0001144204-14-040964.txt : 20140702 0001144204-14-040964.hdr.sgml : 20140702 20140702111754 ACCESSION NUMBER: 0001144204-14-040964 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20140702 FILED AS OF DATE: 20140702 DATE AS OF CHANGE: 20140702 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREESEAS INC. CENTRAL INDEX KEY: 0001325159 STANDARD INDUSTRIAL CLASSIFICATION: DEEP SEA FOREIGN TRANSPORTATION OF FREIGHT [4412] IRS NUMBER: 000000000 STATE OF INCORPORATION: 1T FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51672 FILM NUMBER: 14954961 BUSINESS ADDRESS: STREET 1: 10 ELEFTHERIOU VENIZELOU STREET STREET 2: (PANEPISTIMIOU AVENUE) CITY: ATHENS STATE: J3 ZIP: 10671 BUSINESS PHONE: 011-30-210-452-8770 MAIL ADDRESS: STREET 1: 10 ELEFTHERIOU VENIZELOU STREET STREET 2: (PANEPISTIMIOU AVENUE) CITY: ATHENS STATE: J3 ZIP: 10671 FORMER COMPANY: FORMER CONFORMED NAME: FreeSeas Inc. DATE OF NAME CHANGE: 20050427 6-K 1 v382604_6k.htm CURRENT REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

For the month of July 2014

Commission File Number: 000-51672

FREESEAS INC.

(Name of Registrant)

10, Eleftheriou Venizelou Street (Panepistimiou Ave.), 106 71, Athens, Greece

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F ¨ Form 40-F ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

Attached hereto as Exhibits 99.1 and 99.2 are the unaudited interim condensed consolidated financial statements of FreeSeas Inc. for the three months ended March 31, 2014 and 2013 and Management's Discussion and Analysis of Financial Condition and Results of Operations, respectively.

Exhibit
Number		Description

99.1		Unaudited Interim Condensed Consolidated Financial Statements for the three months ended March 31, 2014 and 2013
99.2		Management’s Discussion and Analysis of Financial Condition and Results of Operations

SIGNATURE

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.

	FREESEAS INC.

Date: July 2, 2014	By:	/s/ DIMITRIS PAPADOPOULOS
	Dimitris Papadopoulos
	Chief Financial Officer

EX-99.1 2 v382604_ex99-1.htm EXHIBIT 99.1

FREESEAS INC.

INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Page Number

Interim Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 (audited)	F-2

Unaudited Interim Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2014 and 2013	F-3

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2014 and 2013	F-4

Notes to Unaudited Interim Condensed Consolidated Financial Statements	F-5 to F-23

F-1

FREESEAS INC.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(All amounts are expressed in thousands of United States dollars)

	March 31, 2014			December 31, 2013
	(Unaudited)			(Audited)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	1,508		$	7,581
Trade receivables, net of provision of $2,227 and $2,227 at March 31, 2014 and December 31, 2013, respectively		1,646			1,318
Insurance claims (Note 9)		1,996			186
Due from related party (Note 4)		1,777			1,167
Inventories		125			32
Deferred charges – current portion		915			1,210
Prepayments and other		1,281			839
Vessel held for sale		-			3,465
Total current assets		9,248			15,798
Vessels, net (Note 5)		70,535			71,834
Total non-current assets		70,535			71,834

Total Assets	$	79,783		$	87,632

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	11,618		$	9,906
Convertible notes, net (Note 7)		-			115
Accrued liabilities		6,071			4,931
Unearned revenue		37			-
Derivative financial instruments – current portion (Note 6)		-			200
Bank loans - current portion (Note 8)		59,687			59,687
Total current liabilities		77,413			74,839

Commitments and Contingencies		-			-
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized Series B Convertible Preferred Stock, $0.001 par value, 15,000 shares designated, no shares issued and outstanding at March 31, 2014 and December 31, 2013		-			-
Series C Convertible Preferred Stock, $0.001 par value, 85,000 shares designated, 0 and 56,000 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively (Note 11 & 13)		-			-
Common stock, $0.001 par value; 250,000,000 shares authorized, 25,675,044 and 22,753,868 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively (Notes 11 & 13)		26			23
Additional paid-in capital		185,134			185,009
Accumulated deficit		(182,790	)		(172,239	)
Total shareholders' equity		2,370			12,793
Total Liabilities and Shareholders' Equity	$	79,783		$	87,632

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

F-2

FREESEAS INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(All amounts are expressed in thousands of United States dollars, except for share and per share data)

	For the Three Months Ended March 31, 2014			For the Three Months Ended March 31, 2013
OPERATING REVENUES	$	774		$	3,065

OPERATING EXPENSES:
Voyage expenses		(508	)		(175	)
Commissions		(53	)		(196	)
Vessel operating expenses		(7,527	)		(2,120	)
Depreciation expense (Note 5)		(1,299	)		(1,412	)
Amortization of deferred charges		-			(53	)
Management and other fees to a related party (Note 4)		(419	)		(706	)
General and administrative expenses		(870	)		(799	)
Provision and write-offs of insurance claims and bad debts		29			-
Disposal of vessel		(33	)		-

Loss from operations		(9,906	)		(2,396	)

OTHER INCOME (EXPENSE):
Interest and finance costs		(579	)		(774	)
Loss on derivative instruments (Note 6)		(21	)		(32	)
Other income/(expense) (Note 13)		(45	)		(1,193	)
Other expense		(645	)		(1,999	)

Net loss	$	(10,551	)	$	(4,395	)

Basic loss per share	$	(0.41	)	$	(8.97	)
Diluted loss per share	$	(0.41	)	$	(8.97	)
Basic weighted average number of shares		25,603,636			490,041
Diluted weighted average number of shares		25,603,636			490,041

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

F-3

FREESEAS INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(All amounts in tables in thousands of United States dollars)

	For the Three Months Ended March 31, 2014			For the Three Months Ended March 31, 2013
Cash Flows from Operating Activities:
Net loss	$	(10,551	)	$	(4,395	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense (Note 5)		1,299			1,412
Amortization of debt discount (Note 7)		14			29
Amortization of deferred financing fees		128			251
Amortization of deferred dry-docking and special survey costs		-			53
Stock compensation cost (Notes 12)		-			11
Common stock issued to manager for services (Note 13)		-			1,528
Loss on settlement of liability through stock issuance (Note 13)		-			1,186
Change in fair value of derivatives (Note 6)		(200	)		(50	)
Changes in operating assets and liabilities:
-Trade receivables		(329	)		(424	)
-Insurance claims		(1,810	)		(268	)
-Due from related party		(610	)		(743	)
-Inventories		(93	)		(132	)
-Prepayments and other		(442	)		(419	)
-Accounts payable		1,712			931
-Accrued liabilities		1,140			542
-Unearned revenue		37			62
Dry-docking and special survey costs paid		167			-
Net Cash used in Operating Activities		(9,538	)		(426	)

Cash flows from Investing Activities:
Proceeds from sale of vessel, net		3,465			-
Cash flows provided by Investing Activities		3,465			-

Cash flows from Financing Activities:
Payments of bank loans		-			(120	)
Proceeds from convertible notes (Note 7)		-			154
Proceeds from sale of common stock (Note 13)		-			389
Net Cash provided by Financing Activities		-			423

Net decrease in cash and cash equivalents	$	(6,073	)	$	(3	)
Cash and cash equivalents, beginning of period		7,581			29

Cash and cash equivalents, end of period	$	1,508		$	26

Supplemental Cash Flow Information:
Cash paid for interest	$	115		$	96
Cash paid for income taxes
Non-Cash Investing and Financing Activities:	$	-		$	-

Accrued Interest converted into common stock (Notes 7 and 13)	$	5		$	-
Notes converted to common Stock (Notes 7 and 13)	$	129		$	-
Series C convertible preferred stock converted into common stock	$	2		$	-
Beneficial conversion feature of convertible debentures	$	-		$	136
Common stock issued for debt extinguishment	$	-		$	3,513

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements

F-4

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

1.	Basis of Presentation and General Information

The accompanying unaudited interim condensed consolidated financial statements include the accounts of FreeSeas Inc. and its wholly owned subsidiaries (collectively, the “Company” or “FreeSeas”). FreeSeas, formerly known as Adventure Holdings S.A., was incorporated in the Marshall Islands on April 23, 2004 for the purpose of being the ultimate holding company of ship-owning companies. The management of FreeSeas’ vessels is performed by Free Bulkers S.A. (the “Manager”), a Marshall Islands company that is controlled by the Chief Executive Officer of FreeSeas (see Note 4).

Effective December 2, 2013, the Company effectuated a five-to-one reverse stock split on its issued and outstanding common stock (Note 11). All share and per share amounts disclosed in the financial statements give effect to this reverse stock split retroactively, for all periods presented.

During the three months ended March 31, 2014, the Company owned and operated five Handysize dry bulk carriers and one Handymax dry bulk carrier. As of March 31, 2014, FreeSeas is the sole owner of all outstanding shares of the following subsidiaries:

Company

% Owned

M/V

Type

Dwt

Year Built/
Expected
Year of
Delivery

Date of
Acquisition

Date of
Disposal

Date of
Contract
Termination

Adventure Two S.A.

100

Free Destiny

Handysize

25,240

1982

08/04/04

08/27/10

N/A

Adventure Three S.A.

100

Free Envoy

Handysize

26,318

1984

09/29/04

05/13/11

N/A

Adventure Four S.A.

100

Free Fighter

Handysize

38,905

1982

06/14/05

04/27/07

N/A

Adventure Five S.A.

100

Free Goddess

Handysize

22,051

1995

10/30/07

N/A

Adventure Six S.A.

100

Free Hero

Handysize

24,318

1995

07/03/07

N/A

Adventure Seven S.A.

100

Free Knight

Handysize

24,111

1998

03/19/08

02/18/14

N/A

Adventure Eight S.A.

100

Free Jupiter

Handymax

47,777

2002

09/05/07

N/A

Adventure Nine S.A.

100

Free Impala

Handysize

24,111

1997

04/02/08

N/A

Adventure Ten S.A.

100

Free Lady

Handymax

50,246

2003

07/07/08

11/08/11

N/A

Adventure Eleven S.A.

100

Free Maverick

Handysize

23,994

1998

09/01/08

N/A

Adventure Twelve S.A.

100

Free Neptune

Handysize

30,838

1996

08/25/09

N/A

Adventure Fourteen S.A.

100

Hull 1

Handysize

33,600

2012

N/A

04/28/12

Adventure Fifteen S.A.

100

Hull 2

Handysize

33,600

2012

N/A

06/04/12

F-5

FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S. GAAP”), for interim financial information. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that might be expected for the fiscal year ending December 31, 2014.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, trade accounts receivable, insurance claims, prepayments and advances, and derivative contracts (interest rate swaps). The Company places its cash and cash equivalents, consisting mostly of deposits, with high credit qualified financial institutions. The Company monitors the credit risk regarding charterer’s turnover in order to review its reliance on individual charterers. The Company does not obtain rights to collateral to reduce its credit risk. The Company is exposed to credit risk in the event of non-performance by counter parties to derivative instruments; however, the Company limits its exposure by diversifying among counter parties with high credit ratings. Credit risk with respect to trade account receivable is considered high due to the fact that the Company’s total income is derived from a few charterers. During the three months ended March 31, 2014 and 2013 the following charterers individually accounted for more than 10% of the Company’s voyage revenues:

Charterer	For the three months ended March 31,2014			For the three months ended March 31,2013
A		34.01	%		27.98	%
B		21.57	%		21.54	%
C		less than 10	%		less than 10	%

F-6

2. Significant Accounting policies:

Described below are the accounting standards that were adopted in the three months of 2014. A discussion of the Company's significant accounting policies can be found in the Company's consolidated financial statements included in the Company’s Annual Reporton Form 20-F for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on March 24, 2014 (the"Consolidated Financial Statements for the year ended December 31, 2013").

Recent Accounting Standards Updates:

Accounting for Special Survey and Dry-docking Costs:Effective as of January 1, 2014, the Company changed the deferral method of accounting for special survey and dry-docking costs whereby actual costs incurred are deferred and are amortized over periods of five and two and a half years, respectively. The Company now follows the direct expense method of accounting for special survey and dry-docking costs whereby costs are expensed in the period incurred for the vessels.

Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

The Company adopted the requirements of ASU 2013-02, "Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified“Out of Accumulated Other Comprehensive Income". The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The adoption of the new guidance for fair value measurements had no effect on the Company’s accompanying unaudited interim condensed consolidated financial statements.

3.	Going Concern

As a result of the historically low charter rates for drybulk vessels which have been affecting the Company for over four years, and the resulting material adverse impact on the Company’s results from operations, the accompanying unaudited interim condensed consolidated financial statements for the three months ended March 31, 2014, have been prepared on a going concern basis. The Company currently has cash and cash equivalents of $1,508 and based on its cash flow projections for the remaining of 2014, the Company will not be able to make debt repayments scheduled as of March 31, 2014, interest payments as well as cover operating expenses and capital expenditure requirements for at least twelve months from the balance sheet date.

The Company has incurred net losses of $10,551 and $4,395 during the three months ended March 31, 2014, and 2013, respectively. As of March 31, 2014 and December 31, 2013, the Company had working capital deficits of approximately, $68,165 and $59,041, respectively. All of the above raises substantial doubt regarding the Company’s ability to continue as a going concern. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their business plan. The Company’s ability to continue as a going concern is dependent uponits ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal course of business operations when they come due and to generate profitable operations in the future.

F-7

In January and April 2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to the National Bank of Greece (“NBG”). The license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits have been transferred to NBG. In January 2014, the Company received notification from NBG that the Company has not paid the aggregate amount of $10,045 constituting repayment installments and accrued interest due in December 2013. On February 22, 2014, the Company and certain of its subsidiaries entered into terms with NBG for settlement of its obligations arising from the Loan Agreement with the Bank. Pursuant to the terms, NBG agreed to accept a cash payment of $22,000 in full and final settlement of all of the Company’s obligations to the NBG and NBG would forgive the remaining outstanding balance of approximately $3,700. Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its two vessels (M/V Free Impala and M/V Free Neptune) as well as all assignments in favor of NBG will be released. The closing of such transaction is contingent upon the Company being able to raise capital towards making such payment.

In 2013, the Company did not pay the interest due in an aggregate amount of $354 or interest rate swap amounts in an aggregate of $256 pursuant to the Credit Suisse facility. On January 29, 2014, the Company entered into a deferral interest payment agreement with Credit Suisse, pursuant to which the interest payment of $115 due on January 31, 2014 was deferred to February 28, 2014. On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate swap agreements with Credit Suisse. On February 28, 2014, pursuant to the deferral interest payment agreement with Credit Suisse, the Company paid the deferred interest of $115. The Company received several reservation of right letters in 2013 stating that Credit Suisse may take any actions and may exercise all of their rights and remedies referred in the security documents. On January 30, 2014, the Company and certain of its subsidiaries entered into a term sheet with Credit Suisse in order to settle its obligations arising from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit Suisse agreed to accept a cash payment of approximately $22,000 in full and final settlement of all of the Company’s obligations to the Bank and the Bank would forgive the remaining outstanding balance of approximately $15,000. Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its three vessels (M/V FreeGoddess, M/V FreeHero and M/V FreeJupiter) as well as all assignments in favor of Credit Suisse will be released. The closing of such transaction is contingent upon the Company being able to raise capital towards making such payment. Subsequent to March 31, 2014 the obligations were settled according to terms of this agreement (Note 14).

If the Company is not able to raise the capital necessary to complete the agreement reached with the NBG or if the Company is unable to comply with its restructured loan terms, this could lead to the acceleration of the outstanding debt under its debt agreement. The Company’s failure to satisfy its covenants under its debt agreement, and any consequent acceleration and cross acceleration of its outstanding indebtedness would have a material adverse effect on the Company’s business operations, financial condition and liquidity.

Generally accepted accounting principles require that long-term debt be classified as a current liability when a covenant violation gives the lender the right to call the debt at the balance sheet date, absent a waiver. As a result of the actual breaches existing under the Company’s credit facilities with NBG and Credit Suisse (Note 8) acceleration of such debt by its lenders could result. Accordingly, as of March 31, 2014, the Company is required to reclassify its long term debt as current liability on its consolidated balance sheet since the Company has not received waivers in respect to the breaches discussed above.

The Company is currently exploring several alternatives aiming to manage its working capital requirements and other commitments, including offerings of securities through structured financing agreements (Note14), disposition of certain vessels in its current fleet (Note 5) and additional reductions in operating and other costs.

F-8

The accompanying unaudited interim condensed consolidated financial statements as of March 31, 2014, were prepared assuming that the Company would continue as a going concern despite its significant losses and working capital deficit. Accordingly, the unaudited interim condensed consolidated financial statements did not include any adjustments relating to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities, or any other adjustments that might result in the event the Company is unable to continue as a going concern, except for the classification of all debt as current.

4.	Related Party Transactions

Manager

All vessels owned by the Company receive management services from the Manager, pursuant to ship management agreements between each of the ship-owning companies and the Manager.

Each of the Company’s ship-owning subsidiaries pays, as per its management agreement with the Manager, a monthly technical management fee of $18.975 (on the basis that the $/Euro exchange rate is 1.30 or lower; if on the first business day of each month the $/Euro exchange rate exceeds 1.30 then the management fee payable will be increased for the month in question, so that the amount payable in $ will be the equivalent in Euro based on 1.30 $/Euro exchange rate) plus a fee of $400 per day for superintendent attendance and other direct expenses.

The Company also pays the Manager a fee equal to 1.25% of the gross freight or hire from the employment of FreeSeas’ vessels. In addition, the Company pays a 1% commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold by the Company with the assistance of the Manager. On February 18, 2014 the Company sold the M/V Free Knight, a 1998-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3.6 million and the vessel was delivered to her new owners. In this respect, the Company paid the Manager $36 relating to the sale of the M/V Free Knight (Note 5) during the three months ended March 31, 2014. During the three months ended March 31, 2013, there were no vessel disposals. In addition, the Company has incurred commission expenses relating to its commercial agreement with the Manager amounting to $8 and $41 for the three months ended March 31, 2014 and 2013, respectively, included in “Commissions” in the accompanying unaudited interim condensed consolidated statements of operations.

The Company also pays, as per its services agreement with the Manager, a monthly fee of $136 (on the basis that the $/Euro exchange rate is 1.35 or lower; if on the last business day of each month the $/Euro exchange rate exceeds 1.35 then the service fee payable will be adjusted for the following month in question, so that the amount payable in dollars will be the equivalent in Euro based on 1.35 $/Euro exchange rate) as compensation for services related to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over financial reporting procedures and general administrative and management services plus expenses. The Manager is entitled to a termination fee if the agreement is terminated upon a “change of control” as defined in its services agreement with the Manager. The termination fee as of March 31, 2014 would be approximately $85,176.

Fees and expenses charged by the Manager are included in the accompanying unaudited interim condensed consolidated financial statements in “Management and other fees to a related party,” “General and administrative expenses” and “Operating expenses”. The total amounts charged for the three months ended March 31, 2014 and 2013 amounted to $920 ($419 of management fees, $414 of services fees, $86 of superintendent fees and $1 for other expenses) and $1,425 ($706 of management fees, $713 of services fees, $2 of superintendent fees and $4 for other expenses), respectively.

The balance due from the Manager as of March 31, 2014 and December 31, 2013 was $1,777 and $1,167, respectively. The amount paid to the Manager for office space during the three months ended March 31, 2014 and 2013 was $42 and $36, respectively and is included in “General and administrative expenses” in the accompanying unaudited interim condensed consolidated statements of operations.

F-9

National Bank of Greece (NBG)

Effective May 13, 2013, FBB ceased to be a related party according to the requirements of ASC 850 (“Related Party Disclosures”), since the bank’s deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to the NBG. The license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits have been transferred to NBG.

Other Related Party

The Company, through the Manager uses from time to time a ship-brokering firm associated with family members of the Company’s Chairman, Chief Executive Officer and President for certain of the charters of the Company’s fleet. During the three months ended March 31, 2014 and 2013, such ship-brokering firm did not charge the Company commissions. In addition, there was no balance due to the ship-brokering firm as of March 31, 2014 and December 31, 2013.

5.	Vessels, net

	Vessels Cost		Accumulated Depreciation			Net Book Value
December 31, 2013	$	105,008	$	(33,174	)	$	71,834
Depreciation		-		(1,299	)		(1,299	)
Disposal of vessel		-		-			-
March 31, 2014	$	105,008	$	(34,473	)	$	70,535

Vessel disposed/sold during the three months ended March 31, 2014.

On February 18, 2014 the Company sold the M/V Free Knight, a 1998-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3,600 and the vessel was delivered to her new owners. The Company recognized an impairment charge of $24,000 in the consolidated statement of operations for the year ended December 31, 2013.

Vessels disposed during the three months ended March 31, 2013.

During the three months ended March 31, 2013, there were no vessel disposals.

As of March 31, 2014, the Company performed an impairment assessment of its long-lived assets by comparing the undiscounted net operating cash flows for each vessel to its respective carrying value. The Company’s assessment concluded that no impairment existed as of March 31, 2014, as the vessels’ future undiscounted net operating cash flows exceeded their carrying value by $10,795. If the Company were to utilize the most recent five year historical average rates, three year historical average rates or one year historical average rates, would recognize an impairment loss of $19,057 (using the most recent five year historical average rates) and $29,321 (using the most recent three year or one year historical average rates).

F-10

Financial Instruments and Fair Value Measurements

The Company is exposed to interest rate fluctuations associated with its variable rate borrowings and its objective is to manage the impact of such fluctuations on earnings and cash flows of its borrowings. In this respect, the Company partially used interest rate swaps to manage net exposure to interest rate fluctuations related to its borrowings.

The Company was party of two interest rate swap agreements which were fully unwound on February 3, 2014. The change in fair value on the Company’s two interest rate swaps for the three months ended March 31, 2013 resulted in unrealized losses of $1. The settlements on the interest rate swaps for the three months ended March 31, 2014 resulted in realized losses of $21. The total of the change in fair value and settlements for the three months ended March 31, 2014 aggregate to losses of $32 which is separately reflected in “Loss on derivative instruments” in the accompanying unaudited interim condensed consolidated statements of operations.

Tabular Disclosure of Derivatives Location

Derivatives are recorded in the balance sheet on a net basis by counterparty when a legal right of setoff exists. The following tables present information with respect to the fair values of derivatives reflected in the balance sheet on a gross basis by transaction. The tables also present information with respect to gains and losses on derivative positions reflected in the Statement of Operations.

Fair Value of Derivative Instruments

		Derivative Liability
		March 31, 2014		December 31, 2013
Derivative	Balance Sheet Location	Fair Value		Fair Value

Derivatives not designated as hedging instruments
Interest rate swaps	Derivative financial instruments - current portion	$	—	$	200

	Derivative financial instruments - net of current portion		—		—

	Total derivatives	$	—	$	200

F-11

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

The Effect of Derivative Instruments on the Statement of Operations for the Three Months Ended March 31, 2014, and 2013

Derivatives Not Designated as Hedging Instruments

		Amount
Derivative	Loss Recognized on Derivative Location	2014			2013
Interest rate swaps	Loss on derivative instruments	$	(21	)	$	(32	)

Total		$	(21	)	$	(32	)

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

—

Cash and cash equivalents, restricted cash, accounts receivable and accounts payable: The carrying values reported in the consolidated balance sheets for those financial instruments are reasonable estimates of their fair values due to their short-term nature.

—

Long-term debt: The fair values of long-term bank loans approximate the recorded values due to the variable interest rates payable.

—

Derivative financial instruments: The fair values of the Company’s derivative financial instruments equate to the amount that would be paid or received by the Company if the agreements were cancelled at the reporting date, taking into account current market data per instrument and the Company’s or counterparty’s creditworthiness, as appropriate.

The guidance for fair value measurements applies to all assets and liabilities that are being measured and reported on a fair value basis. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted market prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Unobservable inputs that are not corroborated by market data and that are significant to the fair value of the assets or liabilities.

The Company’s derivative financial instruments are valued using pricing models that are used to value similar instruments by market participants. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility and correlations of such inputs. The Company’s derivatives trade in liquid markets, and as such, model inputs can generally be verified and do not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.

F-12

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

The following table summarizes the valuation of liabilities measured at fair value on a recurring basis as of the valuation date:

		March 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Recurring measurements:		2014		(Level 1)		(Level 2)		(Level 3)
Interest rate swap contracts	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Recurring measurements:	2013		(Level 1)		(Level 2)		(Level 3)
Interest rate swap contracts	$	200	$	-	$	200	$	-

Total	$	200	$	-	$	200	$	-

The following table summarizes the valuation of assets measured at fair value on a non-recurring basis as of the valuation date:

	March 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Non -Recurring measurements:	2014		(Level 1)		(Level 2)		(Level 3)
Vessels held for sale	$	-	$	-	$	-	$	-

Total	$	-	$	-	$	-	$	-

Non -Recurring measurements:	December 31, 2013		(Level 1)		(Level 2)		(Level 3)
Vessel held for sale	$	3,465	$	-	$	3,465	$	-

Total	$	3,465	$	-	$	3,465	$	-

F-13

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

As of December 31, 2013 the Company (i) classified the M/V Free Knight as “held for sale”, and (ii) reclassified the M/V Free Hero , M/V Free Jupiter , M/V Free Impala and M/V Free Neptune as ‘‘held and used’’ .

On February 18, 2014 the Company sold the M/V Free Knight, a 1998-built, 24,111 dwt Handysize dry bulk carrier for a gross sale price of $3,600 and the vessel was delivered to her new owners. As of March 31, 2014 all the Company’s vessels were classified as “held and used”.

7.	Convertible Notes Payable

In January, April, May and July 2013, the Company entered into agreements with Asher Enterprises, Inc. (“Asher”) to four 8% interest bearing convertible notes for $489 due in nine months (“The 8% Convertible Notes”). One hundred eighty days following the date of this note, the holder has the right to convert all or any part of the outstanding and unpaid principal amount of the note into Company’s common shares at a 35% discount rate. In connection with these notes, the Company recorded a $263 discount on debt, related to the beneficial conversion feature of the notes to be amortized over the life of the notes or until the notes were converted or repaid. On August 2, 2013, the Company issued 232,948 shares of common stock to Asher upon conversion of the $153.5 convertible promissory note dated January 31, 2013. On October 10, 2013, the Company issued 53,618 shares of common stock to Asher upon conversion of the $103.5 convertible promissory note dated April 8, 2013. On November 18, 2013, the Company issued 109,279 shares of common stock to Asher upon conversion of the $103.5 convertible promissory note dated May 13, 2013 plus accrued interest. On February 6, 2014, the Company issued 67,476 shares of common stock to Asher upon conversion of $75 principal of a convertible promissory note dated July 29, 2013 plus accrued interest.On February 7, 2014, the Company issued 53,700 shares of common stock to Asher upon conversion of the remaining principal of $53.5 convertible promissory note dated July 29, 2013 plus accrued interest. As of March 31, 2014, 100% of the balance of the convertible notes has been converted into common shares.

8.	Bank Loans - current portion

As of March 31, 2014, the Company’s bank debt is as follows:

	Credit Suisse		NBG		Total
December 31, 2013	$	36,450	$	23,237	$	59,687
Additions		-		-		-
Payments		-		-		-
March 31, 2014	$	36,450	$	23,237	$	59,687

All the Company’s credit facilities bear interest at LIBOR plus a margin, ranging from 1.00% to 4%, and are secured by mortgages on the financed vessels and assignments of vessels’ earnings and insurance coverage proceeds. They also include affirmative and negative financial covenants of the borrowers, including maintenance of operating accounts, minimum cash deposits, average cash balances to be maintained with the lending banks and minimum ratios for the fair values of the collateral vessels compared to the outstanding loan balances. Each borrower is restricted under its respective loan agreement from incurring additional indebtedness, changing the vessels’ flag without the lender’s consent or distributing earnings.

The weighted average interest rate for the three months ended March 31, 2014 and 2013 was 2.9% and 2.3%, respectively. Interest expense incurred under the above loan agreements amounted to $436 and $505 for the three months ended March 31, 2014 and 2013, respectively, and is included in “Interest and Finance Costs” in the accompanying unaudited interim condensed consolidated statements of operations.

F-14

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

Credit Suisse Facility

On May 31, 2012, the Company entered into a Sixth Supplemental Agreement with Credit Suisse, which amended and restated the Facility Agreement dated December 24, 2007, as amended, between the Company and Credit Suisse. The Sixth Supplemental Agreement, among other things, modified the Facility Agreement to:

Defer further principal repayments until March 31, 2014;

Reduce the interest rate on the facility to LIBOR plus 1% until March 31, 2014 from a current interest margin of 3.25;

Release restricted cash of $1,125;

Waive compliance through March 31, 2014 with the requirement to maintain a minimum ratio of aggregate fair market value of the financed vessels to loan balance, after which date the required minimum ratio will be 115% beginning April 1, 2014, 120% beginning October 1, 2014, and 135% beginning April 1, 2015;

Establish certain financial covenants, including an interest coverage ratio, which must be complied with starting January 1, 2013, a consolidated leverage ratio, which must be complied with starting January 1, 2014, and a minimum liquidity ratio, which must be complied with starting July 1, 2014; and

Require the amount of any “Excess Cash,” as determined in accordance with the Facility Agreement at each fiscal quarter end beginning June 30, 2012, to be applied to pay the amendment and restructuring fee described below and prepay the outstanding loan balance, depending on the Company’s compliance at the time with the vessel market value to loan ratio and the outstanding balance of the loan.

In 2013, the Company did not pay the interest due in an aggregate amount of $354 or interest rate swap amounts in an aggregate of $256 pursuant to the Credit Suisse facility. On January 29, 2014, the Company entered into a deferral interest payment agreement with Credit Suisse, pursuant to which the interest payment of $115 due on January 31, 2014 was deferred to February 28, 2014.On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate swap agreements with Credit Suisse. On February 28, 2014, pursuant to the deferral interest payment agreement with Credit Suisse, the Company paid the deferred interest of $115.The Company received several reservation of right letters in 2013 stating that Credit Suisse may take any actions and may exercise all of their rights and remedies referred in the security documents.On January 30, 2014, the Company and certain of its subsidiaries entered into a term sheet with Credit Suisse in order to settle its obligations arising from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit Suisse agreed to accept a cash payment of approximately $22,000 in full and final settlement of all of the Company’s obligations to the Bank and the Bank would forgive the remaining outstanding balance of approximately $15,000. Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its three vessels (M/V Free Goddess, M/V Free Hero and M/V Free Jupiter) as well as all assignments in favor of Credit Suisse will be released. The closing of such transaction is contingent upon the Company being able to raise capital towards making such payment. Subsequent to March 31, 2014 the obligations were settled according to terms of this agreement (Note 14).

NBG Facility (fka FBB Facility)

In January and April 2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred toNBG. The license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits have been transferred to NBG. In January 2014, the Company received notification from NBG that the Company has not paid the aggregate amount of $10,045 constituting repayment installments and accrued interest due in December 2013. On February 22, 2014, the Company and certain of its subsidiaries entered into terms with NBG for settlement of its obligations arising from the Loan Agreement with the Bank. Pursuant to the terms, NBG agreed to accept a cash payment of $22,000 in full and final settlement of all of the Company’s obligations to the NBG and NBG would forgive the remaining outstanding balance of approximately $3,700.

F-15

FREESEAS INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data

Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its two vessels (M/V Free Impala and M/V Free Neptune) as well as all assignments in favor of NBG will be released. The closing of such transaction is contingent upon the Company being able to raise capital towards making such payment.

Loan Covenants

As of March 31, 2014, the Company was in breach of certain of its financial covenants for its loan agreement with NBG, including the loan-to-value ratio, interest cover ratio, minimum liquidity requirements and leverage ratio. As well, as of March 31, 2014 the Company was in breach of the interest coverage and the consolidated leverage ratiofor its loan agreement with Credit Suisse.Thus, in accordance with guidance related to classification of obligations that are callable by the creditor, the Company has classified all of the related long-term debt amounting to $59,687 as current at March 31, 2014.

Credit Suisse Sixth Supplemental Agreement:

Value to loan ratio:

(a)

during the period commencing on April 1, 2014 and ending on September 30, 2014, the aggregate fair market value of the financed vessels must not be less than 115% of the outstanding loan balance at such time plus the swap exposure minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts of the Company opened with the bank;

(b)

during the period commencing on October 1, 2014 and ending on March 31, 2015, the aggregate fair market value of the financed vessels must not be less than 120% of the outstanding loan balance at such time plus the swap exposure minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts of the Company opened with the bank; and

(c)

after March 31, 2015, the aggregate fair market value of the financed vessels must not be less than 135% of the outstanding loan balance at such time plus the swap exposure minus the aggregate amount, if any, standing to the credit of the operating accounts, the retention account and any bank accounts of the Company opened with the bank;

Consolidated leverage ratio: at the end of each accounting period falling between January 1, 2014 and December 31, 2015 (both inclusive), the ratio of funded debt to shareholders’ equity shall not be greater than 2.5:1.0;

Liquidity: it maintains (on a consolidated basis) on each day falling after June 30, 2014, cash in an amount equal to the higher of $2,500 and $500 per vessel; and

Interest coverage ratio: the ratio of EBITDA to Interest Expense at the end of each accounting period falling between January 1, 2013 and December 31, 2013 (both inclusive), shall not be less than 2.0:1.0; falling between January 1, 2014 and December 31, 2014 (both inclusive), shall not be less than 3.5:1.0; and falling between January 1, 2015 and December 31, 2015 (both inclusive), shall not be less than 4.5:1.0.

NBG (fka FBB) loan agreement:

Average corporate liquidity: the Company is required to maintain an average corporate liquidity of at least $3,000;

Leverage ratio: the corporate guarantor’s leverage ratio shall not at any time exceed 55%;

F-16

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

Ratio of EBITDA to net interest expense shall not be less than 3; and

Value to loan ratio: the fair market value of the financed vessels shall be at least (a) 115% for the period July 1, 2010 to June 30, 2011 and (b) 125% thereafter.

The covenants described above are tested annually on December 31st.

9.	Commitments and Contingencies

The following table summarizes our contractual obligations and their maturity dates as of March 31, 2014:

	Payments Due by Period
(Dollars in thousands)	Total		Less than 1 year		2- year		3- year		4- year		5- year		More than 5 years
	(U.S. dollars in thousands)

Long-term debt	$	59,687	$	59,687	$	-	$	-	$	-	$	-	$	-

Interest on variable-rate debt		1,207		1,207		-		-		-		-		-

Services fees to the Manager		7,364		1,635		1,635		1,635		1,635		824		-

Management fees to the Manager		15,919		1,366		1,366		1,366		1,366		1,366		9,089

Total obligations	$	84,177	$	63,895	$	3,001	$	3,001	$	3,001	$	2,190	$	9,089

The above table does not include our share of the monthly rental expenses for our offices of approximately 8.7 Euro (in thousands).

Claims

Various claims, suits, and complaints, including those involving government regulations and product liability, arise in the ordinary course of the shipping business. In addition, losses may arise from disputes with charterers, agents, insurance and other claims with suppliers relating to the operations of the Company’s vessels. Currently, management is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The Company is a member of a protection and indemnity association, or P&I Club that is a member of the International Group of P&I Clubs, which covers its third party liabilities in connection with its shipping activities. A member of a P&I Club that is a member of the International Group is typically subject to possible supplemental amounts or calls, payable to its P&I Club based on its claim records as well as the claim records of all other members of the individual associations, and members of the International Group. Although there is no cap on its liability exposure under this arrangement, historically supplemental calls have ranged from 25%-40% of the Company’s annual insurance premiums, and in no year have exceeded $1 million. The Company accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able to reasonably estimate the probable exposure. Currently, management is not aware of any such claims or contingent liabilities, which should be disclosed, or for which a provision should be established in the accompanying consolidated financial statements. The Company’s protection and indemnity (P&I) insurance coverage for pollution is $1 billion per vessel.

F-17

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

The M/V Free Goddess was hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound. On October 11, 2012, we announced that all 21 crew members of the M/V Free Goddess were reported safe and well after the vessel’s release by the pirates. At the time of the hijacking the vessel was on time charter in laden condition. Since the release from the pirates, the vessel has been laying at the port of Salalah, Oman, undertaking repairs funded mostly by Insurers. The repairs of the vessel were completed, and notice of readiness was tendered to her Charterers for the resumption of the voyage. The Charterers repudiated the Charter and we accepted Charterers' repudiation and terminated the fixture reserving our right to claim damages and other amounts due to us. The Tribunal previously constituted will hear our claim for (amongst others) unpaid hire and damages from the Charterers. In the meantime, cargo interests have commenced proceedings under the Bills of Lading although they have not yet particularized their claims. At the same time, all options are being explored for the commercial resolution of the situation arising from Charterers refusal to honor their obligations, including the further contribution by Insurers and cargo interests towards the completion of the voyage and recovery of amounts due. The Company is working for a diligent solution in order to complete the voyage without further delays. In case no commercially reasonable solution may be found the company will explore its strategic alternatives with respect to this vessel.

Pursuant to a charterparty dated November 8, 2012, the Company chartered the M/V Free Neptune to Tramp Maritime Enterprises Ltd. ("TME"). TME failed to pay outstanding hire in the amount of US$356. On April 2, 2013, the Company therefore commenced arbitration proceedings against TME under the charterparty.

On December 14, 2012, while the M/V Free Neptune was at Singapore, bunkers were supplied to the vessel through O.W. Bunker Malta Limited. The bunkers were ordered by TME but were not paid for. OW Bunker is now pursuing the Company for their claim amount which currently stands at $542 inclusive of interest as per their terms & conditions. The Company intends to vigorously defend this claim on the basis that it did not contract with O.W. Bunker Malta Limited (TME did) and is therefore not responsible for this amount. TME were responsible for bunkers as time charterers pursuant to the terms of the charterparty. The Company will claim an indemnity from TME with regard to any exposure which it may face with regard to this claim.

On June 5, 2013, the M/V Free Neptune, while at anchorage off Port Nouakchott, Mauritania, was stricken by the general cargo vessel Dazi Yun. Severe collision damage incurred at the contact side shell point in way of cargo hold No. 2 starboard side and the cargo hold No. 2 flooded. No pollution or crew injuries were reported. Nominated salvage team delivered the vessel to a shipyard in Turkey for repairs on September 2, 2013. The vessel was dry-docked in the yard where she completed all necessary maintenance and repairs and returned to service. The costs incurred are claimable from hull and machinery underwriters.

The outstanding balance of the Company’s claims as of March 31, 2014 stands at $1,996 related to Company’s insurance claims for vessel incidents arising in the ordinary course of business.

10.

Loss per Share

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period, as adjusted to reflect the reverse stock split effective December 2, 2013. The Company entered on November 3, 2013 into a securities purchase agreement (the “Purchase Agreement”), with Crede, for an aggregate investment of $10,000 through the private placement of two series of zero-dividend convertible preferred stock (collectively, the “Preferred Stock”) and Series A Warrants and Series B Warrants (collectively, the “Warrants”), subject to certain terms and conditions (Note). The computation of the dilutive common shares outstanding does not include 5,000,000 Series A Warrants and 2,500,000 Series B Warrants, as the average stock price during the three months ended March 31, 2014 was less than their exercise price, thus resulting in an antidilutive effect. The potential proceeds to the Company of the 5,000,000 Series A and 2,500,000 Series B exercisable warrants as of March 31, 2014 amounts to $19,500.

F-18

The components of the denominator for the calculation of basic loss per share and diluted loss per share for the three months ended March 31, 2014 and 2013, respectively, are as follows:

	For the three months Ended			For the three months Ended
	March 31, 2014			March 31, 2013
Numerator:
Net loss — basic and diluted	$	(10,551	)	$	(4,395	)

Basic loss per share denominator:
Weighted average common shares outstanding		25,603,636			490,041

Diluted loss per share denominator:
Weighted average common shares outstanding		25,603,636			490,041

Dilutive common shares:
Options		—			—
Warrants		—			—
Restricted shares		—			—

Dilutive effect		—			—

Weighted average common shares — diluted		25,603,636			490,041

Basic loss per common share	$	(0.41	)	$	(8.97	)
Diluted loss per common share	$	(0.41	)	$	(8.97	)

11.

Reverse stock split

Effective February 14, 2013, the Company effectuated a reverse stock split at a ratio of 1 for 10. The reverse stock split consolidated 10 shares of common stock into one share of common stock at a par value of $0.001 per share. Effective December 2, 2013, the Company effectuated a reverse stock split at a ratio of 1 for 5. The reverse stock split consolidated five shares of common stock into one share of common stock at a par value of $0.001 per share. As a result of the reverse stock split, the number of outstanding common shares reduced at that time from 94,324,530 to 18,864,906 subject to adjustment for fractional shares. The reverse stock split did not affect any shareholder’s ownership percentage of the Company’s common shares, except to the limited extent that the reverse stock split resulted in any shareholder owning a fractional share. Fractional shares of common stock were rounded up to the nearest whole share.

12.

Stock Incentive Plan

On December 31, 2009, the Company’s Board of Directors awarded 5,100 restricted shares, as adjusted to reflect the reverse stock split effective December 2, 2013, to its non-executive directors, executive officers and certain of Manager’s employees. The remaining unvested restricted shares amounted to 1,000 were vested on December 31, 2013. For the three months ended March 31, 2014, all the stock based compensation expense in relation to the restricted shares has been recognized.

F-19

13.

Shareholders’ Equity

On January 15, 2013, the Company issued 27,500 shares of our common stock (the “Settlement Shares”) to Hanover in connection with a stipulation of settlement (the “First Settlement Agreement”) of an outstanding litigation claim. The First Settlement Agreement provided that the Settlement Shares would be subject to adjustment on the 36th trading day following the date on which the Settlement Shares were initially issued to reflect the intention of the parties that the total number of shares of Common Stock to be issued to Hanover pursuant to the First Settlement Agreement be based upon a specified discount to the trading volume weighted average price (the “VWAP”) of the Common Stock for a specified period of time. Specifically, the total number of shares of Common Stock to be issued to Hanover pursuant to the First Settlement Agreement shall be equal to the quotient obtained by dividing (i) $305,485.59 by (ii) 70% of the VWAP of the Common Stock over the 35-trading day period following the date of issuance of the Settlement Shares (the “True-Up Period”), rounded up to the nearest whole share (the “VWAP Shares”). The First Settlement Agreement further provided that if, at any time and from time to time during the True-Up Period, Hanover reasonably believed that the total number of Settlement Shares previously issued to Hanover were less than the total number of VWAP Shares to be issued to Hanover or its designee in connection with the First Settlement Agreement, Hanover could, in its sole discretion, deliver one or more written notices to the Company, at any time and from time to time during the True-Up Period, requesting that a specified number of additional shares of Common Stock promptly be issued and delivered to Hanover or its designee (subject to the limitations described below), and the Company would upon such request reserve and issue the number of additional shares of Common Stock requested to be so issued and delivered in the notice (all of which additional shares shall be considered “Settlement Shares” for purposes of the First Settlement Agreement).

On January 18, 2013, the Company delivered an additional 8,000 shares to Hanover and on January 29, 2013, delivered an additional 1,657 shares to Hanover. At the end of the True-Up Period, (i) if the number of VWAP Shares exceeds the number of Settlement Shares issued, then the Company would issue to Hanover or its designee additional shares of Common Stock equal to the difference between the number of VWAP Shares and the number of Settlement Shares, and (ii) if the number of VWAP Shares were less than the number of Settlement Shares, then Hanover or its designee will return to the Company for cancellation that number of shares of Common Stock equal to the difference between the number of VWAP Shares and the number of Settlement Shares.

On January 31, 2013, an amendment to the First Settlement Agreement reduced the True-Up Period from 35 trading days following the date the Initial Settlement Shares were issued to four trading days following the date the Initial Settlement Shares were issued. As a result, the True-Up Period expired on January 22, 2013. Accordingly, the total number of shares of Common Stock issuable to Hanover pursuant to the First Settlement Agreement, as amended, was 37,157, which number is equal to the quotient obtained by dividing (i) $305,485.59 by (ii) 70% of the VWAP of the Common Stock over the four-trading day period following the date of issuance of the Initial Settlement Shares, rounded up to the nearest whole share. All of such 37,157 shares of Common Stock had been issued to Hanover prior to the amendment of the First Settlement Agreement. Accordingly, no further shares of Common Stock are issuable to Hanover pursuant to the First Settlement Agreement, as amended, and Hanover is not required to return any shares of Common Stock to the Company for cancellation pursuant thereto.

The First Settlement Agreement provided that in no event should the number of shares of Common Stock issued to Hanover or its designee in connection with the First Settlement Agreement, when aggregated with all other shares of Common Stock then beneficially owned by Hanover and its affiliates (as calculated pursuant to Section 13(d) of the Exchange, and the rules and regulations thereunder, result in the beneficial ownership by Hanover and its affiliates (as calculated pursuant to Section 13(d) of the Exchange Act and the rules and regulations thereunder) at any time of more than 9.99% of the Common Stock.

F-20

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

On January 24, 2013, the Company entered into an Investment Agreement with Granite (the “Granite Agreement”), pursuant to which, for a 36-month period, the Company had the right to sell up to 79,159 shares of its common stock to Granite. The Granite Agreement entitled the Company to sell and obligated Granite to purchase, from time to time over a period of 36 months (the “Open Period”), 79,159 shares of the Company’s common stock, subject to conditions the Company must had satisfied as set forth in the Granite Agreement. For each share of common stock purchased under the Granite Agreement, Granite would pay 98% of the lowest daily volume weighted average price during the pricing period, which was the five consecutive trading days commencing on the day the Company delivered a put notice to Granite. Each such put could be for an amount not to exceed the greater of $500 or 200% of the average daily trading volume of our common stock for the three consecutive trading days prior to the put notice date, multiplied by the average of the three daily closing prices immediately preceding the put notice date. In no event, however, should the number of shares of common stock issuable to Granite pursuant to a put cause the aggregate number of shares of common stock beneficially owned by Granite and its affiliates to exceed 9.99% of the outstanding common stock at the time.

On February 13, 2013, the Company issued 37,000 shares of our common stock (the “Second Settlement Shares”) to Hanover in connection with a second stipulation of settlement (the “Second Settlement Agreement”) of an outstanding litigation claim. The Second Settlement Agreement provides that the Second Settlement Shares would be subject to adjustment on the 36th trading day following the date on which the Second Settlement Shares were initially issued to reflect the intention of the parties that the total number of shares of Common Stock to be issued to Hanover pursuant to the Second Settlement Agreement be based upon a specified discount to the VWAP of the Common Stock for a specified period of time. Specifically, the total number of shares of Common Stock to be issued to Hanover pursuant to the Second Settlement Agreement should be equal to the quotient obtained by dividing (i) $740,651.57 by (ii) 75% of the VWAP of the Common Stock over the 35-trading day period following the date of issuance of the Second Settlement Shares (the “Second True-Up Period”), rounded up to the nearest whole share (the “Second VWAP Shares”). The Second Settlement Agreement further provided that if, at any time and from time to time during the Second True-Up Period, Hanover reasonably believed that the total number of Second Settlement Shares previously issued to Hanover were less than the total number of Second VWAP Shares to be issued to Hanover or its designee in connection with the Second Settlement Agreement, Hanover could, in its sole discretion, deliver one or more written notices to the Company, at any time and from time to time during the Second True-Up Period, requesting that a specified number of additional shares of Common Stock promptly be issued and delivered to Hanover or its designee, and the Company would upon such request reserve and issue the number of additional shares of Common Stock requested to be so issued and delivered in the notice (all of which additional shares should be considered “Second Settlement Shares” for purposes of the Second Settlement Agreement). On February 19, 2013, the Company issued and delivered to Hanover 18,000 additional Second Settlement Shares, on February 25, 2013, the Company issued and delivered to Hanover another 18,000 additional Second Settlement Shares, on February 26, 2013 the Company issued and delivered to Hanover another 18,000 additional Second Settlement Shares, on February 27, 2013, the Company issued and delivered to Hanover another 20,000 additional Second Settlement Shares, on February 28, 2013, the Company issued and delivered to Hanover another 20,000 additional Second Settlement Shares and on March 4, 2013, the Company issued and delivered to Hanover another 20,000 additional Second Settlement Shares. At the end of the Second True-Up Period, on March 6, 2013, the Company issued and delivered 6,351 additional Second Settlement Shares to Hanover.

On February 15, 2013, the Company entered into a termination agreement of the Standby Equity Distribution Agreement, or SEDA with YA Global. As a result, the outstanding fees of $10 owed to YA Global under the SEDA were written off.

On February 19, 2013, the Company issued the press release announcing the approval of the transfer of the listing of the Company’s common stock to The NASDAQ Capital Market, the granting of the additional extension to comply with the minimum bid price requirement and the cancellation of the NASDAQ appeal hearing.

F-21

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

On February 28, 2013, pursuant to the approval of the Company’s Board of Directors at its January 18, 2013 meeting, the Company issued 128,328 shares of its common stock to the Manager in payment of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 and 8,382 shares of its common stock to its non-executive directors in payment of $48 in unpaid Board fees for the fourth quarter of 2012.

On March 14, 2013, the Company issued to YA Global 14,038 shares of its common stock for final settlement of $63 of outstanding principal of Note and accrued unpaid interest due.

On January 3, 2014, the Company issued to Crede 1,500,000 shares of common stock upon conversion of 30,000 shares of Series C Preferred Stock.

On January 8, 2014, the Company issued to Crede 1,300,000 shares of common stock upon conversion of the remaining 26,000 shares of Series C Preferred Stock.

In February 2014, the Company issued 121,176 shares of common stock upon conversion of convertible debt amounting to $129 and accrued interest of $5 (Note 7).

Common Stock Dividends

During the three months ended March 31, 2014 and 2013, the Company did not declare or pay any dividends.

14.

Subsequent Events

On April 9, 2014 we filed a Registered Direct Public Offering with the SEC in the form of F-1, which was subsequently amended on May 1, 2014 (F-1/A1), May 19, 2014 (F-1/A2) and May 21, 2014 (F-1A/3), offering 250,000 units at a purchase price of $100 per unit, with each unit consisting of one share of our Series D Convertible Preferred Stock, at par value $0.001 per share, and Series C Warrants to purchase 200% of the shares of common stock underlying the Series D Preferred Stock, at an exercise price of 130% of the Series D Preferred Stock conversion price on the initial issuance date of the Series D Preferred Stock, rounded to the nearest cent.

Each share of Series D Preferred Stock to be convertible into a number of shares of common stock equal to $100 divided by the conversion price in effect at the time of conversion. The initial conversion price of each share of Series D Preferred Stock is to be the lesser of (i) $1.09 (the closing bid price of our common stock on May 16, 2014) and (ii) the greater of (1) the closing bid price of our common stock on the date immediately prior to the closing of this offering (which was expected to be May 28, 2014) and (2) $0.981. At the initial conversion price of $1.09 each share of Series D Preferred Stock would be convertible into 92 shares of common stock (rounding up to the nearest whole share) and the warrants included in each unit would be exercisable for 184 shares of common stock at an initial exercise price of $1.42 per share. The Series D Preferred Stock and Series C Warrants are immediately convertible and exercisable, as applicable, subject to certain ownership limitations. The Series C Warrants will expire on the fifth anniversary of the issuance date thereof. We will use approximately $22 million of the net proceeds to eliminate all of our debt obligations to Credit Suisse and we will no longer owe any amounts to the Bank and the Bank will release any and all liens it may have on the assets of the Company and our subsidiaries. Any remaining proceeds will be used for general corporate purposes.

On May 28, 2014 the Company closed on the $25,000 offering of Series D Convertible Preferred Stock and Series C Warrants, following the execution of a Placement Agent agreement with Dawson James Securities, Inc. on May 21, 2014. The securities sold were 250,000 units, at a purchase price of $100 per unit, with each unit consisting of one share of the Company’s Series D Convertible Preferred Stock and 184 Series C Warrants, exercisable for five years at an initial price of $1.42 per share. Each share of Series D Preferred Stock sold has a stated value of $100 and is initially convertible into 92 shares of common stock at the initial conversion price of $1.09.

F-22

FREESEAS INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amounts are expressed in thousands of United States dollars, except for share data and per share data)

On May 28, 2014, we concluded the agreement with Credit Suisse to pay approximately $22,636 from the offering proceeds to eliminate all of our debt obligations owed to Credit Suisse, amounting to $37,636 as of that date, and be discharged and released from any and all payment obligations (actual and contingent) owed and payable by the Company in respect of all amounts of principal, interest thereon, fees, costs and expenses under the credit Facility Agreement and Master Swap Agreement, both dated December 24, 2007 (as amended and/or supplemented and/or restated from time to time). Under the terms of this agreement Credit Suisse undertook, upon receipt of such payment, to cancel all the remaining debt of $15,000 owed by the Company and to release (i) any and all liens it has on the assets of the Company and (ii) all corporate guarantees received from the Company’s subsidiaries.

On May 30, 2014 having paid the amount of $22,636 to Credit Suisse, as per the agreement above, we received the relative Waiver of Debt and Deed of Release and Reassignment, which included the release of all first preferred mortgages, general assignments of collateral and charter assignments (relating to our vessels M/V Free Jupiter, M/V Free Hero and M/V Free Goddess) together with each vessel’s release and reassignment of insurance, as well as the release of all first priority account pledges and guarantee agreements executed by our subsidiaries owning these vessels.

As of June 20, 2014 we have received notices of conversion from various investors totaling 110,940 shares of Series D Convertible Preferred Stock and in response thereto we have issued 10,178,052 shares of common stock at the initial conversion price of $1.09.

F-23

EX-99.2 3 v382604_ex99-2.htm EXHIBIT 99.2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). These forward-looking statements include information about our possible or assumed future results of operations or our performance. Words such as “expects,” “intends,” “plans,” “believes,” “anticipates,” “estimates,” “projects”, “forecasts”, “may”, “should” and variations of such words and similar expressions are intended to identify the forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to be correct. These statements involve known and unknown risks and are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements.

Forward-looking statements include statements regarding:

our future operating or financial results;

our financial condition and liquidity, including our ability to comply with our loan covenants, to repay our indebtedness and to continue as a going concern;

potential liability from future litigation and incidents involving our vessels, including seizures by pirates, and our expected recoveries of claims under our insurance policies;

our ability to comply with the continued listing standards on the exchange or trading market on which our common stock is listed for trading;

our ability to find employment for our vessels;

drybulk shipping industry trends, including charter rates and factors affecting vessel supply and demand;

business strategy, areas of possible expansion, and expected capital spending or operating expenses and general and administrative expenses;

the useful lives and value of our vessels;

our ability to receive in full or partially our accounts receivable and insurance claims;

greater than anticipated levels of drybulk vessel new building orders or lower than anticipated rates of drybulk vessel scrapping;

changes in the cost of other modes of bulk commodity transportation;

availability of crew, number of off-hire days, dry-docking requirements and insurance costs;

changes in condition of our vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated dry-docking costs);

competition in the seaborne transportation industry;

global and regional economic and political conditions;

fluctuations in currencies and interest rates;

our ability to leverage to our advantage the relationships and reputation Free Bulkers S.A., our Manager, has in the drybulk shipping industry;

the overall health and condition of the U.S. and global financial markets;

changes in seaborne and other transportation patterns;

changes in governmental rules and regulations or actions taken by regulatory authorities;

our ability to pay dividends in the future; and

acts of terrorism and other hostilities.

We undertake no obligation to publicly update or revise any forward-looking statements contained in this report to reflect any change in our expectations with respect to such statements or any change in events, conditions or circumstances on which any statement is based.

FreeSeas Inc. is a Republic of the Marshall Islands company that is referred to in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, together with its subsidiaries, as “FreeSeas Inc.,” “FreeSeas,” “the Company,” "the Group," “we,” “us,” or “our.” All references to dollar amounts in this report are expressed in thousands of U.S. dollars, unless otherwise stated.

Overview

We are an international drybulk shipping company incorporated under the laws of the Republic of the Marshall Islands with principal executive offices in Athens, Greece. Our fleet currently consists of five Handysize vessels and one Handymax vessel that carry a variety of drybulk commodities, including iron ore, grain and coal, which are referred to as “major bulks,” as well as bauxite, phosphate, fertilizers, steel products, cement, sugar and rice, or “minor bulks.” As of June 20, 2014, the aggregate dwt of our operational fleet is approximately 173,089 dwt and the average age of our fleet is 16.8 years.

Our investment and operational focus has been in the Handysize sector, which is generally defined as less than 40,000 dwt of carrying capacity and the Handymax sector which is generally defined as between 40,000 dwt and 60,000 dwt. Handysize and Handymax vessels are, we believe, more versatile in the types of cargoes that they can carry and trade routes they can follow, and offer less volatile returns than larger vessel classes. We believe this segment also offers better demand and supply demographics than other drybulk asset classes. Due to the very adverse charter rate environment of the latest shipping cycle values of larger vessels have dropped to levels that constitute buying opportunities. We shall explore the possibility to expand into other segments of the dry-bulk sector.

We have contracted the management of our fleet to our Manager, Free Bulkers S.A., an entity controlled by Ion G. Varouxakis, our Chairman, President and Chief Executive Officer, and one of our principal shareholders. Our Manager provides technical management of our fleet, commercial management of our fleet, financial reporting and accounting services and office space. While the Manager is responsible for finding and arranging charters for our vessels, the final decision to charter our vessels remains with us.

Recent Developments

Employment and Charter Rates

The following table details the vessels in our fleet as of June 20, 2014:

Vessel Name	Type	Built	Dwt		Employment
M/V Free Jupiter	Handymax	2002		47,777	About 70 - day time charter trip at $8,350 per day through April – June 2014
M/V Free Maverick	Handysize	1998		23,994	About 25-30 - day time charter trip at $3,000 per day, thereafter $6,750 per day if trip exceeds 30 days
M/V Free Impala	Handysize	1997		24,111	Laid-up
M/V Free Neptune	Handysize	1996		30,838	About 40 - 45 day time charter trip at $6,500 per day through early June 2014, thereafter, in case this trip exceeds 45 days, at $10,500 per day
M/V Free Hero	Handysize	1995		24,318	About 25-30 day time charter trip at $7,400 per day through late June 2014
M/V Free Goddess	Handysize	1995		22,051	See note below

The M/V Free Goddess was hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound. On October 11, 2012, we announced that all 21 crew members of the M/V Free Goddess were reported safe and well after the vessel’s release by the pirates. At the time of the hijacking, the vessel was on time charter in laden condition. Since the release from the pirates, the vessel has been laying at the port of Salalah, Oman, undertaking repairs funded mostly by insurers. The repairs of the vessel were completed, and notice of readiness was tendered to her Charterers for the resumption of the voyage. The Charterers repudiated the Charter and we accepted Charterers' repudiation and terminated the fixture reserving our right to claim damages and other amounts due to us. The Tribunal previously constituted will hear our claim for (amongst others) unpaid hire and damages from the Charterers. In the meantime, cargo interests have commenced proceedings under the Bills of Lading although they have not yet particularized their claims. At the same time, all options are being explored for the commercial resolution of the situation arising from Charterers refusal to honor their obligations, including the further contribution by insurers and cargo interests towards the completion of the voyage and recovery of amounts due. The Company is working for a diligent solution in order to complete the voyage without further delays. In case no commercially reasonable solution may be found, the Company will explore its strategic alternatives with respect to this vessel.

Our Fleet-Illustrative Comparison of Possible Excess of Carrying Value over Estimated Charter-Free Market Value of Certain Vessels

In “-Critical Accounting Policies-Impairment of Long Lived Assets,” which can be found in the Company's consolidated financial statements included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on March 24, 2014 (the "Consolidated Financial Statements for the year ended December 31, 2013"), we discuss our policy for impairing the carrying values of our vessels. Historically, the market values of vessels have experienced volatility, which from time to time may be substantial. As a result, the charter-free market value, or basic market value, of certain of our vessels may have declined below those vessels’ carrying value, even though we would not impair those vessels’ carrying value under our accounting impairment policy, due to our belief that future undiscounted cash flows expected to be earned by such vessels over their operating lives would exceed such vessels’ carrying amounts. Based on: (i) the carrying value of each of our vessels as of March 31, 2014 and (ii) what we believe the charter free market value of each of our vessels was as of March 31, 2014, the aggregate carrying value of two of our vessels (the M/V Free Goddess and the M/V Free Maverick ) in our fleet as of March 31, 2014 exceeded their aggregate charter-free market value by approximately $29,300, as noted in the table below (which includes a comparative analysis of how the carrying values of our vessels compare to the fair market value of such vessels as of each balance sheet date presented in our accompanying unaudited interim condensed consolidated financial statements). This aggregate difference represents the approximate analysis of the amount by which we believe we would have to reduce our net income if we sold all of such vessels (at March 31, 2014, on industry standard terms, in cash transactions, and to a willing buyer where we were not under any compulsion to sell, and where the buyer was not under any compulsion to buy. For purposes of this calculation, we have assumed that these vessels would be sold at a price that reflects our estimate of their charter-free market values as of March 31, 2014).

Our estimates of charter-free market value assume that our vessels are all in good and seaworthy condition without need for repair and if inspected would be certified in class without notations of any kind. Our estimates are based on information available from various industry sources, including:

•

reports by industry analysts and data providers that focus on our industry and related dynamics affecting vessel values;

•

news and industry reports of similar vessel sales;

•

news and industry reports of sales of vessels that are not similar to our vessels where we have made certain adjustments in an attempt to derive information that can be used as part of our estimates;

•

approximate market values for our vessels or similar vessels that we have received from shipbrokers, whether solicited or unsolicited, or that shipbrokers have generally disseminated;

•

offers that we may have received from potential purchasers of our vessels; and

•

vessel sale prices and values of which we are aware through both formal and informal communications with shipowners, shipbrokers, industry analysts and various other shipping industry participants and observers.

As we obtain information from various industry and other sources, our estimates of basic market value are inherently uncertain. In addition, vessel values are highly volatile; as such, our estimates may not be indicative of the current or future charter-free market value of our vessels or prices that we could achieve if we were to sell them. The market values of our vessels have declined and may further decrease, and we may incur losses when we sell vessels or we may be required to write down their carrying value, which may adversely affect our earnings”.

Drybulk Vessels	DWT		Year Built	Date of Acquisition	Purchase Price (in million USD)		Carrying Value as of 3/31/2014 (in million USD)		Fair Market Value as of 3/31/2014 (in million USD)		Carrying Value as of 12/31/2013 (in million USD)		Fair Market Value as of 12/31/2013 (in million USD)
Free Hero		24,318	1995	07/03/07	$	25.3	$	4.6	$	5.5	$	4.7	$	5.5
Free Jupiter		47,777	2002	09/05/07	$	47	$	12.8	$	14.2	$	12.9	$	14.2
Free Goddess		22,051	1995	10/30/07	$	25.2	$	15.6	$	5.3	$	15.9	$	5.3
Free Impala		24,111	1997	04/02/08	$	37.5	$	4	$	4.8	$	4.1	$	4.8
Free Maverick		23,994	1998	09/01/08	$	39.6	$	26	$	7	$	26.6	$	7
Free Neptune		30,838	1996	08/25/09	$	11	$	7.5	$	8.7	$	7.6	$	8.7
Total		173,089			$	185.6	$	70.5	$	45.5	$	71.8	$	45.5

Important Measures for Analyzing Results of Operations

We believe that the important measures for analyzing trends in the results of our operations consist of the following:

•

Ownership days. We define ownership days as the total number of calendar days in a period during which each vessel in the fleet was owned by us, including days of vessels in lay-up. Ownership days are an indicator of the size of the fleet over a period and affect both the amount of revenues earned and the amount of expenses that we incur during that period.

•

Available days. We define available days as the number of ownership days less the aggregate number of days that our vessels are off-hire due to major repairs, dry-dockings or special or intermediate surveys or days of vessels in lay-up. The shipping industry uses available days to measure the number of ownership days in a period during which vessels are actually capable of generating revenues.

•

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

•

Fleet utilization. We calculate fleet utilization by dividing the number of operating days during a period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company’s efficiency properly operating its vessels and minimizing the amount of days that its vessels are off-hire for any unforeseen reason.

•

Off-hire. The period a vessel is unable to perform the services for which it is required under a charter. Off-hire periods typically include days spent undergoing repairs and dry-docking, whether or not scheduled.

•

Time charter. A time charter is a contract for the use of a vessel for a specific period of time during which the charterer pays substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses. The vessel owner pays the vessel operating expenses, which include crew wages, insurance, technical maintenance costs, spares, stores and supplies and commissions on gross voyage revenues. Time charter rates are usually fixed during the term of the charter. Prevailing time charter rates do fluctuate on a seasonal and year-to-year basis and may be substantially higher or lower from a prior time charter agreement when the subject vessel is seeking to renew the time charter agreement with the existing charterer or enter into a new time charter agreement with another charterer. Fluctuations in time charter rates are influenced by changes in spot charter rates.

•

Voyage charter. A voyage charter is an agreement to charter the vessel for an agreed per-ton amount of freight from specified loading port(s) to specified discharge port(s). In contrast to a time charter, the vessel owner is required to pay substantially all of the voyage expenses, including port costs, canal charges and bunkers expenses, in addition to the vessel operating expenses.

•

Time charter equivalent (TCE). The time charter equivalent, or TCE, equals voyage revenues minus voyage expenses divided by the number of operating days during the relevant time period, including the trip to the loading port. TCE is a non-GAAP, standard seaborne transportation industry performance measure used primarily to compare period-to-period changes in a seaborne transportation company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed during a specific period.

•

Adjusted EBITDA represents net loss before taxes, depreciation and amortization, (gain)/loss on derivative instruments, stock-based compensation expense, interest and finance cost net, provision and write-offs of insurance claims and bad debts and loss on settlement of liability through stock issuance. Under the laws of the Marshall Islands, we are not subject to tax on international shipping income. However, we are subject to registration and tonnage taxes, which have been included in vessel operating expenses. Accordingly, no adjustment for taxes has been made for purposes of calculating Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by U.S. GAAP, and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies. The shipping industry is capital intensive and may involve significant financing costs. The Company uses Adjusted EBITDA because it presents useful information to management regarding the Company’s ability to service and/or incur indebtedness by excluding items that we do not believe are indicative of our core operating performance, and therefore is an alternative measure of our performance. The Company also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Adjusted EBITDA has limitations as an analytical tool, however, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP. Some of these limitations are: (i) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such capital expenditures.

Performance Indicators

(All amounts in tables in thousands of U.S. dollars except for fleet data and average daily results)

The following performance measures were derived from our unaudited condensed consolidated financial statements for the three months ended March 31, 2014 and 2013 included elsewhere in this analysis. The historical data included below is not necessarily indicative of our future performance.

	Three Months Ended
	March 31,
	2014			2013

Adjusted EBITDA (1)	$	(5,257	)	$	(927	)
Fleet Data:
Average number of vessels (2)		6.83			7
Ownership days (3)		587			630
Available days (4)		135			630
Operating days (5)		111			538
Fleet utilization (6)		82.2	%		85.4	%
Average Daily Results:
Average TCE rate (7)	$	1,919		$	5,007
Vessel operating expenses (8)		6,990			3,365
Management fees (9)		714			746
General and administrative expenses (10)		1,482			875
Total vessel operating expenses (11)		7,704			4,111

(1)

Adjusted EBITDA represents net loss before taxes, depreciation and amortization, (gain)/loss on derivative instruments, stock-based compensation expense, interest and finance cost net, provision and write-offs of insurance claims and bad debts, loss on settlement of liability through stock issuance and dry-docking costs. In the period reported herein ended March 31, 2014, an accounting policy change with respect to the Accounting for Special Survey and Dry-docking Costs has adversely affected the Adjusted EBITDA calculation. Effective as of January 1, 2014, the Company follows the direct expense method of accounting for special survey and dry-docking costs whereby such costs are expensed in the period incurred and not amortized until the next dry-docking. Under the laws of the Marshall Islands, we are not subject to tax on international shipping income. However, we are subject to registration and tonnage taxes, which have been included in vessel operating expenses. Accordingly, no adjustment for taxes has been made for purposes of calculating Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by U.S. GAAP, and our calculation of Adjusted EBITDA may not be comparable to that reported by other companies. The shipping industry is capital intensive and may involve significant financing costs. The Company uses Adjusted EBITDA because it presents useful information to management regarding the Company’s ability to service and/or incur indebtedness by excluding items that we do not believe are indicative of our core operating performance, and therefore is an alternative measure of our performance. The Company also believes that Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Adjusted EBITDA has limitations as an analytical tool, however, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP. Some of these limitations are: (i) Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such capital expenditures.

	Three Months Ended
	March 31,
	2014			2013
	( U.S. dollars in thousands)

Net loss	$	(10,551	)	$	(4,395	)
Depreciation and amortization		1,299			1,465
Stock-based compensation expense		-			11
Loss on derivative instruments		21			32
Interest and finance costs, net of interest income		579			774
Loss on settlement of liability through stock issuance		-			1,186
Provision and write-offs of insurance claims and bad debt		(29	)		-
Dry-docking costs		3,424			-
Adjusted EBITDA	$	(5,257	)	$	(927	)

(2)

Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the number of days each vessel was a part of our fleet during the period divided by the number of calendar days in the period.


	(3)	Ownership days are the total number of days in a period during which the vessels in our fleet have been owned by us, including days of vessels in lay-up. 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.

(4)

Available days are the number of ownership days less the aggregate number of days that our vessels are off-hire due to major repairs, dry dockings or special or intermediate surveys or days of vessels in lay-up. The shipping industry uses available days to measure the number of ownership days in a period during which vessels are actually capable of generating revenues.

(5)

Operating days are the number of available days less the aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels could actually generate revenues.

(6)

We calculate fleet utilization by dividing the number of our fleet’s operating days during a period by the number of available days during the period. The shipping industry uses fleet utilization to measure a company’s efficiency in properly operating its vessels and minimizing the amount of days that its vessels are off-hire for any unforeseen reasons.

(7)

TCE is a non-GAAP measure of the average daily revenue performance of a vessel on a per voyage basis. Our method of calculating TCE is consistent with industry standards and is determined by dividing operating revenues (net of voyage expenses and commissions) by operating days for the relevant time period. Voyage expenses primarily consist of port, canal and fuel costs that are unique to a particular voyage, which would otherwise be paid by the charterer under a time charter contract. TCE is a standard shipping industry performance measure used primarily to compare period-to-period changes in a shipping company’s performance despite changes in the mix of charter types (i.e., spot charters, time charters and bareboat charters) under which the vessels may be employed between the periods:

	Three Months Ended
	March 31,
	2014			2013
	(U.S. dollars in thousands, except
	per diem amounts)

Operating revenues	$	774		$	3,065
Voyage expenses and commissions		(561	)		(371	)
Net operating revenues		213			2,694
Operating days		111			538
Time charter equivalent daily rate	$	1,919		$	5,007

(8)Average daily vessel operating expenses, which includes crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs (excluding dry-docking costs) is calculated by dividing vessel operating expenses by ownership days for the relevant time periods:

	Three Months Ended
	March 31,
	2014		2013
	(U.S. dollars in thousands, except per diem amounts)

Vessel operating expenses (excluding dry-docking costs)	$	4,103	$	2,120
Ownership days		587		630
Daily vessel operating expenses	$	6,990	$	3,365

(9) Daily management fees are calculated by dividing total management fees (excluding stock-based compensation expense) paid on ships owned by ownership days for the relevant time period.

(10) Average daily general and administrative expenses are calculated by dividing general and administrative expenses (excluding stock-based compensation) by ownership days for the relevant period.

(11) Total vessel operating expenses, or TVOE, is a measurement of our total expenses associated with operating our vessels. TVOE is the sum of vessel operating expenses and management fees. Daily TVOE is calculated by dividing TVOE by fleet ownership days for the relevant time period.

Results of Operations

Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013

REVENUES - Operating revenues for the three months ended March 31, 2014 were $774 compared to $3,065 for the three months ended March 31, 2013. The decrease of $2,291 is mainly attributable to the fact that M/V Free Knight was sold on February 18, 2014 and only 1.5 vessels of our fleet were operative during the first quarter of 2014 primarily due to extensive dry-docking services for the M/V Free Hero, M/V Free Maverick and M/V Free Neptune; as a result the operating days of our fleet was reduced to 111 days compared to 538 days in the same period of 2013.

VOYAGE EXPENSES AND COMMISSIONS - Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra insurance and various expenses, were $508 for the three months ended March 31, 2014, as compared to $175 for the three months ended March 31, 2013. The variance in voyage expenses reflects mainly the increased replenishment of bunkers to the owners’ account during the three months ended March 31, 2014. For the three months ended March 31, 2014, commissions charged amounted to $53, as compared to $196 for the three months ended March 31, 2013. The decrease in commissions is due to the substantial decrease of operating revenues for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The commission fees represent commissions paid to the Manager, other affiliated companies associated with family members of our CEO, and unaffiliated third parties relating to vessels chartered during the relevant periods.

OPERATING EXPENSES - Vessel operating expenses, which include dry-docking costs, crew cost, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, totaled $7,527 in the three months ended March 31, 2014, as compared to $2,120 in the three months ended March 31, 2013. The increase in operating expenses was due to the change of the accounting policy for special survey and dry-docking costs, whereby costs of approximately $3,500 were expensed in the period incurred as opposed to being amortized until the next dry-docking. In addition, substantial maintenance repairs took place in an effort to render the vessels fully operational for income producing purposes resulting in an increase of the average daily vessel operating expenses to $6,990.

DEPRECIATION AND AMORTIZATION - For the three months ended March 31, 2014, depreciation expense was at $1,299 as compared to $1,412 in the three months ended March 31, 2013. The decrease was due to the sale of M/V Free Knight on February 18, 2014. For the three months ended March 31, 2014, amortization of deferred charges was $nil due to the change of the Company’s accounting policy for special survey and dry-docking costs described above.

MANAGEMENT FEES - Management fees for the three months ended March 31, 2014 totaled $419 as compared to $706 in the three months ended March 31, 2013. The $287 decrease in management fees reflects the reduction of vessels under management and the inclusion of $236 stock-based compensation for the issuance of 6,737 shares of the Company’s common stock to the Manager in payment of $135 in unpaid management fees due to the Manager for January 2013.

GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses, which include, among other things, legal, audit, audit-related expenses, travel expenses, communications expenses, and services fees and expenses charged by the Manager, totaled $870 as compared to $799. The increase of $71 was mainly due to one-time legal expenses related to the release from arrest of the M/V Free Maverick.

PROVISION AND WRITE-OFFS OF INSURANCE CLAIMS AND BAD DEBTS - For the three months ended March 31, 2014 and 2013, the amounts were $29 and $nil, respectively, which reflected the provision for write-off of various long outstanding accounts receivable.

VESSEL IMPAIRMENT LOSS - As of March 31, 2014, the Company performed an impairment assessment of its long-lived assets by comparing the undiscounted net operating cash flows for each vessel to its respective carrying value. The Company’s assessment concluded that no impairment existed as of March 31, 2014, as the vessels’ future undiscounted net operating cash flows exceeded their carrying value by $10,795. If the Company were to utilize the most recent five year historical average rates, three year historical average rates or one year historical average rates, would recognize an impairment loss of $19,057 (using the most recent five year historical average rates) and $29,321 (using the most recent three year or one year historical average rates).

FINANCING COSTS - Financing costs amounted to $579 for the three months ended March 31, 2014 and $774 for the three months ended March 31, 2013. The decrease of the interest and financing costs incurred for the three months ended March 31, 2014 as compared to the same period in 2013 was mainly attributed to the reduced outstanding bank debt from $89,049 to $59,687 resulting from the settlement of the Deutsche Bank loan in October 2013.

GAIN/(LOSS) ON INTEREST RATE SWAPS - The Company is exposed to interest rate fluctuations associated with its variable rate borrowings and its objective is to manage the impact of such fluctuations on earnings and cash flows of its borrowings. In this respect, the Company partially used interest rate swaps to manage net exposure to interest rate fluctuations related to its borrowings.

The Company was party of two interest rate swap agreements which were fully unwound on February 3, 2014. The change in fair value on the Company’s two interest rate swaps for the three months ended March 31, 2013 resulted in unrealized losses of $1. The settlements on the interest rate swaps for the three months ended March 31, 2014 resulted in realized losses of $21. The total of the change in fair value and settlements for the three months ended March 31, 2013 aggregate to losses of $32 which is separately reflected in “Loss on derivative instruments” in the accompanying unaudited interim condensed consolidated statements of operations.

NET LOSS - Net loss for the three months ended March 31, 2014 was $10,551 as compared to net loss of $4,395 for the three months ended March 31, 2013. The increase of the net loss for the three months ended March 31, 2014 resulted primarily from the substantial decline in revenue, as a result of the reduced number of operating days as explained above.

Liquidity and Capital Resources

The Company has historically financed its capital requirements from sales of equity securities, operating cash flows and long-term borrowings. As of March 31, 2014, its bank borrowings totaled $59,687. The Company has primarily used its funds for capital expenditures to maintain its fleet, comply with international shipping standards and environmental laws and regulations, and fund working capital requirements.

As of March 31, 2014, the Company had cash and cash equivalents of $1,508 and based on its cash flow projections for the remaining of 2014, the Company will not be able to make debt repayments scheduled as of March 31, 2014, interest payments as well as cover operating expenses and capital expenditure requirements for at least twelve months from the balance sheet date.

The Company has incurred net losses of $10,551 and $4,395 during the three months ended March 31, 2014, and 2013, respectively. As of March 31, 2014 and December 31, 2013, the Company had working capital deficits of approximately, $68,165 and $59,041, respectively. All of the above raises substantial doubt regarding the Company’s ability to continue as a going concern. Management plans to continue to provide for its capital requirements by issuing additional equity securities and debt in addition to executing their business plan. The Company’s ability to continue as a going concern is dependent upon its ability to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal course of business operations when they come due and to generate profitable operations in the future.

In 2013, the Company did not pay the interest due in an aggregate amount of $354 or interest rate swap amounts in an aggregate of $256 pursuant to the Credit Suisse facility. On January 29, 2014, the Company entered into a deferral interest payment agreement with Credit Suisse, pursuant to which the interest payment of $115 due on January 31, 2014 was deferred to February 28, 2014.On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate swap agreements with Credit Suisse. On February 28, 2014, pursuant to the deferral interest payment agreement with Credit Suisse, the Company paid the deferred interest of $115.The Company received several reservation of right letters in 2013 stating that Credit Suisse may take any actions and may exercise all of their rights and remedies referred in the security documents. On January 30, 2014, the Company and certain of its subsidiaries entered into a term sheet with Credit Suisse in order to settle its obligations arising from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit Suisse agreed to accept a cash payment of approximately $22,000 in full and final settlement of all of the Company’s obligations to the Bank and the Bank would forgive the remaining outstanding balance of approximately $15,000. Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its three vessels (M/V Free Goddess, M/V Free Hero and M/V Free Jupiter) as well as all assignments in favor of Credit Suisse will be released.

Following the closing on May 28, 2014 of the $25,000 offering of Series D Convertible Preferred Stock and Series C Warrants (see “Recent Developments” above), the Company on May 30, 2014 paid the amount of $22,636 to Credit Suisse, and received the relative Waiver of Debt and Deed of Release and Reassignment, which included the release of all first preferred mortgages, general assignments of collateral and charter assignments (relating to the vessels M/V Free Jupiter, M/V Free Hero and M/V Free Goddess) together with each vessel’s release and reassignment of insurance, as well as the release of all first priority account pledges and guarantee agreements executed by its subsidiaries owning these vessels.

The Company is currently exploring several alternatives aiming to manage its working capital requirements and other commitments, including offerings of securities through structured financing agreements (see “Recent Developments” above), disposition of certain vessels in its current fleet and additional reductions in operating and other costs.

The accompanying unaudited interim condensed consolidated financial statements as of March 31, 2014, were prepared assuming that the Company would continue as a going concern despite its significant losses and working capital deficit. Accordingly, the financial statements did not include any adjustments relating to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities, or any other adjustments that might result in the event the Company is unable to continue as a going concern, except for the classification of all debt as current.

Cash Flows

Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013

OPERATING ACTIVITIES - Net cash used in operating activities increased by $9,112 to $9,538 for the three months ended March 31, 2014, as compared to $426 for the three months ended March 31, 2013. The increase reflected the weaker freight market and the decrease of the operational vessels in our fleet during the three months ended March 31, 2014.

INVESTING ACTIVITIES - Net cash provided by investing activities for the three months ended March 31, 2014, was $3,465 from the proceeds of the sale of M/V Free Knight on February 18, 2014.

FINANCING ACTIVITIES - Net cash provided by financing activities for the three months ended March 31, 2014 was $nil , as compared to $423 for the three months ended March 31, 2013 as the Company did not materialize any financing activities during the first three-month period of 2014.

Long-Term Debt

Credit Suisse Facility

Defer further principal repayments until March 31, 2014;

Reduce the interest rate on the facility to LIBOR plus 1% until March 31, 2014 from a current interest margin of 3.25;

Release restricted cash of $1,125;

In 2013, the Company did not pay the interest due in an aggregate amount of $354 or interest rate swap amounts in an aggregate of $256 pursuant to the Credit Suisse facility. On January 29, 2014, the Company entered into a deferral interest payment agreement with Credit Suisse, pursuant to which the interest payment of $115 due on January 31, 2014 was deferred to February 28, 2014. On February 3, 2014, the Company paid the amount of $201 to fully unwind the two interest rate swap agreements with Credit Suisse. On February 28, 2014, pursuant to the deferral interest payment agreement with Credit Suisse, the Company paid the deferred interest of $115. The Company received several reservation of right letters in 2013 stating that Credit Suisse may take any actions and may exercise all of their rights and remedies referred in the security documents. On January 30, 2014, the Company and certain of its subsidiaries entered into a term sheet with Credit Suisse in order to settle its obligations arising from the Loan Agreement with the Bank. Pursuant to the term sheet, Credit Suisse agreed to accept a cash payment of approximately $22,000 in full and final settlement of all of the Company’s obligations to the Bank and the Bank would forgive the remaining outstanding balance of approximately $15,000. Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its three vessels (M/V Free Goddess, M/V Free Hero and M/V Free Jupiter) as well as all assignments in favor of Credit Suisse will be released.

NBG Facility (fka FBB Facility)

In January and April 2013, the Company received notifications from FBB that the Company is in default under its loan agreements as a result of the breach of certain covenants and the failure to pay principal and interest due under the loan agreements. Effective May 13, 2013, the bank’s deposits and loans other than the loans in definite delay and the bank’s network of nineteen branches were transferred to NBG. The license of FBB was revoked and the bank was placed under special liquidation. The Company’s loan facility and deposits have been transferred to NBG. In January 2014, the Company received notification from NBG that the Company has not paid the aggregate amount of $10,045 constituting repayment installments and accrued interest due in December 2013. On February 22, 2014, the Company and certain of its subsidiaries entered into terms with NBG for settlement of its obligations arising from the Loan Agreement with the Bank. Pursuant to the terms, NBG agreed to accept a cash payment of $22,000 in full and final settlement of all of the Company’s obligations to the NBG and NBG would forgive the remaining outstanding balance of approximately $3,700. Upon payment, all of the existing corporate guarantees of the Company and its subsidiaries and the mortgages and security interests on its two vessels (M/V Free Impala and M/V Free Neptune) as well as all assignments in favor of NBG will be released. The closing of such transaction is contingent upon the Company being able to raise capital towards making such payment.

Loan Covenants

As of March 31, 2014, the Company was in breach of certain of its financial covenants for its loan agreement with NBG, including the loan-to-value ratio, interest cover ratio, minimum liquidity requirements and leverage ratio. As well, as of March 31, 2014 the Company was in breach of the interest coverage and the consolidated leverage ratio for its loan agreement with Credit Suisse. Thus, in accordance with guidance related to classification of obligations that are callable by the creditor, the Company has classified all of the related long-term debt amounting to $59,687 as current at March 31, 2014.

Credit Suisse Sixth Supplemental Agreement:

Value to loan ratio:

(a)

(b)

(c)

Liquidity: it maintains (on a consolidated basis) on each day falling after June 30, 2014, cash in an amount equal to the higher of $2,500 and $500 per vessel; and

NBG (fka FBB) loan agreement:

Average corporate liquidity: the Company is required to maintain an average corporate liquidity of at least $3,000;

Leverage ratio: the corporate guarantor’s leverage ratio shall not at any time exceed 55%;

Ratio of EBITDA to net interest expense shall not be less than 3; and

Value to loan ratio: the fair market value of the financed vessels shall be at least (a) 115% for the period July 1, 2010 to June 30, 2011 and (b) 125% thereafter.

The covenants described above are tested annually on December 31st.