MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Form 6-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations of Star Bulk Carriers Corp. ("Star Bulk") for the three-month periods ended March 31, 2022 and 2023. Unless otherwise specified herein, references to the "Company," "we," "us" or "our" shall include Star Bulk and its subsidiaries. You should read the following discussion and analysis together with the unaudited interim condensed consolidated financial statements and related notes included elsewhere herein. For additional information relating to our management's discussion and analysis of financial conditions and results of operations, please see our Annual Report on Form 20-F for the year ended December 31, 2022, which was filed with the U.S. Securities and Exchange Commission (the "Commission") on March 7, 2023 (the "2022 Annual Report"). Unless otherwise defined herein, capitalized words and expressions used herein shall have the same meanings ascribed to them in the 2022 Annual Report. This discussion includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements.

Overview

We are a global shipping company providing worldwide seaborne transportation solutions in the dry bulk sector. Our vessels transport major bulks, which include iron ore, coal and grain, and minor bulks which include bauxite, fertilizers and steel products. We were incorporated in the Marshall Islands on December 13, 2006 and, on December 3, 2007, we commenced operations when we took delivery of our first vessel. We maintain offices in Athens, New York, Limassol, Singapore and Germany. Our common shares trade on the Nasdaq Global Select Market under the symbol "SBLK."

Our Fleet

During the first quarter of 2023, we agreed with the war risk insurers of the vessel Star Pavlina, that the vessel became a constructive total loss on February 24, 2023, given its prolonged detainment in Ukraine following the commencement of Russia's military action against Ukraine on February 24, 2022.

On March 24, 2023, we agreed to sell the vessels Star Borealis and Star Polaris. The Star Borealis was delivered to its new owner on May 4, 2023, while the delivery of Star Polaris is expected to occur by end of May 2023 or early June 2023.

As of May 12, 2023 and as adjusted for the delivery of Star Polaris as further discussed above, our owned fleet consisted of 125 operating vessels with an aggregate carrying capacity of approximately 13.6 million dwt, consisting of Newcastlemax, Capesize, Post Panamax, Kamsarmax, Panamax, Ultramax and Supramax vessels.

The following tables present summary information relating to our fleet as of May 12, 2023 (as adjusted for the delivery of Star Polaris to its new owners as discussed above):

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Operating Fleet:

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In addition, we have entered into long-term charter-in arrangements with respect to four Kamsarmax newbuildings and two Ultramax newbuildings which are expected to be delivered during 2024 with an approximate duration of seven years per vessel plus optional years. Furthermore, in November 2021 we took delivery of the Capesize vessel Star Shibumi, under a long-term charter-in contract for a period up to November 2028. Please see below a summary table of the respective contracts:

Liquidity and Capital Resources

Our principal sources of funds have been cash flow from operations, equity offerings, borrowings under secured credit facilities, debt securities or bareboat lease financings and proceeds from vessel sales. Our principal uses of funds have been capital expenditures to establish, grow our fleet, maintain the quality of our dry bulk carriers and comply with international shipping standards, environmental laws and regulations, fund working capital requirements, make principal and interest payments on outstanding indebtedness and make dividend payments when approved by the Board of Directors.

Our short-term liquidity requirements include paying operating costs, funding working capital requirements and the short-term equity portion of the cost of vessel acquisitions and vessel upgrades, interest and principal payments on outstanding indebtedness and maintaining cash reserves to strengthen our position against adverse fluctuations in operating cash flows. Our primary source of short-term liquidity is cash generated from operating activities, available cash balances and portions from new debt and refinancings as well as equity financings.

Our medium- and long-term liquidity requirements are funding the equity portion of our newbuilding vessel installments and secondhand vessel acquisitions, if any, funding required payments under our vessel financing and other financing agreements and paying cash dividends when declared. Sources of funding for our medium- and long-term liquidity requirements include cash flows from operations, new debt and refinancings or bareboat lease financings, sale and lease back arrangements, equity issuances and vessel sales. Please also refer to Note 12 to our unaudited interim condensed consolidated financial statements, included elsewhere herein, for further discussion on our commitments as of March 31, 2023.

As of May 12, 2023, we had total cash of $374.5 million and outstanding borrowings (including bareboat lease financing) of $1,231.9 million, pro forma for the proceeds from vessel sales, repayment of loans/leases and drawdown of new loans, as further described in Notes 8 and 15 to our unaudited interim condensed consolidated financial statements as of March 31, 2023, included herein. In addition, following a number of interest rates swaps that we have entered into, we have converted a total of $636.5 million of such debt from floating to an average fixed rate of 45 bps with average maturity of 1.0 year.

Our debt agreements contain financial covenants and undertakings requiring us to maintain various ratios. A summary of these terms is included in Note 8 of the Company's consolidated financial statements for the year ended December 31, 2022, included in the 2022 Annual Report.

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We believe that our current cash balance and our operating cash flows to be generated over the short-term period will be sufficient to meet our liquidity needs for the foreseeable future (and at least through the end of the second quarter of 2024), including funding the operations of our fleet, capital expenditure requirements and any other present financial requirements, including the cost for the installation of ballast water treatment systems ("BWTS") and Energy Saving Devices ("ESD"). In addition we may sell and issue shares under our two effective At-the-Market offering programs of up to $150.0 million at any time and from time to time. As of May 12, 2023, cumulative gross proceeds under our At-the-Market offering programs were $20.2 million. We may seek additional indebtedness to finance future vessel acquisitions in order to maintain our cash position or to refinance our existing debt on more favorable terms. Our practice has been to fund the cash portion of the acquisition of dry bulk carriers using a combination of funds from operations and bank debt or lease financing secured by mortgages or title of ownership on our dry bulk carriers held by the relevant lenders, respectively. We may also use the proceeds from potential equity or debt offerings to finance future vessel acquisitions. Our business is capital-intensive and its future success will depend on our ability to maintain a high-quality fleet through the acquisition of newer dry bulk carriers and the selective sale of older dry bulk carriers. These acquisitions will be principally subject to management's expectation of future market conditions as well as our ability to acquire dry bulk carriers on favorable terms. However our ability to obtain bank or lease financing, to refinance our existing debt or to access the capital markets for offerings in the future, may be limited by our financial condition at the time of any such financing or offering, including the market value of our fleet, as well as by adverse market conditions resulting from, among other things, general economic conditions, weakness in the financial and equity markets and contingencies and uncertainties that are beyond our control. Our liquidity is also impacted by our dividend policy, as discussed below.

The 2019 Novel Coronavirus ("COVID-19") pandemic resulted in a significant reduction in global economic activity and extreme volatility in the global financial market. During the second half of 2022, rates declined from highs seen earlier in the year as China's COVID-related lockdown measures intensified. After a seasonal decline in charter rates during the first quarter of 2023, Capesize and Supramax spot earnings began to rebound in March 2023 partially driven by China's economic reopening. There continues to be a high level of uncertainty relating to how the COVID-19 pandemic will evolve, the evolution and emergence of existing and future variants, the availability of vaccines and their global deployment, the development of effective treatments, the imposition of effective public safety and other protective measures and the public's and government's responses to such measures. As a result of the COVID-19 pandemic restrictions imposed since 2020, additional crew expenses have been incurred. An increase in the severity or duration or a resurgence of the COVID-19 pandemic and any significant disruption of wide-scale vaccine distribution could have a material adverse effect on our business, results of operations, cash flows, financial condition, the carrying value of our assets, the fair values of our vessels, and our ability to pay dividends.

Dividend Policy

Our dividend policy is described in Item 8. Financial Information-A. Consolidated statements and other financial information-Dividend Policy of our 2022 Annual Report.

As of March 31, 2023, our aggregate amount of cash on our balance sheet was $254.6 million and after giving effect to the share repurchases and the prepayments of debt in connection with the changes in our fleet as described under section "Our Fleet" above, that took place during the first quarter of 2023, the cash available for distribution under our dividend policy was $306.0 million. Taking into account the Minimum Cash Balance per Vessel, as defined in our 2022 Annual Report, on May 16, 2023, pursuant to our dividend policy, our Board of Directors declared a quarterly cash dividend of $0.35 per share, payable on or about June 27, 2023 to all shareholders of record as of June 7, 2023. The ex-dividend date is expected to be June 6, 2023.

Since Star Bulk is a holding company with no material assets other than the shares of its subsidiaries through which it conducts its operations, Star Bulk's ability to pay dividends in the future will depend on its subsidiaries' ability to distribute funds to it. Any future dividends declared will be at the discretion and remain subject to approval of our Board of Directors each quarter after its review of our financial condition and other factors, including but not limited to our earnings, the prevailing charter market conditions, capital requirements, limitations under our debt agreements and applicable provisions of Marshall Islands law, which generally prohibits the payment of dividends other than from operating surplus or while a company is insolvent or would be rendered insolvent upon the payment of such dividend. Star Bulk's dividend policy and declaration and payment of dividends may be changed at any time and are subject to legally available funds and our Board of Directors' determination that each declaration and payment is at the time in the best interests of Star Bulk and its shareholders after its review of our financial performance. There can be no assurance that our Board of Directors will declare or pay any dividend in the future.

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Other Recent Developments

Please refer to Note 15 to our unaudited interim condensed consolidated financial statements, included elsewhere herein, for developments that took place after March 31, 2023.

Operating Results

Factors Affecting Our Results of Operations

We deploy our vessels on a mix of short to medium time charters or voyage charters, contracts of affreightment or in dry bulk carrier pools, according to our assessment of market conditions. We adjust the mix of these charters to take advantage of the relatively stable cash flow and high utilization rates associated with medium to long-term time charters, or to profit from attractive spot charter rates during periods of strong charter market conditions, or to maintain employment flexibility that the spot market offers during periods of weak charter market conditions. The following table reflects certain operating data of our fleet, including our ownership days and TCE rates, which we believe are important measures for analyzing trends in our results of operations, for the periods indicated:

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The following table reflects the calculation of our TCE rates as discussed in footnote (7) above. The table presents reconciliation of TCE Revenues to voyage revenues as reflected in the unaudited interim condensed consolidated income statements.

Voyage Revenues

Voyage revenues are driven primarily by the number of vessels in our operating fleet, the duration of our charters, the number of charter-in days, the amount of daily charter hire or freight rates that our vessels earn under time and voyage charters, respectively, which, in turn, are affected by a number of factors, including our decisions relating to vessel acquisitions and disposals, the number of vessels chartered-in, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend in dry dock undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our vessels, levels of supply and demand in the seaborne transportation market.

Vessels operating on time charters for a certain period of time provide more predictable cash flows over that period of time, but can yield lower profit margins than vessels operating in the spot charter market during periods characterized by favorable market conditions. Vessels operating in the spot charter market generate revenues that are less predictable, but may enable us to capture increased profit margins during periods of improvements in charter rates, although we would be exposed to the risk of declining vessel rates, which may have a materially adverse impact on our financial performance. If we employ vessels on period time charters, future spot market rates may be higher or lower than the rates at which we have employed our vessels on period time charters.

Voyage Expenses

Voyage expenses may include port and canal charges, agency fees, fuel (bunker) expenses and brokerage commissions payable to related and third parties. Voyage expenses are incurred for our owned and chartered-in vessels during voyage charters or when the vessel is unemployed. Bunker expenses, port and canal charges primarily increase in periods during which vessels are employed on voyage charters because these expenses are paid by the owners. Our voyage expenses primarily consist of bunkers cost, port expenses and commissions paid in connection with the chartering of our vessels.

Charter-in Hire Expenses

Charter-in hire expenses represent hire expenses for chartering-in third and related party vessels, either under time charters or voyage charters.

Vessel Operating Expenses

Vessel operating expenses include crew wages and related costs, the cost of insurance and vessel registry, expenses relating to repairs and maintenance, the cost of spares and consumable stores, tonnage taxes, regulatory fees, vessel scrubbers and BWTS maintenance expenses, lubricants and other miscellaneous expenses. Other factors beyond our control, some of which may affect the shipping industry in general, including for instance, developments relating to market prices for crew wages, lubricants and insurance, may also cause these expenses to increase.

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Dry Docking Expenses

Dry docking expenses relate to regularly scheduled intermediate survey or special survey dry docking necessary to preserve the quality of our vessels as well as to comply with international shipping standards and environmental laws and regulations. Dry docking expenses can vary according to the age of the vessel and its condition, the location where the dry docking takes place, shipyard availability and the number of days the vessel is under dry dock. We utilize the direct expense method, under which we expense all dry docking costs as incurred.

Depreciation

We depreciate our vessels on a straight-line basis over their estimated useful lives, which is determined to be 25 years from the date of their initial delivery from the shipyard. Depreciation is calculated based on a vessel's cost less the estimated residual value. Effective January 1, 2023, following management's reassessment of the residual value of our vessels, we increased the estimated scrap rate per lightweight ton from $300 to $400. The current value of $400 was based on the historical average demolition prices prevailing in the market in the last 20 years. The change in this accounting estimate, which pursuant to ASC 250 "Accounting Changes and Error Corrections" was applied prospectively and did not require retrospective application, decreased the depreciation expense and increased the net income for the three-month period ended March 31, 2023 by $3.9 million or $0.04 per basic and diluted share.

General and Administrative Expenses

We incur general and administrative expenses, including our onshore personnel related expenses, directors' and executives' compensation, share based compensation, legal, consulting, audit and accounting expenses.

Management Fees

Management fees include fees paid to third parties as well as related parties providing certain procurement services to our fleet.

(Gain) / Loss on Forward Freight Agreements and Bunker Swaps, net

When deemed appropriate from a risk management perspective, we take positions in freight derivatives, including freight forward agreements (the "FFAs") and freight options, with an objective to utilize those instruments as economic hedges to reduce the risk on specific vessels trading in the spot market and to take advantage of short term fluctuations in the market prices. Upon the settlement, if the contracted charter rate is less than the average of the rates, as reported by an identified index, for the specified route and time period, the seller of the FFA is required to pay the buyer the settlement sum. The settlement amount is an amount equal to the difference between the contracted rate and the settlement rate, multiplied by the number of days in the specified period covered by the FFA. Conversely, if the contracted rate is greater than the settlement rate, the buyer is required to pay the seller the settlement sum. Our FFAs are settled on a daily basis mainly through reputable exchanges such as European Energy Exchange ("EEX") or Singapore Exchange ("SGX") so as to limit our exposure in over-the-counter transactions. Customary requirements for trading in FFAs include the maintenance of initial and variation margins based on expected volatility, open position and mark to market of the contracts. The fair value of the FFAs or freight options is treated as asset or liability until they are settled. Any such settlements by us or settlements to us under FFAs or freight options, if any, are recorded under (Gain)/ Loss on forward freight agreements and bunker swaps, net.

Also, when deemed appropriate from a risk management perspective, we enter into bunker swap contracts to manage our exposure to fluctuations of bunker prices associated with the consumption of bunkers by our vessels. Bunker swaps are agreements between two parties to exchange cash flows at a fixed price on bunkers, where volume, time period and price are agreed in advance. Our bunker swaps are settled on a daily basis, mainly through reputable exchanges such as Intercontinental Exchange ("ICE") to limit our counterparty exposure in over the counter transactions. Bunker price differentials paid or received under the swap agreements are recognized under (Gain)/Loss on forward freight agreements and bunker swaps, net.

The fair value of freight derivatives and bunker swaps is determined through Level 1 inputs of the fair value hierarchy (quoted prices from the applicable exchanges such as EEX, SGX or ICE. Our FFAs and bunker swaps do not qualify for hedge accounting and therefore unrealized gains or losses are recognized under (Gain)/Loss on forward freight agreements and bunker swaps, net.

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Loss on Write-Down of Inventory

Loss on write-down of inventory results from the valuation of the bunkers remaining onboard our vessels following the decrease of bunkers' net realizable value compared to their historical cost as of each period end.

Interest and Finance Costs

We incur interest expense and financing costs in connection with our outstanding indebtedness under our existing loan facilities (including sale and leaseback financing transactions). We also incur financing costs in connection with establishing those facilities, which are presented as a direct deduction from the carrying amount of the relevant debt liability and amortize them to interest and financing costs over the term of the underlying obligation using the effective interest method.

Interest Income

We earn interest income on our cash deposits with our lenders and other financial institutions.

Gain / (Loss) on Interest Rate Swaps, net

We enter into interest rate swap transactions to manage interest costs and risk associated with changing interest rates with respect to our variable interest loans and credit facilities. Interest rate swaps are recorded in the balance sheet as either assets or liabilities, measured at their fair value (Level 2), with changes in such fair value recognized in earnings under Gain/(Loss) on interest rate swaps, net, unless specific hedge accounting criteria are met. When interest rate swaps are designated and qualify as cash flow hedges, the effective portion of the unrealized gains/losses from those swaps is recorded in Other Comprehensive Income / (Loss) while any ineffective portion is recorded as Gain/(loss) on interest rate swaps, net.

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Results of Operations

The three-month period ended March 31, 2023 compared to the three-month period ended March 31, 2022

Voyage revenues net of Voyage expenses: Voyage revenues for the three months ended March 31, 2023 decreased to $224.0 million from $360.9 million in the corresponding period in 2022. Time charter equivalent revenues ("TCE Revenues") (as defined above) were $156.1 million compared to $304.9 million for the corresponding period in 2022. As a result, the TCE rate for the first three months of 2023 was $14,199 compared to $27,405 for the corresponding period in 2022 which is indicative of the weaker market conditions prevailing during the recent quarter. Please refer to the table above for the calculation of the TCE Revenues and TCE and their reconciliation with Voyage Revenues, which is the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.

Charter-in hire expenses: Charter-in hire expenses for the three months ended March 31, 2023 and 2022 were $6.6 million and $4.0 million, respectively. This increase is mainly attributable to the increase in charter-in days to 247 in the first three months of 2023 from 199 in the corresponding period in 2022.

Vessel operating expenses: For the three-months ended March 31, 2023 and 2022, vessel operating expenses were $55.8 million and $57.5 million, respectively. Vessel operating expenses for the first three months of 2023 included additional crew expenses related to the increased number and cost of crew changes performed during the period as a result of COVID-19 related restrictions, estimated to be $1.4 million. In addition, we incurred $0.5 million of additional operating expenses due to change of management of certain vessels from third party to in-house. Vessel operating expenses for the first three months of 2022 included COVID-19 related expenses of $2.8 million.

Dry docking expenses: Drydocking expenses for the three-months ended March 31, 2023 and 2022, were $8.0 million and $8.7 million, respectively. During the first three months of 2023, five vessels completed their periodic dry-docking surveys while during the corresponding period in 2022, eight vessels completed their periodic dry docking surveys.

Depreciation: Depreciation expense decreased to $35.1 million for the three-month period ended March 31, 2023 compared to $38.5 million for the corresponding period in 2022. The decrease is primarily driven by the change in the estimated scrap rate per light weight tonnage from $300 to $400 effective January 1, 2023, which resulted in lower depreciation expense by $3.9 million.

Impairment loss: During the three months ended March 31, 2023, an impairment loss of $7.7 million was incurred, resulting from the agreement to sell the vessels Star Borealis and Star Polaris described above as part of our fleet update under "Our Fleet" section.

Other operational gain: Other operational gain for the three months ended March 31, 2023 of $33.2 million includes: a) gain from insurance proceeds relating to Star Pavlina's total loss discussed in our fleet update above of $28.2 million, b) daily detention compensation for Star Pavlina pursuant to its war risk insurance policy of $2.7 million in aggregate, as well as c) other gains from insurance claims relating to other vessels of $2.3 million in aggregate.

Management fees: Management fees decreased to $4.2 million for the three-month period ended March 31, 2023 compared to $4.8 million for the corresponding period in 2022 due to the change of management of certain vessels, from third party to in-house.

General and administrative expenses: General and administrative expenses for the three month period ended March 31, 2023 were $11.7 million compared to $8.8 million in the corresponding period in 2022, primarily due to the increase in the stock-based compensation expense to $3.4 million from $1.2 million.

(Gain)/Loss on forward freight agreements and bunker swaps, net: For the three month period ended March 31, 2023, we incurred a net gain on FFAs and bunker swaps of $1.3 million, consisting of an unrealized loss of $4.9 million and a realized gain of $6.2 million. For the three-month period ended March 31, 2022, we incurred a net loss on FFAs and bunker swaps of $2.6 million, consisting of an unrealized loss of $4.0 million and a realized gain of $1.4 million.

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Loss on write-down of inventory: Our results for the three months ended March 31, 2023 include a loss on write-down of inventories of $2.2 million resulting from the valuation of the bunkers remaining on board our vessels as a result of the bunkers' lower net realizable value compared to their historical cost.

Interest and finance costs: Interest and finance costs for the three-months ended March 31, 2023 and 2022 were $15.7 million and $12.1 million, respectively. The driving factor for this increase is the significant increase in variable interest rates, which was partially offset by the positive effect from our interest rate swaps and the decrease in our weighted average outstanding indebtedness.

Interest and other income/(loss): Interest and other income for the three-months ended March 31, 2023 amounted to $3.1 million, compared to an interest and other income, of $0.3 million in three-months ended March 31, 2022. This variation is mainly due to higher interest earned from fixed deposits during the first quarter of 2023 and higher foreign exchange gains incurred in the same period compared to the first quarter of 2022.

Cash Flows

Net cash provided by operating activities for the three-months ended March 31, 2023 and 2022 was $83.2 million and $229.2 million, respectively. This decrease was primarily driven by the lower charter rates due to the weaker market conditions prevailing during the recent period compared to the corresponding period in 2022, and the increase in our interest payments for the reasons outlined above under "Interest and finance costs".

Net cash used in investing activities for the three-months ended March 31, 2023 and 2022 was $5.0 million and $4.8 million, respectively. The increase was attributable to lower insurance proceeds compared to 2022, partially offset by lower cash paid in 2023 in connection with the acquisition of fixed assets and vessel upgrades.

Net cash used in financing activities for the three-months ended March 31, 2023 and 2022 was $109.9 million and $253.2 million, respectively. The decrease was primarily driven by lower dividend payments of $62.1 million in 2023 compared to $204.8 million in the corresponding period in 2022 as well as lower net debt outflows of $40.3 million in the first quarter of 2023 compared to $52.8 million in the same period in 2022.

Significant Accounting Policies and Critical Accounting Estimates

For a description of our critical accounting estimates and all of our significant accounting policies, see Note 2 to our audited financial statements and "Item 5 - Operating and Financial Review and Prospects," included in our 2022 Annual Report. There have been no material changes from the "Critical Accounting Estimates" previously disclosed in our 2022 Annual Report, except as discussed above under our depreciation policy.

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