Introduction
Pangaea Logistics Solutions Ltd. and its subsidiaries (collectively, “Pangaea” or the “Company”) is a provider of seaborne drybulk transportation services. Pangaea utilizes its logistics expertise to service a broad base of industrial customers who require the transportation of a wide variety of drybulk cargoes, including grains, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone. The Company addresses the transportation needs of its customers by undertaking a comprehensive set of services and activities, including cargo loading, cargo discharge, vessel chartering, voyage planning, and technical vessel management.
Completed Mergers
On April 30, 2014 the Company (formerly known as Quartet Holdco Ltd.,) entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Quartet Merger Corp. (“Quartet”), Quartet Merger Sub Ltd. (“Merger Sub”), Bulk Partners (Bermuda), Ltd. (at the time, Pangaea Logistics Solutions Ltd., now known as Bulk Partners (Bermuda), Ltd “Bulk Partners” or “Former Pangaea”), and the security holders of Bulk Partners (“Signing Holders”), which contemplated (i) Quartet merging with and into the Company, with the Company surviving such merger as the publicly-traded entity and (ii) Merger Sub merging with and into Bulk Partners with Bulk Partners surviving such merger as a wholly-owned subsidiary of the Company (collectively, the “Mergers”).
On September 29, 2014, Quartet held a special meeting in lieu of its annual meeting of stockholders, at which time the Quartet stockholders considered and adopted, among other matters, the Merger Agreement and the Mergers. On September 26, 2014, Bulk Partners’ Board of Directors, acting by unanimous written consent, approved the Merger Agreement and the Mergers. On October 1, 2014, the parties consummated the Mergers.
The Company is a holding company incorporated under the laws of Bermuda as an exempted company on April 29, 2014. Bulk Partners, which following the Mergers is wholly owned by the Company, is a holding company that was incorporated under the laws of Bermuda as an exempted company on June 17, 2008 by three individuals who are collectively referred to as the “Founders.” The Company and its subsidiaries provide seaborne drybulk transportation services.
In the merger, holders of 8,840,014 shares of Quartet common stock sold in its initial public offering (“public shares”) exercised their rights to convert those shares to cash at a conversion price of approximately $10.20 per share, or an aggregate of approximately $90.1 million. As a result of the number of public shares converted into cash, the Quartet initial stockholders forfeited 1,739,062 shares (the “Forfeited Shares”) of Quartet common stock immediately prior to the Closing. Upon the Closing, the former security holders of Quartet were issued an aggregate of 3,130,844 common shares of the Company, including 1,026,813 common shares of the Registrant issued in exchange for Quartet’s then outstanding rights.
In accordance with the terms of the convertible redeemable preferred stock of Former Pangaea, upon the Closing, 105,670 convertible redeemable preferred shares were converted into 115,352 common shares of Former Pangaea. The Signing Holders received 29,411,765 shares of the Company in exchange for their Former Pangaea securities and an additional 1,739,062 Forfeited Shares, or 31,150,827 shares in aggregate.
Further, in connection with the Mergers, Quartet entered into agreements with certain third-party advisors pursuant to which such parties agreed to accept shares of the Company in lieu of cash for certain amounts owed to them, resulting in the issuance of an aggregate of 291,953 common shares. Additionally, 420,000 unit purchase options of Quartet were converted into 123,356 common shares of the Company,for a total of 415,309 issued to third-party advisors.
At December 31, 2014, there are 34,756,980 common shares of the Company issued and outstanding where the Signing Holders own approximately 89.7% of the common shares, the Quartet stockholders own approximately 6.7% of the common shares, and the Advisors to the Mergers own approximately 1.2% of the common shares.
Business
The Company utilizes its logistics expertise to service a broad base of industrial customers who require the transportation of a wide variety of drybulk cargoes, including grains, pig iron, hot briquetted iron, bauxite, alumina, cement clinker, dolomite and limestone. The Company derives substantially all of its revenue from contracts of affreightment, also known as COAs, voyage charters, and time charters. In particular, the Company has historically focused on backhaul routes. Backhaul routes or ballast legs, position vessels for discharge in loading areas. Backhaul routes allow us to reduce ballast days and, instead, earn revenues at times and on routes that are typically travelled without paying cargo.
Contracts of affreightment (“COAs”), are contracts to transport multiple shipments of cargo during the term of the contract between specified load and discharge ports, at a fixed or variable price per metric ton of cargo. Voyage charters are revenue streams under which a vessel carries a shipment of cargo for a customer on a specified route for a fixed price per metric ton of cargo, and time charters are agreements during which the vessel is dedicated solely to the charterer for the term of the agreement. A majority of the Company’s revenue is from COAs and voyage charters, as our focus is on transporting cargo for our customers. The Company’s COAs typically extend for a period of one to five years, although some extend for longer periods. A time charter may vary from a single trip to longer-term charters, whenever we deem such use to be in our commercial interest. The length of a voyage depends on the number of load and discharge ports, the time spent in such ports and the distance between the ports. The Company attempts, through selecting COAs and voyage contracts on what would normally be backhaul or “ballast” legs, to enhance vessel utilization and its profitability because these contracts and charters position vessels at or near loading areas where spot cargoes are typically obtained. This reduces ballast time and expense as a percentage of the vessel’s total revenue and increases expected earnings for the vessel.
The Company uses a mix of owned and chartered-in vessels to transport more than 19.5 million deadweight tons (“dwt”) of cargo to more than 190 ports around the world, averaging over 48 vessels in service during 2014. The majority of our fleet is chartered-in on short-term charters of less than 9 months. The Company believes that these shorter-term charters afford us more flexibility to match our variable costs to our customers’ service requirements, allowing us to respond to changes in market demand and limiting our exposure to changes in prevailing charter rates. In addition to the Company’s chartered-in fleet, we currently have interests in 14 vessels and have orders for the construction of three additional vessels, all at prices we believe will permit us to operate profitably through a range of cargo rate environments. These vessels are and will be used to serve the Company’s customers’ cargo transportation needs. Included in the vessels currently owned or on order, are six Ice-Class 1A Panamax ships that are currently the only dry bulk vessels of their size rated to operate on the Northern Sea Route and the severe ice conditions of the Baltic Sea in winter. The Company believes that a combination of owned and chartered-in vessels helps it to more efficiently match its customer demand than it could with an entirely owned fleet or an entirely chartered-in fleet.
The Company’s Ice-Class 1A vessels are under contract to be technically managed by a third-party manager with extensive expertise managing these vessel types and ice pilotage. The technical management of the remainder of the Company’s owned fleet continues to be performed in-house. The technical management for the Company’s chartered-in vessels is performed by each respective ship owner.
Active risk management is an important part of our business model. The Company believes its active risk management allows it to reduce the sensitivity of its revenues to market fluctuations and helps it to secure its long-term profitability. We manage our market risk primarily through chartering in vessels for periods of less than 9 months. We further manage our market exposure through a portfolio approach based upon owned vessels, chartered-in vessels, COAs, voyage charters, and time charters. The Company tries to identify routes and ports for efficient bunkering to minimize its fuel expense. The Company also seeks to hedge a portion of its exposure to changes in the price of marine fuels, or bunkers and to fluctuating future freight rates through forward freight agreements. We have also entered into interest rate swap agreements to fix a portion of our interest rate exposure.
Business Strategy
The Company’s principal business objectives are to profitably grow its business and increase shareholder value. The Company expects to achieve these objectives through the following strategies:
Competitive Strengths
The Company believes that it possesses a number of competitive strengths in its industry, including: