the U.S. dollar, and the foreign exchange risk associated with these operating expenses has historically been immaterial. If foreign exchange risk becomes material in the future, the Company may seek to reduce its exposure to fluctuations in foreign exchange rates through the use of short-term currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable. For contracts which qualify as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes in foreign exchange spot rates with the change in fair value of the effective portions being recorded in accumulated other comprehensive loss.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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, 2020. Disclosure controls and procedures are those controls and other procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended September 30, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 

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.

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in the Company’s 2019 Annual Report, which could materially affect our business, financial condition or future results. The risks described in our 2019 Annual Report are not the only the risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results in the future.

 

The ongoing COVID-19 pandemic and governmental responses thereto could adversely affect the Company’s business.

 

As previously disclosed by the Company, the ongoing outbreak of the novel coronavirus (“COVID-19”) has caused severe global disruptions and has and may continue to negatively affect economic conditions regionally as well as globally and otherwise impact the Company’s operations and the operations of the Company’s customers and suppliers. Governments in affected countries have imposed travel bans, quarantines and other emergency public health measures in an effort to contain the outbreak. These measures have resulted in a significant reduction in global economic activity and extreme volatility in the global financial markets which has reduced the global demand for oil and refined petroleum products. Additionally, as a result of restrictive measures, the Company’s vessels may not be able to call on ports, or may be restricted from disembarking from ports, located in regions affected by the outbreak. The Company may also experience operational disruptions and delays, unavailability of normal port infrastructure and services including limited access to equipment, critical goods and personnel, disruptions to crew change, quarantine of ships and/or crew, counterparty solidity, closure of ports and custom offices, as well as disruptions in the supply chain and industrial production, which may lead to reduced cargo demand, amongst other potential consequences attendant to pandemic diseases.

 

To date, the COVID-19 pandemic has primarily affected the Company’s operations in the following ways, which may result in loss of revenue days and/or increase in vessel operating expenses:

 

·the Company’s ability to arrange, in a timely manner, crew reliefs, Flag and Class Surveys, delivery of spares and stores, and requested inspections of vessels, has been made more difficult by the effects of COVID-19;
·it has become more difficult for the Company to obtain the services required by our vessels;
·the Company is now required to comply with the requirements of port states with respect to procedures for the prevention of community spread of COVID-19; and
·the Company has needed to implement precautions to prevent any exposure of our ships’ crews to COVID-19 when calling at ports and/or places affected by the virus.

 

If the COVID-19 pandemic continues on a prolonged basis or becomes more severe, the rate environment in the crude and product markets may deteriorate and our operations and cash flows may be negatively impacted. A prolonged negative rate environment could result in the value of our vessels being impaired which could in turn impair our ability to borrow amounts under our revolving credit facilities or to access to credit and capital markets in the future on favorable terms or at all.

 

The extent to which COVID-19 will materially impact the Company’s results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the outbreak, it may have a material adverse effect on the Company’s future results of operation and financial condition.

 

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ITEM 6. EXHIBITS

 

Exhibit No.  Description
2.1  Transaction Agreement, dated as of November 27, 2018 (the “Transaction Agreement”), by and among DSS Holdings L.P., DSS Crude Transport Inc., DSS Products Transport Inc., Diamond S Technical Management LLC, Capital Product Partners L.P., Athena SpinCo Inc., Athena Mergerco 1 Inc., Athena Mergerco 2 Inc., Athena Mergerco 3 LLC, and Athena Mergerco 4 LLC (incorporated by reference to Exhibit 2.1 to the Company’s Registration Statement on Form 10, initially filed on December 21, 2018 (the “Form 10”))†
2.2  Amendment No. 1, dated March 7, 2019, to the Transaction Agreement (incorporated by reference to Exhibit 2.2 to the Form 10)
3.1  Articles of Amendment of the Articles of Incorporation of Athena SpinCo Inc. (now known as Diamond S Shipping Inc.) (incorporated by reference to Exhibit 3.2 to the Form 10)
3.2  Amended and Restated Articles of Incorporation of Diamond S Shipping Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2019)
3.3  Amended and Restated Bylaws of Diamond S Shipping Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2019)
4.1  Registration Rights Agreement, dated March 27, 2019 (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K, filed on March 29, 2019 (the “March 29 Form 8-K”))
4.2  Director Designation Agreement, dated March 27, 2019, with certain former CPLP investors (incorporated by reference to Exhibit 10.2 to the March 29 Form 8-K)
4.3  Director Designation Agreement, dated March 27, 2019, with certain WLR investors (incorporated by reference to Exhibit 10.3 to the March 29 Form 8-K)
4.4  Director Designation Agreement, dated March 27, 2019, with First Reserve Investors (incorporated by reference to Exhibit 10.4 to the March 29 Form 8-K)
31.1  Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by Craig H. Stevenson, Jr., Chief Executive Officer.
31.2  Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002, by Kevin M. Kilcullen, Chief Financial Officer.
32.1  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by Craig H. Stevenson, Jr., Chief Executive Officer.*
32.2  Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002, by Kevin M. Kilcullen.*
101.INS  XBRL Instance Document
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document

 

Certain schedules, exhibits and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant agrees to furnish a copy of any such omitted schedule or similar attachment to the SEC upon request.
   
* The certifications attached as exhibits 32.1 and 32.2 to this quarterly report on Form 10-Q are “furnished” to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

37

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    DIAMOND S SHIPPING INC.
       
Date: November 16, 2020 By: /s/ Craig H. Stevenson, Jr.
      Craig H. Stevenson, Jr.
       Chief Executive Officer and President
      (Principal Executive Officer)
       
Date: November 16, 2020 By: /s/ Kevin M. Kilcullen
      Kevin M. Kilcullen
      Chief Financial Officer
      (Principal Financial Officer)