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BALT > SEC Filings for BALT > Form 10-Q on 12-May-2014All Recent SEC Filings

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Form 10-Q for BALTIC TRADING LTD


12-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with a discussion of potential future events, circumstances or future operating or financial performance. These forward-looking statements are based on management's current expectations and observations. Included among the factors that, in our view, could cause actual results to differ materially from the forward looking statements contained in this report are the following: (i) declines in demand or rates in the drybulk shipping industry; (ii) prolonged weakness in drybulk shipping rates;
(iii) changes in the supply of or demand for drybulk products, generally or in particular regions; (iv) changes in the supply of drybulk carriers, including newbuilding of vessels or lower than anticipated scrapping of older vessels;
(v) changes in rules and regulations applicable to the cargo industry, including, without limitation, legislation adopted by international organizations or by individual countries and actions taken by regulatory authorities; (vi) increases in costs and expenses including but not limited to:
crew wages, insurance, provisions, lube oil, bunkers, repairs, maintenance and general, administrative and management fee expenses; (vii) whether our insurance arrangements are adequate; (viii) changes in general domestic and international political conditions; (ix) acts of war, terrorism, or piracy; (x) changes in the condition of our vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated drydocking or maintenance and repair costs) and unanticipated drydock expenditures; (xi) the amount of offhire time needed to complete repairs on vessels and the timing and amount of any reimbursement by our insurance carriers for insurance claims, including offhire days; (xii) our acquisition or disposition of vessels, (xiii) our ability to leverage Genco's relationships in the shipping industry; (xiv) the completion of definitive documentation with respect to charters;
(xv) charterers' compliance with the terms of their charters in the current market environment; (xvi) the fulfillment of the closing conditions under, or the execution of additional documentation for, the Company's agreements to acquire vessels; (xvii) obtaining, completion of definitive documentation for, and funding of financing for the vessel acquisitions on acceptable terms; and other factors listed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequent reports on Form 8-K and Form 10-Q. Our ability to pay dividends in any period will depend upon various factors, including the limitations under any credit agreements to which we may be a party, applicable provisions of Marshall Islands law and the final determination by the Board of Directors each quarter after its review of our financial performance. The timing and amount of dividends, if any, could also be affected by factors affecting cash flows, results of operations, required capital expenditures, or reserves. As a result, the amount of dividends actually paid may vary. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following management's discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included in this Form 10-Q.

General

We are a New York City-based company incorporated in October 2009 in the Marshall Islands to conduct a shipping business focused on the drybulk industry spot market. We were formed by Genco Shipping & Trading Limited ("Genco"), an international drybulk shipping company that also serves as our Manager. Our fleet currently consists of four Capesize vessels, four Supramax vessels and five Handysize vessels with an aggregate carrying capacity of approximately 1,095,000 dwt and the average age of our fleet is currently 4.1 years, as compared to the average age for the world fleet of approximately 9 years for the drybulk shipping segments in which we compete. After the expected delivery of the four Ultramax vessels that we have agreed to acquire, we will own 17 drybulk vessels, consisting of four Capesize vessels, four Ultramax vessels, four Supramax vessels and five Handysize vessels with a total carrying capacity of approximately 1,350,000 dwt. Our fleet contains five groups of sister ships, which are vessels of virtually identical sizes and specifications. We believe that maintaining a fleet that includes sister ships reduces costs by creating economies of scale in the maintenance, supply and crewing of our vessels.

On July 2, 2013, we entered into agreements to purchase two Handysize drybulk vessels from subsidiaries of Clipper Group for an aggregate purchase price of $41,000. The Baltic Hare, a 2009-built Handysize vessel, was delivered on September 5, 2013 and the Baltic Fox, a 2010-built Handysize vessel, was delivered on September 6, 2013. We funded a portion of the purchase price of the vessels using proceeds from our registered follow-on common stock offering completed on May 28, 2013. For the remainder of the purchase price, we drew down $22,000 on our $22 Million Term Loan Facility. Refer to Note 7 - Debt in our condensed consolidated financial statements for further information regarding this credit facility.

On October 31, 2013, we entered into agreements to purchase two Capesize drybulk vessels from affiliates of SK Shipping Co. Ltd. for an aggregate purchase price of $103,000. The Baltic Lion, a 2012-built Capesize drybulk vessel, was delivered on December 27, 2013, and the Baltic Tiger, a 2011-built Capesize vessel, was delivered on November 26, 2013. We funded a portion of the purchase price of the vessels using proceeds from our registered follow-on common stock offering completed on September 25,


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2013. For the remainder of the purchase price, we drew down $44,000 on our $44 Million Term Loan Facility. Refer to Note 7 - Debt in our condensed consolidated financial statements for further information regarding this credit facility.

On November 13, 2013, we entered into agreements to purchase up to four 64,000 dwt Ultramax newbuilding drybulk vessels from Yangfan Group Co., Ltd. for a purchase price of $28,000 per vessel, or up to $112,000 in the aggregate. We agreed to purchase two such vessels, to be renamed the Baltic Hornet and Baltic Wasp, and had an option, which was exercisable until January 10, 2013, to purchase up to two additional vessels. On January 8, 2014, we exercised our option to purchase the two additional 64,000 dwt Ultramax drybulk vessels from Yangfan Group Co., Ltd. for a purchase price of $28,000 per vessel. These vessels are to be renamed the Baltic Mantis and the Baltic Scorpion. The purchases are subject to completion of customary additional documentation and closing conditions. The Baltic Hornet and Baltic Wasp are expected to be delivered to us during the third quarter and fourth quarter of 2014, respectively. The Baltic Scorpion and the Baltic Mantis are expected to be delivered to us during the second and third quarters of 2015, respectively. We intend to use a combination of cash on hand, future cash flow from operations as well as commercial bank debt to fully finance the acquisition of these four Ultramax newbuilding drybulk vessels.

We seek to leverage the expertise and reputation of Genco and its management to pursue growth opportunities in the drybulk shipping spot market. To pursue these opportunities, we operate a fleet of drybulk ships that transport iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes. We currently operate all of our vessels on spot market-related time charters, short-term time charters or in vessel pools trading in the spot market. We may also consider operating vessels in the spot market directly based on our view of market conditions. We have financed our fleet primarily with equity capital and have financed the remainder with our 2010 Credit Facility, $22 Million Term Loan Facility and $44 Million Term Loan Facility. Depending on market conditions, we aim to grow our fleet through timely and selective acquisitions of vessels. We expect to fund acquisitions of additional vessels using equity and debt financing. We intend to distribute to our shareholders on a quarterly basis all of our net income less cash expenditures for capital items related to our fleet, other than vessel acquisitions and related expenses, plus non-cash compensation, during the previous quarter, subject to any additional reserves our Board of Directors may from time to time determine are required for the prudent conduct of our business, as further described below under "Dividend Policy." We have declared dividends for the past nine quarters even though the application of the formula in our policy would not have resulted in a dividend, although we may not continue to do so.

Refer to pages 21 - 22 for a table of all vessels that have been or are expected to be delivered to us.

Our operations are managed, under the supervision of our Board of Directors, by Genco as our Manager. We entered into a long-term management agreement (the "Management Agreement") pursuant to which our Manager and its affiliates apply their expertise and experience in the drybulk industry to provide us with commercial, technical, administrative and strategic services. The Management Agreement is for an initial term of approximately fifteen years and will automatically renew for additional five-year periods unless terminated in accordance with its terms. We pay our Manager fees for the services it provides us as well as reimburse our Manager for its costs and expenses incurred in providing certain of these services. However, see Note 7 of the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q
- Debt - for a discussion of the potential effects of a change of control and the Genco bankruptcy case under the covenants of the Company's credit facilities and the Management Agreement. Also, see Part II, IA "Risk Factors" and the Risk Factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

On May 28, 2013, we closed an equity offering of 6,419,217 shares of common stock at an offering price of $3.60 per share. We received net proceeds of $21.6 million after deducting underwriters' fees and expenses. Additionally, on September 25, 2013, we closed an equity offering of 13,800,000 shares of common stock at an offering price of $4.60 per share. We received net proceeds of $59.5 million after deducting underwriters' fees and expenses. On November 18, 2013, we closed an equity offering of 12,650,000 shares of common stock at an offering price of $4.60 per share. We received net proceeds of $55.1 million after deducting underwriters' fees and expenses. Pursuant to the Management Agreement, for so long as Genco directly or indirectly holds at least 10% of the aggregate number of outstanding shares of our common stock and Class B stock, Genco will be entitled to receive at no cost an additional number of shares of Class B stock equal to 2% of the number of common shares issued, other than shares issued under the our 2010 Equity Incentive Plan. As a result of the equity offerings on May 28, 2013, September 25, 2013 and November 18, 2013, Genco was issued 128,383, 276,000 and 253,000 shares, respectively, of Class B stock, which represents 2% of the number of common shares issued.


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Factors Affecting Our Results of Operations

We believe that the following table reflects important measures for analyzing trends in our results of operations. The table reflects our ownership days, available days, operating days, fleet utilization, Time Charter Equivalent ("TCE") rates and daily vessel operating expenses for the three months ended March 31, 2014 and 2013.

                                      For the Three Months Ended March 31,         Increase
                                           2014                   2013            (Decrease)     % Change
Fleet Data:
Ownership days (1)
Capesize                                          360.0                 180.0           180.0        100.0 %
Supramax                                          360.0                 360.0               -            -
Handysize                                         450.0                 270.0           180.0         66.7 %

Total                                           1,170.0                 810.0           360.0         44.4 %

Available days (2)
Capesize                                          360.0                 180.0           180.0        100.0 %
Supramax                                          321.0                 347.5           (26.5 )       (7.6 )%
Handysize                                         432.5                 270.0           162.5         60.2 %

Total                                           1,113.5                 797.5           316.0         39.6 %

Operating days (3)
Capesize                                          360.0                 180.0           180.0        100.0 %
Supramax                                          316.7                 347.2           (30.5 )       (8.8 )%
Handysize                                         431.4                 270.0           161.4         59.8 %

Total                                           1,108.1                 797.2           310.9         39.0 %

Fleet utilization (4)
Capesize                                          100.0 %               100.0 %             -            -
Supramax                                           98.6 %                99.9 %          (1.3 )%      (1.3 )%
Handysize                                          99.7 %               100.0 %          (0.3 )%      (0.3 )%

Fleet average                                      99.5 %               100.0 %          (0.5 )%      (0.5 )%

Average Daily Results: (U.S.
dollars)
Time Charter Equivalent (5)
Capesize                           $             15,848     $           5,933    $      9,915        167.1 %
Supramax                                          8,685                 6,706           1,979         29.5 %
Handysize                                         9,272                 7,161           2,111         29.5 %

Fleet average                                    11,229                 6,685           4,544         68.0 %

Daily vessel operating expenses
(6)
Capesize                           $              5,223     $           5,413    $       (190 )       (3.5 )%
Supramax                                          6,527                 4,806           1,721         35.8 %
Handysize                                         5,157                 4,296            8,61         20.0 %

Fleet average                                     5,599                 4,771             828         17.4 %


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Definitions

In order to understand our discussion of our results of operations, it is important to understand the meaning of the following terms used in our analysis and the factors that influence our results of operations.



(1) Ownership days. We define ownership days as the aggregate number of days in a period during which each vessel in our fleet has been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period.

(2) Available days. We define available days as the number of our ownership days less the aggregate number of days that our vessels are off-hire due to scheduled repairs or repairs under guarantee, vessel upgrades or special surveys and the aggregate amount of time that we spend positioning our vessels between time charters. Companies in the shipping industry generally use available days to measure the number of days in a period during which vessels should be capable of generating revenues.

(3) Operating days. We define operating days as the number of our available days in a period less the aggregate number of days that our vessels are off-hire due to unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues.

(4) Fleet utilization. We calculate fleet utilization by dividing the number of our operating days during a period by the number of our available days during the period. The shipping industry uses fleet utilization to measure a company's efficiency in finding suitable employment for its vessels and minimizing the number of days that its vessels are off-hire for reasons other than scheduled repairs or repairs under guarantee, vessel upgrades, special surveys or vessel positioning.

(5) TCE rates. We define TCE rates as net voyage revenue (voyage revenues less voyage expenses (including voyage expenses to Parent)) divided by the number of our available days during the period, which is consistent with industry standards. TCE rate is a common shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with daily earnings generated by vessels on voyage charters, because charterhire rates for vessels on voyage charters are generally not expressed in per-day amounts while charterhire rates for vessels on time charters generally are expressed in such amounts.

                                              For the Three Months Ended
                                                      March 31,
                                                2014              2013

Voyage revenues (in thousands)             $        13,091    $       5,986
Voyage expenses (in thousands)                         420              582
Voyage expenses to Parent (in thousands)               168               73
                                           $        12,503    $       5,331
Total available days                               1,113.5            797.5
Total TCE rate                             $        11,229    $       6,685

(6) Daily vessel operating expenses. We define daily vessel operating expenses ("DVOE") as vessel operating expenses divided by ownership days for the period. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance (excluding drydocking), the costs of spares and consumable stores, tonnage taxes and other miscellaneous expenses.


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Operating Data



The following discusses our financial results for the three months ended
March 31, 2014 and 2013:



                                             For the Three Months Ended March 31,              Increase
                                              2014                         2013               (Decrease)       % Change
                                           (U.S. dollars in thousands, except for per share amounts)
Revenues                             $                13,091      $                 5,986    $       7,105         118.7 %

Operating Expenses:
Voyage expenses                                          420                          582             (162 )       (27.8 )%
Voyage expenses to Parent                                168                           73               95         130.1 %
Vessel operating expenses                              6,551                        3,864            2,687          69.5 %
General, administrative and
technical management fees                              1,972                        1,291              681          52.7 %
Management fees to Parent                                878                          608              270          44.4 %
Depreciation and amortization                          5,103                        3,643            1,460          40.1 %

Total operating expenses                              15,092                       10,061            5,031          50.0 %

Operating loss                                        (2,001 )                     (4,075 )          2,074         (50.9 )%
Other expense                                         (1,520 )                     (1,008 )           (512 )        50.8 %

Loss before income taxes                              (3,521 )                     (5,083 )          1,562         (30.7 )%
Income tax expense                                       (12 )                          -              (12 )       100.0 %
Net loss                             $                (3,533 )    $                (5,083 )  $       1,550         (30.5 )%
Net loss per share of common
and Class B Stock:
Net loss per share - basic           $                 (0.06 )    $                 (0.23 )  $        0.17         (73.9 )%
Net loss per share - diluted         $                 (0.06 )    $                 (0.23 )  $        0.17         (73.9 )%
Dividends declared and paid per
share                                $                  0.03      $                  0.01    $        0.02         200.0 %

EBITDA (1)                           $                 3,082      $                  (425 )  $       3,507        (825.2 )%



(1) EBITDA represents net (loss) income plus net interest expense, taxes and depreciation and amortization. EBITDA is included because it is used by management and certain investors as a measure of operating performance. EBITDA is used by analysts in the shipping industry as a common performance measure to compare results across peers. Our management uses EBITDA as a performance measure in our consolidated internal financial statements, and it is presented for review at our board meetings. We believe that EBITDA is useful to investors as the shipping industry is capital intensive which often results in significant depreciation and cost of financing. EBITDA presents investors with a measure in addition to net (loss) income to evaluate our performance prior to these costs. EBITDA is not an item recognized by U.S. GAAP and should not be considered as an alternative to net (loss) income, operating income or any other indicator of a company's operating performance required by U.S. GAAP. EBITDA is not a measure of liquidity or cash flows as shown in our consolidated statement of cash flows. The definition of EBITDA used here may not be comparable to that used by other companies. The following table demonstrates our calculation of EBITDA and provides a reconciliation of EBITDA to net income (loss) for each of the periods presented above:

                                   For the Three Months Ended March 31,
                                       2014                    2013

Net loss                        $            (3,533 )   $            (5,083 )
Net interest expense                          1,500                   1,015
Income tax expense                               12                       -
Depreciation and amortization                 5,103                   3,643

EBITDA (1)                      $             3,082     $              (425 )


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Results of Operations

Our revenues consist primarily of charterhire. Our ongoing cash expenses consist of fees and reimbursements under our Management Agreement and other expenses directly related to the operation of our vessels and certain administrative expenses. We do not expect to have any income tax liabilities in the Marshall Islands but may be subject to tax in the United States on revenues derived from voyages that either begin or end in the United States

The following table reflects the current employment of our current fleet as well as information on vessels expected to join our fleet as of May 7, 2014:

                     Year                              Charter        Employment     Expected
Vessel              Built         Charterer         Expiration(1)     Structure     Delivery(2)

Capesize Vessels
   Baltic Bear       2010    Swissmarine Services   February 2015     101.5% of
                                     S.A.                              BCI (3)
   Baltic Wolf       2010          Cargill            July 2014      100% of BCI
                              International S.A.                         (4)
  Baltic Tiger       2011    Swissmarine Services    October 2014     102.75% of
                                     S.A                               BCI (5)
   Baltic Lion       2012          Cargill          November 2014     102.75% of
                              International S.A.                       BCI (6)
Ultramax Vessels
  Baltic Hornet      2014            TBD                 TBD             TBD          Q3 2014
   Baltic Wasp       2014            TBD                 TBD             TBD          Q4 2014
 Baltic Scorpion     2015            TBD                 TBD             TBD          Q2 2015
  Baltic Mantis      2015            TBD                 TBD             TBD          Q3 2015
Supramax Vessels
 Baltic Leopard      2009     Daiichi Chuo Kisen       May 2014
                                    Kaisha                            $9,700 (7)
 Baltic Panther      2009        Bulkhandling        August 2014      Spot Pool
                                 Handymax A/S                            (8)
  Baltic Jaguar      2009    Resource Marine PTE      June 2014       95% of BSI
                              Ltd. (part of the                          (9)
                              Macquarie group of
                                  companies)
  Baltic Cougar      2009        Bulkhandling        August 2014      Spot Pool
                                 Handymax A/S                            (8)
Handysize Vessels
   Baltic Wind       2009    Agriculture & Energy     June 2014
                                Carriers Ltd.                        $10,550 (10)
   Baltic Cove       2010    Trammo Bulk Carriers    January 2015    106% of BHSI
                                                                         (11)
  Baltic Breeze      2010          Cargill            July 2014      115% of BHSI
                              International S.A.                         (12)
   Baltic Fox        2010    Clipper Logger Pool    September 2015    Spot Pool
                                                                         (13)
   Baltic Hare       2009    Clipper Logger Pool    September 2015    Spot Pool
                                                                         (13)



(1) The charter expiration dates presented represent the earliest dates that our charters may be terminated in the ordinary course. Under the terms of each . . .
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