OVERSEAS SHIPHOLDING GROUP INC - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2023

OR

For the transition period from _____to_____

Commission File Number: 001-06479

OVERSEAS SHIPHOLDING GROUP, INC.

(Exact name of registrant as specified in its charter)

(813) 209-0600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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 pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the issuer’s Class A common stock, par value $0.01, as of November 2, 2023: 72,371,476 shares. Excluded from this amount are warrants outstanding as of November 2, 2023 for the purchase of 809,575 shares of Class A common stock for nominal consideration.

TABLE OF CONTENTS

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

DOLLARS IN THOUSANDS

See notes to condensed consolidated financial statements.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

(UNAUDITED)

See notes to condensed consolidated financial statements.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

DOLLARS IN THOUSANDS

(UNAUDITED)

See notes to condensed consolidated financial statements.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

DOLLARS IN THOUSANDS

(UNAUDITED)

See notes to condensed consolidated financial statements.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

DOLLARS IN THOUSANDS

(UNAUDITED)

See notes to condensed consolidated financial statements.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Overseas Shipholding Group, Inc., a Delaware corporation (the “Parent Company”), and its wholly owned subsidiaries (collectively, the “Company” or “OSG”, “we”, “us” or “our”). The Company owns and operates a fleet of oceangoing vessels engaged primarily in the transportation of crude oil and refined petroleum products in the U.S. Flag trade.

These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any other period.

The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”).

Note 2 — Recently Issued Accounting Standards

In November 2019, the Financial Accounting Standards Board issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which allows a two-bucket approach for determining the effective dates of these accounting standards. Under this approach, the buckets would be defined as follows:

Bucket 1— All public business entities (“PBEs”) that are SEC filers (as defined in GAAP), excluding smaller reporting companies (“SRCs”) (as defined by the Securities and Exchange Commission (“SEC”). This standard became effective January 1, 2020.

Bucket 2— All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans. This standard became effective January 1, 2023.

At June 30, 2019, the evaluation date for purposes of determining the applicability of the Bucket 2 credit losses standard, the Company met the SEC definition of a smaller reporting company. The Company adopted that standard on January 1, 2023. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.

Note 3 - Revenue Recognition

Disaggregated Revenue

The Company has disaggregated revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The disaggregation below is based on contract type. Since the terms within these contract types are generally standard in nature, the Company does not believe that further disaggregation would result in increased insight into the economic factors impacting revenue and cash flows.

The following table shows the Company’s shipping revenues disaggregated by nature of the charter arrangement for the three and nine months ended September 30, 2023 and 2022:

Schedule of Disaggregation of Revenue

Voyage Receivables

As of September 30, 2023 and December 31, 2022, contract balances from contracts with customers consisted of voyage receivables of $9,317 and $9,258, respectively, net of reserves for credit losses for voyage charters and lightering contracts, which were not material.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2023, the Company expects to recognize revenue of approximately $11,779 for the remainder of 2023, $47,578 for 2024 and $14,608 for 2025 under COAs. These estimated amounts relate to the fixed consideration of contractual minimums within the contracts based on the Company’s estimate of future services.

Note 4 — Earnings per Common Share

Basic earnings per common share is computed by dividing earnings by the weighted average number of common shares outstanding during the period. As management deems the exercise price for the Class A warrants of $0.01 per share to be nominal, warrant proceeds are ignored, and the shares issuable upon exercises of Class A warrants are included in the calculation of basic weighted average common shares outstanding for all periods.

The computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and restricted stock units. Participating securities are defined by ASC 260, Earnings Per Share, as unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents and are included in the computation of earnings per share pursuant to the two-class method.

Class A

As of September 30, 2023, there were 3,180,728 shares of Class A common stock issuable under outstanding restricted stock units and 1,478,756 shares of Class A common stock issuable under outstanding options, both of which are considered to be potentially dilutive securities. As of September 30, 2022, there were 3,677,942 shares of Class A common stock issuable under outstanding restricted stock units and 1,478,756 shares of Class A common stock issuable under outstanding options, both of which are considered to be potentially dilutive securities.

The components of the calculation of basic earnings per share and diluted earnings per share are as follows:

Schedule of Earnings Per Share

For the three and nine months ended September 30, 2023, there were dilutive equity awards outstanding covering 2,436,951 and 2,688,725 shares, respectively. Awards of 297,818 and 322,510 shares (related to stock options), respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive for the three and nine months ended September 30, 2023. For the three and nine months ended September 30, 2022, there were dilutive equity awards outstanding covering 2,174,927 and 1,632,359 shares, respectively. Awards of 371,893 and 609,956 shares (related to restricted stock units and stock options), respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive for the three and nine months ended September 30, 2022.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Note 5 — Investment in Security to be Held to Maturity

In July 2022, the Company purchased a $15,000 U.S. Treasury Note for $14,794, with a maturity date of August 15, 2024. The U.S. Treasury Note is classified as investment in security to be held to maturity and is carried at amortized cost on the condensed consolidated balance sheets, as the Company has the intent and ability to hold until maturity. The amortized cost, gross unrealized loss and fair value of the U.S. Treasury Note at September 30, 2023 and December 31, 2022 was as follows:

Schedule of Fair Value of U.S. Treasury Note

Other-Than-Temporarily Impaired (“OTTI”)

The Company performed a quarterly review of the U.S. Treasury Note in order to determine whether the decline in fair value below the amortized cost basis was considered other-than-temporary in accordance with applicable guidance. At September 30, 2023, the Company determined that the unrealized loss on the U.S. Treasury Note was primarily due to increases in interest rates. Therefore, there was no OTTI loss recognized during the three and nine months ended September 30, 2023 or three months ended December 31, 2022.

Note 6 — Fair Value Measurements and Fair Value Disclosures

The following methods and assumptions are used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents and restricted cash— The carrying amounts reported in the condensed consolidated balance sheet for interest-bearing deposits approximate fair value. Investments in trading securities consist of equity securities and were measured using quoted market prices at the reporting date.

U.S. Treasury Note — The fair value of the U.S. Treasury Note is based on a quoted market price in an active market.

Debt— The fair values of the publicly traded and non-public debt held by the Company are estimated based on similar instruments.

ASC 820, Fair Value Measurements and Disclosures, relating to fair value measurements, defines fair value and establishes a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions, based on the available information deemed best in the circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In addition, the fair value of assets and liabilities should include consideration of non-performance risk, which for the liabilities described below includes the Company’s own credit risk.

The levels of the fair value hierarchy established by ASC 820 are as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities

Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Financial Instruments that are not Measured at Fair Value on a Recurring Basis

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:

Schedule of Financial Instruments not Measured at Fair Value on a Recurring Basis 

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

Vessel and Intangible Assets Impairments

During the third quarter of 2023, the Company considered whether events or changes in circumstances had occurred since December 31, 2022 that could indicate whether the carrying amounts of the vessels, including operating right-of-use assets, in the Company’s fleet, and whether the carrying value of the Company’s intangible assets, may not be recoverable as of September 30, 2023. The Company concluded that no such events or changes in circumstances had occurred.

Note 7 — Taxes

For the three months ended September 30, 2023 and 2022, the Company recorded income tax expense of $4,471 and $1,522, respectively, which represented effective tax rates of 20.3% and 10.3%, respectively. The increase in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the tonnage tax exclusion. For the nine months ended September 30, 2023 and 2022, the Company recorded income tax expense of $9,131 and $2,074, respectively, which represented effective tax rates of 17.9% and 11.2%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the tonnage tax exclusion. The effective tax rate for the nine months ended September 30, 2023 was less than the statutory rate due to a favorable Louisiana law change and the tonnage tax exclusion. The effective tax rate for the nine months ended September 30, 2022 was less than the statutory rate due to the tonnage tax exclusion.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Note 8 — Capital Stock and Stock Compensation

Share and Warrant Repurchases

In September 2023, the Company purchased 13,851,382 warrants for the Company’s common stock from entities managed by Cyrus Capital Partners, L.P. (“Cyrus”), a major stockholder of the Company, for total consideration of $11,384. The warrants purchased, which were exercisable for 2,631,763 shares of the Company’s Class A common stock and represented all of the warrants held by Cyrus, were cancelled subsequent to the purchase. At September 30, 2023, the Company had 4,519,504 warrants outstanding convertible into 858,706 shares.

On March 17, 2023, the Company’s Board of Directors (the “Board”) authorized a program (the “program”) to purchase up to $10,000 of the Company’s common stock. In June 2023, the Board authorized the repurchase of an additional $10,000 of common stock, raising the total value of the program to $20,000. Under the program, the Company may repurchase shares from time to time in open market transactions or in privately negotiated transactions.

In August 2023, the Company purchased 3,788,639 shares of the Company’s common stock from entities managed by Cyrus at a price of $4.05 per share for total consideration of $15,344. Including these transactions, for the three and nine months ended September 30, 2023, the Company repurchased 4,580,921 and 7,174,059 shares, respectively, for $18,653 and $28,499, respectively, at an average price of $4.07 and $3.97 per share, respectively. At September 30, 2023, the Company had a remaining authorization under the program of $6,844 for share repurchases.

Warrant Conversions

During the nine months ended September 30, 2023 and 2022, the Company issued 128,943 and 11,179 shares of Class A common stock, respectively, as a result of the exercise of 680,892 and 59,124 Class A warrants, respectively.

Stock Compensation

The Company accounts for stock compensation expense in accordance with the fair value-based method required by ASC 718, Compensation – Stock Compensation. This method requires share-based payment transactions to be measured based on the fair value of the equity instruments issued.

Director Compensation — Restricted Stock Units

On June 15, 2023 and June 1, 2022, the Company awarded 195,800 and 305,000 time-based RSUs, respectively, to its non-employee directors. The grant date fair values of these awards were $3.83 and $2.09 per RSU, respectively. Each RSU represents a contingent right to receive one share of Class A common stock upon vesting. These RSUs vest in full on the first anniversary of the grant date, subject to each director continuing to provide services to the Company through such date.

Management Compensation — Restricted Stock Units

During the nine months ended September 30, 2023 and 2022, the Company granted RSUs to its employees, including senior officers, covering 584,922 and 718,360 shares, respectively. The grant date fair values of these awards were $2.90 and $2.09 per RSU, respectively. Each RSU represents a contingent right to receive one share of Class A common stock upon vesting. Each award vests in approximately equal installments on each of the first three anniversaries of the grant date.

During the nine months ended September 30, 2023 and 2022, the Company awarded performance-based RSUs to its senior officers covering 416,832 and 518,600 shares, respectively (which amounts may be increased up to a maximum of 625,248 and 777,900 shares, respectively, based upon performance). Each performance-based RSU represents a contingent right to receive RSUs based upon continuous employment, subject to the achievement of performance metrics through the end of a three-year performance period. The grant date fair values of the awards, which are subject to performance conditions, were determined to be $2.90 and $2.09 per RSU, respectively.

During the nine months ended September 30, 2022, the Company awarded RSUs to its senior officers covering 576,981 shares. The grant date fair value of these awards was $2.09. Each award of RSUs vest as follows: 20% vests on the first anniversary of the grant date, 30% vests on the second anniversary of the grant date, and 50% vests on the third anniversary of the grant date. Each RSU represents a contingent right to receive one share of Class A common stock upon vesting.

During the nine months ended September 30, 2023 and 2022, in connection with the vesting of restricted stock units (“RSUs”), the Company withheld 333,085 and 179,040 shares of Class A common stock, respectively, at an average price of $3.51 and $2.07 per share (based on the market prices on the dates of vesting), respectively, from certain members of management to cover withholding taxes.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Note 9 — Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of related taxes, in the condensed consolidated balance sheets follow:

Schedule of Components of Accumulated Other Comprehensive Loss

The following tables present the changes in the balances of each component of accumulated other comprehensive income, net of related taxes, during the three and nine months ended September 30, 2023 and 2022:

Schedule of Changes in Balances of Component of Accumulated Other Comprehensive Loss

The Company includes the service cost component for net periodic benefit cost/(income) in vessel expenses and general and administrative expenses and other components in other (expense)/income, net on the condensed consolidated statements of operations.

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

Note 10 — Leases

In October 2023, the Company entered into new bareboat charter agreements in respect of the seven vessels comprising OSG’s Veteran Class products tanker fleet, all of which are now indirectly owned by a private fund (the “MP Fund”) managed by Maritime Partners, LLC. The economic terms of the bareboat charters remain the same as the previous bareboat charters. Prior to their recent acquisition by a Jones Act qualified subsidiary of the MP Fund, these seven vessels were previously owned indirectly by AMSC ASA (“AMSC”). The previous charters with AMSC for two of the seven chartered-in vessels contained a deferred payment obligation (“DPO”), which was $6,514 at September 30, 2023, related to charter hire expense incurred by the Company in prior years and was payable to AMSC in future periods. As part of the new agreements, the Company prepaid, at a discount, $5,602 to the MP Fund, representing all of its remaining outstanding DPO.

In August 2023, the Company extended its lease on the Overseas Key West for an additional lease term of two months to April 2029. Upon reassessment, the lease is accounted for as an operating lease. It was previously accounted for as a finance lease. The future minimum commitments under the lease are $1,550 for 2023, $4,172 for 2024, $4,161 for 2025, $4,161 for 2026, $4,161 for 2027, and $5,449 thereafter. For the nine months ended September 30, 2023, the non-cash activity for obtaining an operating right-of-use asset and liability was not material as a result of the lease extension.

In March 2023, the Company extended its lease on the Alaskan Frontier for an additional lease term of three years, to March 2026. The lease is accounted for as an operating lease. The future minimum commitments under the lease are $92 for the remainder of 2023, $366 in 2024, $365 in 2025, and $71 in 2026. For the nine months ended September 30, 2023, the Company had non-cash operating activity of approximately $1,000 for obtaining an operating right-of-use asset and liability as a result of the lease extension. Subsequently, the Company entered into an agreement with BP Oil Shipping Company, USA, in October 2023, to purchase the Alaskan Frontier for $20,000. The purchase is expected to be completed in November 2023. OSG intends to reactivate the 1.3-million-barrel capacity tanker which has been in cold layup in Malaysia since 2019. OSG plans to make investments in the vessel for it to begin commercial trade by the fourth quarter of 2024.

Charters-out

The Company is the lessor under its time charter contracts. Total time charter revenue for the three and nine months ended September 30, 2023 was equal to income from lease payments of $90,801 and $262,087, respectively, plus straight-line adjustments of $2,423 and $2,534, respectively. For the three and nine months ended September 30, 2022, total time charter revenue was equal to income from lease payments of $92,539 and $232,360, respectively, plus straight-line adjustments of $191 and $574, respectively.

Note 11 — Contingencies

The Company is a party, as plaintiff or defendant, to various suits in the ordinary course of business for monetary relief arising principally from personal injuries (including exposure to asbestos and other toxic materials), wrongful death, collision or other casualty and to claims arising under charter parties. A substantial majority of such personal injury, wrongful death, collision or other casualty claims against the Company are covered by insurance (subject to deductibles not material in amount). In the opinion of management, none of these claims, individually or in the aggregate, are expected to be material to the Company’s financial position, results of operations and cash flows.

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

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. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the section titled “Forward-Looking Statements” and Item 1A. Risk Factors of our Form 10-K. Other factors besides those listed in our Form 10-K and in our quarterly reports also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. The following highlights some of these risk factors:

The Company assumes no obligation to update or revise any forward-looking statements, except as may be required by law. Forward-looking statements in this Quarterly Report on Form 10-Q and written and oral forward-looking statements attributable to the Company or its representatives after the date of this Quarterly Report on Form 10-Q are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports filed by the Company with the SEC.

Business Overview

OSG is a publicly traded company providing liquid bulk and energy transportation services for crude oil and petroleum products in the U.S. Flag markets. In January 2023, the Overseas Sun Coast was converted to U.S. Flag status, joining the rest of OSG’s U.S. Flag fleet. OSG’s U.S. Flag fleet consists of Suezmax crude oil tankers doing business in Alaska, conventional and lightering ATBs, shuttle and conventional MR tankers, and non-Jones Act MR tankers that participate in the U.S. Tanker Security Program (“TSP”) or are on time charter to the U.S. Military Sealift Command. In October 2023, the Company entered into an agreement with BP Oil Shipping Company, USA to purchase the Alaskan Frontier. The purchase is expected to be completed in November 2023. OSG intends to reactivate the 1.3-million-barrel capacity tanker which has been in cold layup in Malaysia since 2019. OSG plans to make significant investments in the vessel for it to begin commercial trade by the fourth quarter of 2024. OSG is committed to setting high standards of excellence for its quality, safety and environmental programs. OSG is recognized as one of the world’s most customer-focused marine transportation companies and is headquartered in Tampa, FL. Our revenues are derived predominantly from time charter agreements for specific periods of time at fixed daily amounts. We also charter-out vessels for specific voyages where we typically earn freight revenue at spot market rates.

The following is a discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2023 and 2022. This Quarterly Report on Form 10-Q includes industry data and forecasts that we have prepared based in part on information obtained from industry publications and surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, certain statements regarding our market position in this report are based on information derived from internal market studies and research reports. Unless we state otherwise, statements about the Company’s relative competitive position in this report are based on management’s beliefs, internal studies and management’s knowledge of industry trends.

All dollar amounts are in thousands, except daily dollar amounts and per share amounts.

Operations and Oil Tanker Markets

Our revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by us and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported, and the number of vessels expected to be available at the time cargoes need to be transported. In the Jones Act trades within which the substantial majority of our vessels operate, demand factors for transportation are affected almost exclusively by supply and distribution decisions of oil producers, refiners and distributors based in the United States. Further, the demand for U.S. domestic oil shipments is significantly affected by the state of the U.S. and global economies, the level of imports into the U.S. from OPEC and other foreign producers, oil production in the United States, and the relative price differentials of U.S. produced crude oil and refined petroleum products as compared with comparable products sourced from or destined for foreign markets, including the cost of transportation on international flag vessels to or from those markets. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally through storage, layup, deletions, or conversions. Our revenues are also affected by the mix of charters between spot (voyage charters which include short-term time charters) and long-term (time or bareboat charters).

The Russia/Ukraine conflict has resulted in economic sanctions against Russia, including the banning or limitation of oil imports from Russia by certain countries and self-sanctioning by many oil companies and traders. In December 2022, the EU banned waterborne crude oil imports from Russia and the G7 nations implemented a price cap limiting the global price paid for Russian oil. Some countries have taken advantage of the current availability of Russian crude oil sold at a discount to world prices. These circumstances have resulted in the redirection of oil (crude and refined product) trade flows, which are apt to continue, reflecting the needs of countries that were large consumers of Russian oil to obtain other supply sources. Although the United States was not a major importer of Russian oil, it is impacted by these global events. Crude and refined products that were previously imported into the United States from non-Russian sources may not be available in prior quantities. Another potential impact is more movement from domestic producing locations via pipeline and marine assets, which would increase vessel demand. An increase in demand could result in higher utilization levels and potentially higher rates for Jones Act vessels.

Renewable diesel produces less carbon dioxide and nitrogen oxide than conventional diesel. As it is chemically identical to regular diesel, it can be used on its own or blended with conventional diesel. Production of renewable diesel increased in 2022 and is expected to grow significantly by 2025 as governments implement policies to encourage further growth of this fuel, including California’s Low Carbon Fuel Standard. The U.S. Gulf Coast currently produces a significant proportion of U.S renewable diesel, and California has been a large consumer of renewable diesel. Marine transportation provides the most cost-effective solution to move finished product to the West Coast. The length of the trip to California creates a significant increase in ton mile demand, creating a large new market for Jones Act shipping.

Having our vessels committed on time charters is a fundamental objective of our chartering strategy. We seek to have a majority of available vessel operating days covered with time charters or contracts of affreightment, but if such charters are not remunerative, or prove unachievable under certain market conditions, some of our vessels may operate in the spot market, which is more volatile and less predictable. Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, we manage our vessels based on TCE revenues and rates, which are non-GAAP measures.

Continued lack of available tonnage throughout the third quarter of 2023 contributed to minimal spot activity for Jones Act tankers and ATBs. Charterers are increasing the duration of some new time charter contracts to secure tonnage for multi-year periods. There are few vessels available in the spot market and total spot activity was 11 spot fixtures in the third quarter of 2023. For the 11 spot fixtures, two were performed by tankers and the others were performed by ATBs.

Our vessels were employed for 100% of available days during the third quarter of 2023, with a total of 1,590 available days (excluding 57 days for vessels that were off-hire due to drydock requirements) seeing no vessels idle without employment. Industry-wide, there were no firm Jones Act vessel orders as of September 30, 2023.

Delaware Bay lightering volumes averaged 61,000 b/d in the third quarter of 2023 compared with 65,000 b/d in the third quarter of 2022. We have contract minimums with our refinery customers that compensate us for barrels not lightered below minimum amounts.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP, which requires the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. There have been no changes to the Company’s critical accounting estimates disclosed in Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for 2022.

Results of Vessel Operations

In December 2022 we redelivered three conventional tankers leased from American Shipping Company. The reduction in the number of vessels we operated in 2023 were the primary reasons for decreases in our revenues in 2023 compared to the comparable periods in 2022. There were additional items that impacted our revenues both positively and negatively which are described below.

During the three months ended September 30, 2023, shipping revenues decreased by $7,624, or 6.2%, compared to the same period in 2022. In addition to the changes in the number of vessels we operate, there was an 8-day increase in drydock days and a decrease in Delaware Bay lightering volumes. The decrease was partially offset by an increase in average daily rates earned by our fleet and one full Government of Israel voyage and one partial Government of Israel voyage that began during the third quarter of 2023 and overlapped into the fourth quarter compared to two partial Government of Israel voyages in the third quarter of 2022.

For the nine months ended September 30, 2023, shipping revenues decreased by $9,191, or 2.7%, compared to the nine months ended September 30, 2022. In addition to the changes in the number of vessels we operate, there were fewer Military Sealift Command (“MSC”) voyages during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, which were longer international voyages. The decrease in shipping revenues was partially offset by a 337-day decrease in layup days. We had no vessels in layup during the nine months ended September 30, 2023. During the first quarter of 2022, we had two vessels in layup for the full quarter and two additional vessels that came out of layup in January 2022 and late February 2022. Our remaining two vessels in layup returned to service in May 2022. Additionally, the decrease was partially offset by (a) an increase in average daily rates earned by our fleet, (b) an increase in Delaware Bay lightering volumes, (c) a 5-day decrease in drydock days and (d) an 8-day decrease in repair days.

Reconciliation of TCE revenues, a non-GAAP measure, to shipping revenues as reported in the consolidated statements of operations follows:

The following tables provide a breakdown of TCE rates achieved for the three and nine months ended September 30, 2023 and 2022 between spot and fixed earnings and the related revenue days. Prior period amounts have been updated to conform to current period presentation.

a) Excludes one Alaska vessel currently in layup.

During the third quarter of 2023, TCE revenues decreased by $6,485, or 5.6%, to $108,577 from $115,062 in the third quarter of 2022. The decrease in TCE revenues was primarily driven by the decrease in shipping revenues explained above.

Voyage expenses decreased by $1,139, or 14.2%, in the third quarter of 2023 to $6,858 compared to $7,997 in the third quarter of 2022, primarily due to decreases in fuel expenses, as our vessels performed fewer voyage charters during the third quarter of 2023 compared to the third quarter of 2022.

Vessel expenses decreased by $5,461, or 12.0%, in the third quarter of 2023 to $39,969 compared to $45,430 in the third quarter of 2022, primarily due to a decrease in crewing costs related to fewer vessels in our fleet, as we redelivered three conventional tankers leased from American Shipping Company in December 2022.

Charter hire expenses decreased by $6,510, or 28.6%, to $16,233 in 2023 from $22,743 in 2022. The decrease primarily resulted from the redelivery of three conventional tankers leased from American Shipping Company in December 2022.

Depreciation and amortization decreased by $899, or 5.0%, to $17,003 in the third quarter of 2023 compared to $17,902 in the third quarter of 2022. The decrease primarily resulted from a decrease in amortization of drydock costs.

During the nine months ended September 30, 2023, TCE revenues increased $1,209, or 0.4%, to $313,438 from $312,229 during the nine months ended September 30, 2022. The increase primarily resulted from the decrease in shipping revenues explained above offset by the decrease in voyage expenses explained below.

Voyage expenses decreased by $10,400, or 31.7%, during the nine months ended September 30, 2023 to $22,413 compared to $32,813 during the nine months ended September 30, 2022, primarily due to decreases in fuel and port expenses, as our vessels performed fewer voyage charters during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Vessel expenses decreased by $7,043, or 5.4%, for the nine months ended September 30, 2023 to $123,337 compared to $130,380 for the nine months ended September 30, 2022, primarily due to a decrease in crewing costs related to fewer vessels in our fleet as we redelivered three conventional tankers leased from American Shipping Company in December 2022.

Charter hire expenses decreased by $19,101, or 28.5%, to $47,988 for the nine months ended September 30, 2023 from $67,089 for the nine months ended September 30, 2022. The decrease primarily resulted from the redelivery of three conventional tankers leased from American Shipping Company in December 2022.

Depreciation and amortization decreased by $1,558, or 3.1%, to $49,500 during the nine months ended September 30, 2023 compared to $51,058 during the nine months ended September 30, 2022. The decrease primarily resulted from a decrease in amortization of drydock costs.

In April 2023, three of our vessels were accepted into the TSP. The program is designed to ensure that militarily useful U.S. Flag tank vessels are available to the U.S. Department of Defense in the event of war or national emergency. The initial program calls for 10 tankers to participate. Under the TSP, participants receive an annual stipend designed to reduce vessel expenses to a level that will allow them to compete for international business. We transferred the two non-Jones Act U.S. Flag Product Carriers participating in the U.S. Maritime Security Program to the TSP and added the Overseas Sun Coast, which was converted to U.S. Flag status in January 2023, to participate in the program. We expect to receive an annual stipend of $6,000 for each vessel under the TSP.

In June 2023, the MSC awarded one of our vessels, the Overseas Mykonos, a time charter contract to provide ongoing fuel transportation services to MSC in support of our nation’s defense. The time charter awarded is for a one-year base period with the MSC holding additional option periods to extend the contract out to a maximum period of five- and one-half years. The Overseas Mykonos was transferred out of the TSP and delivered to MSC in August 2023.

General and Administrative Expenses

General and administrative expenses increased by $617, or 9.4%, to $7,173 during the three months ended September 30, 2023 compared to $6,556 for the three months ended September 30, 2022. The increase was primarily driven by higher compensation and benefits costs related to an increase in headcount and higher compensation levels. Additionally, general and administrative expenses increased primarily due to increased travel, training and legal expenses during the three months ended September 30, 2023 compared to the same period in 2022.

For the nine months ended September 30, 2023, general and administrative expenses increased by $685 or 3.3% at $21,614 compared to $20,929 for the nine months ended September 30, 2022. The increase was primarily driven by higher compensation and benefits costs related to an increase in headcount and higher compensation levels.

Other Income, Net

Other income, net was $1,643 and $4,184 for the three and nine months ended September 30, 2023, respectively, compared with $568 and $649 for the three and nine months ended September 30, 2022, respectively. The increase in other income, net was primarily due to investment income earned on our investment accounts at higher interest rates year over year.

Interest Expense

Interest expense was $7,779 and $24,019 for the three and nine months ended September 30, 2023, respectively, compared with $8,229 and $24,869 for the three and nine months ended September 30, 2022. The decrease in interest expense was primarily due to a lower average balance of debt outstanding during the three and nine months ended September 30, 2023 compared to the same periods in 2022.

Income Taxes

For the three months ended September 30, 2023 and 2022, we recorded income tax expense of $4,471 and $1,522, respectively, which represented effective tax rates of 20.3% and 10.3%, respectively. The increase in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was substantially due to the tonnage tax exclusion. For the nine months ended September 30, 2023 and 2022, we recorded income tax expense of $9,131 and $2,074, respectively, which represented effective tax rates of 17.9% and 11.2%, respectively. The increase in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was substantially due to the tonnage tax exclusion. The effective tax rate for the nine months ended September 30, 2023 was less than the statutory rate due to a favorable Louisiana law change and tonnage tax exclusion. The effective tax rate for the nine months ended September 30, 2022 was less than the statutory rate due to the tonnage tax exclusion.

Liquidity and Sources of Capital

Our business is capital intensive. Our ability to successfully implement our strategy is dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business to meet near-term and long-term debt repayment obligations is dependent on maintaining sufficient liquidity.

Liquidity

Working capital at September 30, 2023 was approximately $(28,000) compared with approximately $(38,000) at December 31, 2022. Excluding the current portion of operating and finance lease liabilities, working capital was approximately $38,936 at September 30, 2023 compared to $30,000 at December 31, 2022. The increase in working capital was primarily due to an increase in cash and cash equivalents, as the Company generated cash flow from operations during the current year, and a decrease in accounts payable, accrued expenses and other current liabilities as a result of timing of accounts payable payments made through September 30, 2023 compared to December 31, 2022. The increase in working capital was partially offset by a decrease in receivables related to the timing of collections from our customers and an increase in current installments of long-term debt as our term loan, due 2024, matures on September 30, 2024.

As of September 30, 2023, we had total liquidity on a consolidated basis comprised of $97,598 of cash and cash equivalents. We manage our cash in accordance with our intercompany cash management system. Our cash and cash equivalents, as well as our restricted cash balances, generally exceed Federal Deposit Insurance Corporation insurance limits. We place our cash, cash equivalents and restricted cash in what we believe to be credit-worthy financial institutions. In addition, certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government or its agencies.

As of September 30, 2023, we had total debt outstanding (net of deferred financing costs) of $406,510 and a total debt to total capitalization of 54.3%, compared to $423,363 and 55.5%, respectively, at December 31, 2022.

Sources, Uses and Management of Capital

We generate significant cash flows through our complementary mix of time charters, voyage charters and contracts of affreightment. Net cash provided by operating activities during the nine months ended September 30, 2023 was $83,050. In addition to operating cash flows, our other current potential sources of funds are proceeds from additional issuances of equity securities, additional borrowings, and proceeds from the opportunistic sales of our vessels. In the past, we have also obtained funds from the issuance of long-term debt securities. However, we can give no assurance as to whether or the terms on which we may be able to issue equity or debt securities, obtain additional borrowings, or sell vessels.

We use capital to fund working capital requirements, maintain the quality of our vessels, comply with U.S. and international shipping standards, and repay our outstanding loan facilities. We also use capital to comply with environmental laws and regulations, and we expect that the costs of such compliance will continue to increase; while it is not possible to determine the amounts of such costs for any future period, we believe that they are likely to be substantial. We may also use cash generated by operations to finance capital expenditures to modernize and grow our fleet.

In October 2023, the Company entered into an agreement with BP Oil Shipping Company, USA to purchase the Alaskan Frontier, for $20,000, which the Company had been leasing. The purchase is expected to be completed in November 2023. OSG intends to reactivate the 1.3-million-barrel capacity tanker which has been in cold layup in Malaysia since 2019. OSG plans to make investments in the vessel for it to begin commercial trade by the fourth quarter of 2024.

Additionally, in October 2023, the Company entered into new bareboat charter agreements in respect of the seven vessels comprising OSG’s Veteran Class products tanker fleet, all of which are now indirectly owned by a private fund (the “MP Fund”) managed by Maritime Partners, LLC. The economic terms of the bareboat charters remain the same as the previous bareboat charters. Prior to their recent acquisition by a Jones Act qualified subsidiary of the MP Fund, these seven vessels were owned indirectly by AMSC ASA (“AMSC”). The previous charters with AMSC for two of the seven chartered-in vessels contained a deferred payment obligation (“DPO”), which was $6,514 at September 20, 2023, related to charter hire expense incurred by the Company in prior years and was payable to AMSC in future periods. As part of the new agreements, the Company prepaid, at a discount, $5,602 to the MP Fund, representing all of its remaining outstanding DPO.

In September 2023, we purchased, using available cash, 13,851,382 warrants for our common stock from entities managed by Cyrus for total consideration of $11,384. The warrants purchased, which were exercisable for 2,631,763 shares of our Class A common stock and represented all of the warrants held by Cyrus, were cancelled subsequent to the purchase.

In August 2023, we purchased 3,788,639 shares of our common stock from entities managed by Cyrus at a price of $4.05 per share for total consideration of $15,344. Including these transactions, for the three and nine months ended September 30, 2023, we used $18,652 and $28,499, respectively, of available cash to repurchase 4,580,921 and 7,174,059 shares, respectively, of our common stock at an average price of $4.07 and $3.97 per share, respectively.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

Not applicable due to the Company’s status as a smaller reporting company.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s current disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are party to lawsuits and claims arising out of the normal course of business. In management’s opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K, and as may be updated in our subsequent quarterly reports. The risks described in our 2022 Form 10-K are not the only risks facing us. 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 or operating results. There have been no material changes in our risk factors from those disclosed in our 2022 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 17, 2023, the Company’s Board of Directors (the “Board”) authorized a program (the “program”) to purchase up to $10,000 of the Company’s common stock. In June 2023, the Board authorized the repurchase of an additional $10,000 of common stock, raising the total value of the program to $20,000. Under the program, the Company may repurchase shares from time to time in open market transactions or in privately negotiated transactions.

During the three months ended September 30, 2023, purchases of our common stock under the program were as follows:

In September 2023, the Company purchased, using available cash, 13,851,382 warrants for the Company’s common stock from entities managed by Cyrus for total consideration of $11,384. The warrants purchased, which were exercisable for 2,631,763 shares of our Class A common stock and represented all of the warrants held by Cyrus, were cancelled subsequent to the purchase.

Item 3. Defaults upon senior securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other information

None.

Item 6. Exhibits

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.